Tax changes / proposals - discussion

[xerty]

@glitch99

owns Wells Fargo stock for the last 50 years. She needs to sell it to pay for the nursing home. Do you know when she bought it and how much she paid?

What you are talking about is a “problem” regardless. And it’s due to poor recordkeeping, so, much like in the event grandma sells the stock and cant show her cost basis, if a heir cannot show the cost basis of stock they inherited from grandma they can either rue her for not keeping better records or thank her for the 80% they do get to keep after claiming it all as capital gains.

It’s not a problem if you, the one looking after her finances since she’s about to go into the nursing home and isn’t paying her own bills these days, arranges for her to borrow from a HELOC or reverse mortgage or you just front her any living expenses she needs since you’re getting the inheritance soon enough at that point.

Then all those problems of poor or missing ancient bookkeeping go away when she does. I’ve been in the situation to try to unravel these types of situations for very old cost bases, and as you can imagine I have enough stock market knowledge and friends with Bloomberg’s and so forth I can put together a decent estimate that would pass muster for the IRS. But most people can’t and this step-up rule is saying their families shouldn’t pay a lot of extra tax just because they don’t have a smart, stock trading grandson.

[xerty]

@scripta

Are home repairs and renovations for my non-rental properties supposed to be added to my cost basis?

Strict maintenance items aren’t, but improvements broadly are

Publication 523 (2023), Selling Your Home | Internal Revenue Service

Selling a Personal Residence: What Costs Qualify as Home Improvements?

While not all-inclusive, the following are examples of items that generally qualify as home improvements that can be capitalized…

And including additions, roofs, siding, new kitchen, extensive carpeting, major appliances, and broadly stuff you aren’t taking with you when you move out and sell. Here’s the IRS’s list from the above link.

[scripta]

Neat!

I have records of all expenses, but I don’t have all the receipts, since I didn’t realize. Live and learn

[Shandril]

@xerty

Then all those problems of poor or missing ancient bookkeeping go away when she does. I’ve been in the situation to try to unravel these types of situations for very old cost bases, and as you can imagine I have enough stock market knowledge and friends with Bloomberg’s and so forth I can put together a decent estimate that would pass muster for the IRS. But most people can’t and this step-up rule is saying their families shouldn’t pay a lot of extra tax just because they don’t have a smart, stock trading grandson.

I feel a lot of this concern about getting the basis right is mostly due to poor documentation dating back to paper records. For stocks, nowadays brokerages are calculating your basis automatically for you even with dividend reinvestments. What would be the rationale for keeping the step-up basis on securities held at brokerages nowadays then?

But let’s even consider the case where it’s incredibly hard for you or the IRS to figure out your exact basis for real estate. Instead of collecting $0 by giving a step-up basis because you could not bother to keep documentation, IRS could simply estimate basis based on property market value between date of purchase and market value at death, using appreciation of median home in the area to estimate basis (maybe increasing estimated basis by 20% to be account for common renovations). Like glitch99 said, you’re then talking IRS asking for 20% of that estimated appreciation. Considering you benefited from deferred taxation for decades, it’s still seems pretty far from “taking you to the cleaners”. Especially considering the fault for not being able to document your basis, is on the owner to start with.

This could also be handled via a threshold like in the Biden budget proposal (to avoid IRS getting into the weeds of complex calculations of basis on small estates). If step-up basis would write-off more than $5M per person of capital gains, then heirs would have have to pay taxes on the capital gains beyond that $5M. Doesn’t seem unfair to me and with relatively high threshold, that should limit the anecdotal sob-stories to a minimum.

[Honkinggoose]

@glitch99

But the principle is sound - expenses minus revenue equals the deficit

I know what you meant, but have to complain. Revenue (more, less, or the same) NEVER leads to a deficit. How can it? Not pointed at you (but anyone reading this) - step back and think about it, only using common sense. Please don’t try to use book sense or talk economics. Just imagine how income/revenue/“incoming funds” can create a deficit.

@glitch99

“We spend what we want, and any shortage is due to bad tax policy” has increasingly become the popular way of thinking, unfortunately.

Boy Howdy!

