The Tax Attic with Jerry Coon — March 25, 2010

New bill creates more complex tax system

I did something on Sunday evening that I have not done previously. I watched C-Span for a solid three hours. I don’t think I have watched C-Span for three total hours in my entire life before Sunday. I would rather do just about anything than watch C-Span. However, on Sunday, a train wreck was occurring in Washington that I just couldn’t keep myself from watching. The House of Representatives was debating and voting on health care reform.

Jerry Coon, Enrolled Agent

The majority of Americans want health care reform. They want insurance companies to be reined in. It should be illegal to throw people off the rolls because they get sick. People with pre-existing conditions should be able to get insurance. Insurance companies should not be able to raise rates like Anthem Insurance did last month by 36%. We should be able to buy health insurance anywhere we want, if we want to buy health insurance, and insurance companies should be able to conduct business in any state they want. A child should be able to stay on his/her parent’s insurance plan until age 26. There are plenty of reasons to reform the health care system.

I happen to be one of those people, however, who thinks the federal government, with the sheer magnitude of these bills, is overstepping its bounds this time. In the few hundred pages that I scanned, I did find the one five-line paragraph that prohibits insurance companies from dropping people because of a health issue. I’m sure that somewhere else within those several hundred pages was another paragraph that keeps insurance companies from unilaterally raising rates by 36% at a time or, even though I couldn’t find it, I would hope that it does. I am concerned about the potential mandated funding of abortions, but that is found in the bill.

From a professional point of view, I am in the business of preparing tax returns, and this bill will be good for the tax preparation business. The bill creates new excise taxes and credits and penalties on taxpayers and businesses that will tend to make our tax system more complex. Changes, credits and new taxes tend to be good for my type of business. The bill creates a whole new federal bureaucracy that will manage our health care system. I’m not at all sure that’s something that we all want or need. I’m not sure we really fully understand that a new, large federal bureaucracy was just created by three votes in the House and perhaps by just one vote in the Senate.

How large is large? For starters, over 16,000 new Internal Revenue Service agents will be hired to collect those new taxes and penalties on taxpayers and businesses. I wonder if those personnel costs were included in the cost projections.

Now that Congress has passed health care reform, I believe this allows them to concentrate on cleaning up some tax issues that have been waiting for resolution. They have taken their eyes off taxes, so to speak, while arguing about health care reform.

One of the largest items in need of attention is the area of estate tax. Since January 1, 2010, there has been no estate tax. For people passing away in 2010, their estates have been estate-tax-free. The conventional thinking is that no tax is good, but this one comes with an offsetting disadvantage. When there is an estate tax, one of the good provisions of that tax allows heirs to step up the tax basis of items that are inherited to the fair market value of the item at the date of death. This means there is no taxable profit on the items inherited.

For example, Joe passes away with $100,000 worth of Exxon stock that he paid $25,000 for in 1982. He also has a home worth $200,000 that he bought in 1970 for $80,000. If there is an estate tax in place, as an ancillary benefit, Joe’s heirs will be able to step up the basis in the Exxon to the fair market value of $100,000 and step up the basis in the home to the full fair market value of $200,000. Joe’s heirs would have no taxable profit on the sale of these assets.

However, when there is no estate tax in place, Joe’s inheritors do not get to step up the value of the stock or the home to the full fair market value. If they sell the stock, they would pay tax on the difference between Joe’s cost of $25,000 and the sale price of $100,000. Ditto for the home.

Let’s hope Congress brings back the estate tax. The stepped-up fair market value provisions are good for most taxpayers. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. Action Tax Service is located on Northland Drive in Rockford. Contact Jerry at Action’s website:

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