Taxable Talk

The 111th Congress will likely be remembered in history books for profligate spending and going against voters’ wishes. Sure, some of President Obama’s agenda was enacted (such as Obamacare), but most of it wasn’t wanted by voters. The public responded by voting out many Democrats. However, the 111th Congress will be back in session one last time in a ‘lame duck’ session.

As Jim McTague reports in Barron’s, the upcoming tax season will almost certainly be worse than usual. First, it’s almost certain that an AMT patch will be enacted. (If an AMT patch is not enacted, somewhere around 25% of Americans, including many middle-class families, would be hit with AMT. Congresscritters are well aware that the outcry would last years, and would ensure that they wouldn’t be Congresscritters the next time they come up for an election.) However, will the Senate consider that patch this week? Or what about the budget? No, food safety will dominate the Senate this week.

What this means is that the IRS must assume an AMT patch won’t be enacted, and the agency won’t update their computers until one is. That means the IRS probably won’t accept electronic returns (or process most paper returns) until sometime in February.

Next, what about the Bush Tax Cuts. President Obama has said he’d like to see those extended for the “middle class” while Republicans want them extended for everyone. I don’t see anything passing the 111th Congress, so while I think eventually we will see such legislation, and some to all of the Bush Tax Cuts will be extended, the IRS will be forced to assume that none of them will be.

What does this mean? Well, if you get a paycheck, the withholding tables the IRS will issue will assume higher tax rates, and you will get less money in early 2011. Assuming that some sort of extension of the Bush Tax Cuts eventually passes, we’ll see revised withholding tables sometime during 2011. Until that happens, you will receive less pay. As I’ve said before, the elimination of a tax cut is a tax increase.

I agree with Mr. McTague’s conclusion:

Democrats and Republicans in the 111th haven’t worked together in two years…My advice: Assume the worst, and take some profits and income in 2010. And plan for less take-home pay in the first part of 2011.

Hooray for new math,
New-hoo-hoo-math,
It won’t do you a bit of good to review math.
It’s so simple,
So very simple,
That only a child can do it!
–Tom Lehrer, “New Math”

That’s what I think of President Obama’s proposal for expensing of fixed assets. That was one part of his proposals to help the economy. Joe Kristan points out that it just speeds up depreciation from (say) five years to one year, but after five years the amount of income a company will have is identical. Of course, we’re also facing higher tax rates courtesy of the end of the Bush Tax Cuts…and that will wipe out any gains under this new plan.

But there’s a cost to this, too–and I’m not talking about whatever revenue ‘enhancements’ are proposed to balance the cost of this plan. Rather, many states will not conform to the new law (California is guaranteed not to). It will be yet another conformity issue for tax professionals and business owners to deal with.

If I were advising the President, I’d tell him there’s a simple fix to the economy. Just cut government spending and simplify the ridiculously complex Tax Code. Unfortunately, the chance of my advising the President is just about zero. Fortunately, that also appears to be the chance that this proposal becomes law.