[Honkinggoose]

@Shandril

I agree the loss of revenues from tax cuts does not appear to be a typical cost.

It is not a typical cost. It is, at best, a hypothetical cost.

@Shandril

But loss of tax revenue is an opportunity cost unless they pay for themselves.

Loss of tax revenue is a loss of income. It is not a cost, any more than not nationalizing companies is a cost.

@Shandril

And servicing the increased debt incurred from the budget deficit created by the imbalance between previous spending and lower tax revenues, is a regular cost.

This jumps to the conclusion, to which, I don’t agree, that the deficit is created my income, or lack thereof. The ONLY thing that can create a deficit is SPENDING.

@Shandril

You can think of it like a family balancing its budget.

Thank you, but I know how I can think of it. I also know how the Russians think of it, along with the Cubans, the ChiComs, and other socialist leaners (not implying that you are any of the above). It makes a big difference in how one thinks of it. I stand by my statement that deficits can only be created by spending. That’s how I think of it. You can think of it that way, too. :]

@Shandril

IMO the main issues are:

<edited 1. tax cuts bills almost never come with specific spending cuts in the bill

I agree. I suspect that you think they should, and with that, I disagree. Tax cuts would never occur if that were a requirement.

Before anything gets in a twist, the same can be said for spending. Do you think every additon to spending should include a tax increase to pay for it? If not, why not? Please don’t say that the spending is cut somewhere else, because we both know that’s not true.

<edited 2. impact of tax cuts on GDP growth (trickle down economics) is usually overestimated

As are the costs of expenditures (well, underestimated)

edited 3. and there are no mechanisms for either rolling back tax cuts or cutting specific spending if needed level of tax revenues are not achieved by the tax bill.

I don’t think there should be mechanism for rolling back tax cuts. If the Congress thinks we need more money, they should vote for tax increases. I also don’t think there should be a mechanism for rolling back spending. If something is costing more than expected, or proves to not be economically sound, Congress should cut its funding.

@Shandril

I’d like that last point (defined remedy for lower than expected tax revendiscovery miles cardues) to be mandatory in any new tax bill.than expected tax revenues) to be mandatory in any new tax bill.

I responded to this in the last sentence of my last paragraph because it seemed to fit, but didn’t want anyone to think I was blowing it off.

[glitch99]

@Honkinggoose

I know what you meant, but have to complain. Revenue (more, less, or the same) NEVER leads to a deficit.

It isnt “revenue”, it’s “intentionally cutting revenue”. Revenue never causes a deficit, but intentionally removing revenue that’s already been “spent” does cause a deficit.

[Honkinggoose]

@glitch99

removing revenue that’s already been “spent” does cause a deficit.

I presume the quotes mean budgeted, as opposed to actually spent. I think that someone up-thread made a decent analogy to a family losing income for some reason. They don’t counterfeit money and continue spending as if their income had not changed. When an individual, family, company, or government sees that revenue is less than projected, whatever the reason, they should cut spending to correspond with the new projections.

[Shandril]

What do you guys think about the proposals to exclude tips from taxes?

From a tax compliance stand-point, tips have always been under-reported, although maybe a bit less now that many of these tips are digitally entered on iPads. So maybe it won’t be that huge a tax revenue loss, at least until tipping (any performance-based compensation could be fair game) expands to other industries.

But I kinda wonder if it won’t make more employers shift their compensation structures towards offering more tips and a lower hourly wage. Or even introduce tips in more places than currently (like say airlines asking you to tip the crew after each flight).

Arguably the loss of tax revenue could be hard to estimate for the CBO because it’d have to estimate the current tax compliance on tips income, and may have trouble also estimating the potential extension of tipping to future compensation structures across all industries.

[xerty]

Seems like an election year gimmick probably, not great policy. It does have the uncertain expense risks that you describe where people could extend tipping to reduce their taxable compensation, potentially in many fields (ie now your tax prep guy wants $50 and a $450 tip instead of a check for $500, and recalling tips were for promptness, the $450 will make sure the return gets e-filed before the deadline…). probably bad policy overall.

