Tax Attic for March 21, 2019

The Internal Revenue has released some interesting statistics concerning the returns they have processed so far during the current tax season. According to the IRS numbers released on March 8, 2019 for returns received and processed through February 9, 2019, it indeed has been a slow start to the tax season. A total of 30,016,000 returns were processed last year in the time frame ending Feb. 9 while 26,950,000 were processed this year. That’s a decrease of 6.9%. E-filed tax returns are down by 7.1%, from 29,724,000 down to 27,602,000. Returns submitted by tax professionals also show a decrease from 12,575,000 down to 11,001,000; a decrease of 12.5%.  In the same period, self prepared returns are down by 3.2%. Anyway you cut it, there are a lot of returns that are still going to be filed by Monday, April 15.

One further important statistic concerns the average refund of returns processed. There has been a lot of media coverage on this particular subject.  The expectation has been set that refunds will be down significantly this year. The statistics do show that, for a variety of reasons, refunds are down. In 2018, the average refund was $2135. So far this year, the average refund has been $1949, a decrease of 8.7% or $186. The predominant  reason for this decrease is that the federal withholding tables were significantly adjusted in early 2019 to give taxpayers more take home pay.  The logic was that tax brackets were decreased by 3% and tax credits such  as the child tax credit were increased.  The flaw in the system was that the IRS over-adjusted for these good things and gave people too much take home pay. More take home pay during the year could lead to a lower refund.  We will keep an eye on that statistic as the tax filing season wears on.

I wrote an article in the fall about the tax treatment of capital gains under the Tax Cuts and Job Act (TCJA) enacted in late 2017.  It’s a confusing topic to say the least. Discussing it another time might be of value to all of us.  First, capital gains have traditionally been taxed at a preferential tax rate.   Per the TCJA, single taxpayers and married filing separate taxpayers with total taxable income up to $38,600 will pay 0% on their capital gains income.  Joint filing and qualifying widow or widowers with taxable income up to $77,200 will pay 0% of tax on their capital gains income. Head of household filers with taxable income up to $51,700 receive the 0% tax rate on capital gains income. Second, capital gains income above the taxable incomes in the previous point will be taxed at a rate of either 15% or 20%. This is still a good preferential tax rate; just not quite as good as zero. Third, for the most part, property must be held for at least one year and one day to qualify for the preferential tax rates. Fourth, even though the preferential tax rates apply on the federal return, most states do not have a special, lower tax rate. Income is income on the Michigan tax return and it’s subject to a tax rate of 4.25%. Fifth, even though the capital gains income can be taxed at zero, the income itself can lead to other income being taxable. For example, a single taxpayer has long term capital gains income of $10,000, a pension of $12,000, social security income of $18,000.  Without the capital gains income, none of the social security income would be taxable and, since the taxpayer is allowed a standard deduction of $12,000, none of the $12,000 pension income would be taxable. The taxpayer would pay zero tax. Throw in the $10,000 of capital gains income, however, and the story changes. Now, in a complicated formula, $3,000 of the social security income is taxable; the $12,000 of pension is taxable; and the capital gains income is put on the tax return even if the tax on that income is zero. The net result is that the taxpayer now owes tax on the social security income even though no tax is due on the capital gains.  The capital gains income has caused the social security income to be taxable.  This is one of those “theory of unintended consequences” items.  They happen all of the time in the world of taxation.  This Jerry Coon signing off.

Jerry Coon is Enrolled Agent.

Action Tax Service is a part of Integrity Tax Group in Rockford.

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