Monday, December 30, 2013
2013: THE YEAR IN TAXES – PART TWO
2013 marked the 100th birthday of the federal income tax. February 3, 1913 was the 100th anniversary of the ratification of the 16th Amendment — the one saying "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." And Congress passed the Revenue Act of 1913 on October 3, 1913, which created the first permanent federal income tax.
The IRS was plagued with several scandals in 2013. It started with a seemingly endless string of IRS training and motivational videos based on TV shows (Star Trek, Gilligan’s Island, The Apprentice, Mad Men) that were clearly a waste of government funds.
It was also discovered that the IRS had targeted political groups applying for tax-exempt status for closer scrutiny based on their names or political themes. The FBI began investigating the IRS's actions as part of a criminal probe ordered by the US Attorney General, which led to both political and public condemnation of the agency and triggered further investigations.
Initial reports had described the targeting as almost exclusively aimed at conservative groups with terms such as "Tea Party" in their names, but further investigation revealed that certain terms and themes in the applications of liberal-leaning groups and the Occupy movement had also triggered additional scrutiny.
As a result of the scandals Steven T. Miller, Acting IRS Commissioner resigned and Joseph H. Grant, commissioner of the Tax Exempt and Government Entities Division, and Lois Lerner, the Internal Revenue Service official at the center of the scandal, elected early retirement.
In August BO nominated John Koskinen, former chairman and CEO of Freddie Mac, as the next Commissioner of the Internal Revenue Service and he was just recently approved by the Senate. My only concern is that he is “a 74-year-old multimillionaire”. I would have liked a younger, and less wealthy, person in the job.
Democrat Max Baucus and Republican Dave Camp, chairmen of the Senate and House tax writing committees, called for serious and substantial tax reform legislation in 2013 and spent the summer touring the country to promote the need for tax reform. However nothing was accomplished. The US Tax Code remains a mucking fess. Camp did tell reporters earlier this month that work on reform legislation would continue in 2014, but I am, to say the least, skeptical that anything of substance will be accomplished next year.
FYI, Baucus has announced he's not running for re-election in 2014, and was just nominated by BO as Ambassador to China so he may be leaving Congress sooner. While Camp has no plans of leaving Congress any time soon, his chairmanship of the House Ways and Means Committee has a term limit, and he'll only hold the position through 2014.
As mentioned earlier, perhaps the top tax story of 2013 was the death of DOMA (the 1996 Defense of Marriage Act). On June 26th the US Supreme Court declared that the Defense of Marriage Act was unconstitutional and that the federal government has no right to deny benefits to same-sex individuals who have married in a state that has legalized same-sex marriage.
Fellow tax blogger Kelly Phillips Erb (aka TaxGirl) explained in her initial post on the decision that “it wasn’t so much about the individual rights of folks to marry but the rights of states to write their own laws defining marriage”. The decision did not say that same-sex marriages should be legal, or that same-sex couples have a legal right to marry. It merely said a same-sex couple that a state has legally joined together in matrimony will be recognized as being married by the federal government.
In response, the IRS ruled that a same-sex couple legally married in a state that recognizes same-sex marriages will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a state that recognizes same-sex marriage or one that does not. The "state of celebration" determines the federal tax treatment and not the state of residence. Legally married same-sex couples can move freely throughout the US, from state to state, and their federal filing status will not change.
From a tax standpoint, same-sex couples who were legally married in a state that recognizes and permits same-sex marriages must file their federal income tax return(s) as either Married Filing Jointly or Married Filing Separately from now on. This is true regardless of their state of residence. How the couple will file their state income tax return(s) depends on the laws of their state of residence. Legally married same-sex couples were given the option to amend previously filed prior-year open federal returns (2010, 2011, and 2012) to file as married.
The theme of American politics continues to be “clowns to the left of me, jokers to the right”. Nothing of consequence was accomplished during 2013. Congress passed the fewest number of new laws in 66 years, only about 60. They did, however, manage to pass a bill “To specify the size of the precious-metal blanks that will be used in the production of the National Baseball Hall of Fame commemorative coins." Thank God the Democrats and Republicans could come together to accomplish that!
During 2013 the members of Congress from both parties did time and again prove themselves to be self-absorbed idiots incapable of independent thought. However it was the Republican Party leadership’s pandering to the fanatical Tea Party and religious right that literally shut down the government for over two weeks in October.
As a result of the shutdown the IRS announced that, once again, it will not be able to begin processing 2013 tax returns until January 31, 2014, because it needs “time to get things right with our programming, testing and systems validation”. Once again this delay will not affect me at all.
The year ended without an extension of the usual “extenders” that expired on December 31, 2013. These include –
· the $250 above-the-line deduction for qualified expenses of K-12 educators,
· the above-the-line deduction for up to $2,000 or $4,000 of qualified tuition and fees,
· the itemized deduction for mortgage insurance premiums,
· the option to claim an itemized deduction for state and local general sales taxes instead of state and local income taxes,
· the $500 lifetime maximum for qualified energy efficient improvements to a taxpayer's principal residence,
· the ability to make a direct tax-free transfer from an IRA to a charity and apply this as a Required Minimum Distribution, and
· the exclusion from income of the discharge of qualified principal residence debt.
Whether or not these items will be on the 2014 Form 1040 will not be decided until 2014 (let’s hope early in the year and not December).
So there you have it – the year 2013 in taxes.
What will happen in 2014? Not much, I am sure. We continue to elect idiots to Congress, and until this changes we can look forward to more of the same inaction and incompetence in Washington.