[harish7631]

My concern is that it becomes a slippery slope. Why end at tips? Why not eliminate taxes on teachers’ wages? What about plumbers’ income? Can a plumber claim that the client paid $50 for the work and the other $200 as a tip?
I don’t believe it’s a good idea to change how some forms of work-related income are taxed, but not others.

[Shandril]

@xerty

(ie now your tax prep guy wants $50 and a $450 tip instead of a check for $500, and recalling tips were for promptness, the $450 will make sure the return gets e-filed before the deadline…)

Yeah the list of performance-based compensation could expand exponentially. Anything that’s currently a bonus could qualify. Why not lawyers counting a success tip for winning your case?

The other issue is FICA taxes. Withholding is based on reported tips. I wonder if these are no longer taxed, what’s gonna happen to that reporting.

[xerty]

Kamala wants to tax the Evil Corporations at 28%, higher than it was before the lower 21% Trump corporate tax rates that benefited US companies.

Harris proposes raising the corporate tax rate to 28%, rolling back a Trump law

[Honkinggoose]

@harish7631

My concern is that it becomes a slippery slope. Why end at tips? Why not eliminate taxes on teachers’ wages? What about plumbers’ income? Can a plumber claim that the client paid $50 for the work and the other $200 as a tip?

Your concern, my hope. Why end at all? Just keep going and remove all taxes on income. Place the taxes on spending, or possibly on exported income. I haven’t thought the last part through, but it sounds catchy.

@harish7631

I don’t believe it’s a good idea to change how some forms of work-related income are taxed, but not others.

I couldn’t agree with you more.

[Shandril]

@Honkinggoose

Place the taxes on spending

Federal VAT would not be a terrible idea to capture the spending of the wealthy. But only in addition to federal income tax (with lowered brackets to compensate). Still since 40% of the US population pays no fed income tax currently, replacing the current system by VAT only would probably make a ton of unhappy campers. It’d be hard to make it up to them, even if you exclude food items from VAT, since it’d still represent a tax hike on the lowest of income earners. Compensating them without knowing how much anyone earns would be very tricky I’d think.

Using VAT to replace Fed income taxes would also be incredibly messy for dealing with all the tax-advantaged accounts. You’d likely piss off many with these types of account by removing all federal income tax. And chances are they’re not even the same as the 40% of the population who don’t pay any income tax. Combined, that doesn’t seem to me like a great platform to get elected on but what do I know.

More seriously, losing federal income tax would make it much harder to incentivize behaviors (like saving money, having kids, purchasing a home, etc. So I don’t think it’d be practically doable. Maybe that’s why, outside of small islands and countries overflowing with oil-money, no country has done it so far.

[Honkinggoose]

@Shandril

But only in addition to federal income tax (with lowered brackets to compensate).

No! No, I say! Give them an inch (.000001 of income tax), and you’re giving them a yard (52%). Let me put it another way. You seem to be quite knowledgeable on international affairs and taxes. There are lots of countries with VATs. Can you name ONE non-communist country that has instituted a VAT and who had lower tax revenues 10 years after the institution of that VAT?

@Shandril

You’d likely piss off many with these types of account by removing all federal income tax.

Wait! So p*ssing many people off is a deterrent? How many is many? I appreciate your argument of irritating people, but taxes should irritate people to the point that they feel enough pain to think about them. There were no income taxes in this country for over a hundred years.

@Shandril

More seriously, losing federal income tax would make it much harder to incentivize behaviors

[shake my head in disbelief emoji] Taxes are a disincentive. Don’t we want to incentivize work? Then why tax it? Don’t we want to incentivize saving? Then why tax it?

Don’t get me wrong. I know there is a certain group of people that want a permanent dependent class. I find that disgusting. I want people to work. I want people to save. I want people to improve. Those things allow people to move out of poverty (or what we call poverty), and all of society benefits.

Oh, and I didn’t think your previous statements were frivolous, but if so, please ignore my comments about them.

ETA:

@Shandril

Federal VAT would not be a terrible idea to capture the spending of the wealthy.

Why obsess with the wealthy? Why not obsess with the poor/downtrodden/diseased/disabled? I think they need attention much more than the wealthy.

[onenote]

The democrats make their tax plan clear
https://www.marketwatch.com/story/kamala-harris-backs-bidens-tax-proposals-including-a-tax-on-unrealized-capital-gains-66c55df2

Kamala Harris backs Biden’s tax proposals — including a tax on unrealized capital gain

In the first few days of Kamala Harris’s 2024 presidential campaign, experts told MarketWatch that her stances on taxes probably would closely resemble those of President Joe Biden.

One month into her campaign, it looks like that is indeed the case. Multiple published reports this week have said the Democratic presidential nominee supports the tax increases put forth in Biden’s most recent budget proposal, which came out in March.

[onenote]

A summary of the Democrats’ tax proposals so far

Price Controls
28% corporate tax
44.6% capital gains tax
25% tax on unrealized gains

[Shandril]

@Honkinggoose

There were no income taxes in this country for over a hundred years.

No taxation would basically mean the immediate elimination of social security, Medicare, Medicaid, defense and homeland safety, unemployment benefits, education spending, veteran benefits, etc plus defaulting on our debt immediately. I think the balance of taxation level vs. provided federal benefits is separate from the evaluation of whether a federal VAT would be beneficial or not.

@Honkinggoose

Can you name ONE non-communist country that has instituted a VAT and who had lower tax revenues 10 years after the institution of that VAT?

There may be one but I’ve not been that preoccupied with the taxation in other countries to be able to answer that. If I had to guess though, I’d think that when VAT was introduced to most countries, the bitter pill was accompanied either by strong patriotic appeal, or a decrease in taxation on other resources (income, real estate, etc), or by forceful enforcement.

I see VAT as just another way to obtain tax revenues compared to taxing incomes, real estate, estates, etc. Most states do have a VAT already. Some don’t. Some don’t have income tax. Some don’t have estate tax. Some tax social security earnings or investment earnings, some don’t. Each state decides how they prefer to bring in tax revenues.

So, at the federal level, I think adding another lever to our taxation capabilities is inherently positive even in a negative tax revenue scenario (less total revenues), as it’d allow finer tuning of whatever the majority in our society agrees a fair taxation system means in that regard.

Of course, that doesn’t mean I’m necessarily happy with the current balance of taxation vs. spending. I’d certainly not distribute spending the same way we currently are. But I also do not consider our current taxation system, the most fair it could be.

[meed18]

@scripta

Wait a minute. I’m learning something new here. Are home repairs and renovations for my non-rental properties supposed to be added to my cost basis?

If you are 100% sure that in the future you will never turn your primary residence into a rental property, and if the basis step-up at death stays intact, and you are 100% sure that your home will not go up by more than $250,000($500,000 if MFJ) in value before you sell it, then you don’t need to keep track of capital improvements to your home because they will be irrelevant.

Obviously, only the first $250k/500k in capital gains is excludable for a primary residence. If you are going to come close to that number when you sell, you should absolutely be adding on those improvement costs to your basis so you can keep the gain under $250k/500k or reduce whatever additional gain you will have to pay taxes on.

If the $250k/500k gain is irrelevant, those improvements can become relevant if you turn your primary residence into a rental/investment property and those improvements you made plus the original cost basis of the house is less than the market value of the house at the time of the conversion (otherwise, you just use the lower market value).

So generally, if the basis step-up stays intact, your house hasn’t gone up in value by more than $250k/500k, and you aren’t planning on turning your primary residence into a rental property, no, you don’t really need to keep track of them.

Note that I said Primary Residence and you said non-rental propertieS. You do need to be keeping track of all renovations to anything that isn’t your primary residence because there is no $250k/500k exclusion on those properties and you want to increase the basis on them whenever you can.

Keep in mind that as you and your spouse age, and you are over $250k in gains but no where near $500k, don’t be dismissive of the recordkeeping by looking only at the $500k number. People pass away unexpectedly all the time. If that happens to you, and all of a sudden that house that was the right size for you and your wife that you lived in for 25 years now has too many memories and is too big for her all by herself. If she doesn’t sell it in the year where she can still file as MFJ, the next year when she’s single, she’s going to be looking at the $250k exclusion and wishing you had kept track of that big kitchen renovation 10 years ago.