The Stealth Tax On Your Social Security

Social security benefits first became taxable in 1983.

The law was relatively straightforward:

·        Half of one’s social security became taxable as adjusted gross income exceeded

o   $32,000 for marrieds filing jointly,

o   $25,000 for everyone else, except for

o   Marrieds filing separately, whose threshold was zero (-0-)

Clearly the tax law frowned on married social security recipients filing separately.

The Senate Finance Committee Report commented on why any social security was being taxed at all:

… by taxing social security benefits and appropriating these revenues to the appropriate trust funds, the financial solvency of the social security trust funds will be strengthened.”

Uh, sure.

In 1993 Congress laid a second grid on top of the 1983 law:

·        85% of one’s social security as adjusted gross income exceeded

o   $44,000 for marrieds filing jointly

o   $34,000 for everyone else, except for

o   Marrieds filing separately, whose threshold remained at zero (-0-)

Depending on where one is income-wise, part of one’s social security can be taxed at 50% and another part at 85%. Make enough and a clawback kicks-in: all your social security will be taxable at 85%.

Seems a bit complicated for a tax provision that snags ordinary people.

So in 1983, if you were married, filing joint and your income was less than $32 grand, your social security was not taxed.

I was curious: what is the equivalent of $32,000 of 1983 dollars in 2019?

Approximately $82 grand.

Wow!

I was also curious: how have the income thresholds for social security changed over three-plus decades?

Here are the thresholds for 2018:

·        $32,000/$25,000

·        $44,000/$34,000

They have not changed at all.

Meanwhile you need almost three 2019 dollars to equal one dollar from 1983.

So let me get this right.

IRA deductions are indexed for inflation. Gift taxes are indexed for inflation. The income thresholds for the new 20% passthrough deduction are indexed for inflation.

But the tax on social security is not.

What a nice gimmick. Even if you started out below the tax threshold, inflation over time would probably put you above the tax threshold.

The cynicism from our politicians is stunning.

Losing Your Passport For Tax Debt

Here is something you don’t see every day:

There is a section in the tax Code that can affect your passport. It entered the tax law in 2015, and it allows the IRS to notify the State Department if you have a seriously delinquent tax debt.

How much tax debt are we talking about?

Around $52,000.

As a career tax CPA, I do not consider $52,000 enough to hold-up someone’s passport. Granted, my perspective is a bit skewed, as average folk (like you or me) are not likely to require my services, at least not on a repetitive basis. Still, I have had friends and acquaintances who have danced the tax tango near or above $52 grand, so I know that average folks can get there.

If the IRS notifies the State Department, the law requires them to deny your passport application or renewal.

That will put a chill on your travel plans.

How do you get out of this predicament?

As a generalization, the IRS does not want to chase you down. They certainly do not want to seize your assets or bounce your passport. What they want is your money.  

I do not immediately know Derrick Tartt’s issue with the IRS, but I can tell you that it has gone cold. If his issue was still being handled – in Appeals, Tax Court, a payment plan or whatnot – this should not have happened. I will not say “would not,” as I have been in practice long enough to see too many “would nots” land on my desk.

How should Mr. Tartt handle this?

He is going to have to move his file from cold to warm. This may mean writing a check or entering a payment plan.

That presumes he owes the tax.

What if he disagrees that he owes the tax, or at least disagrees that he owes all of it?

The situation becomes trickier. His file has moved to Collections, and that crowd does not care whether you owe or not. Their only concern is prying money from you.

Am I being unfair?

Let me give you an story. We have a client who got himself into a tax hole a few years ago. He has been working his way out, and he was very optimistic that his 2018 return would have a large enough refund to pay off the back taxes, interest and penalties. He was partially correct, as he did have a refund, but it was not enough for payoff in full. It did however put him close enough that he could write a check for the balance.

I called Collections to hold back the hounds. I requested that the refund be applied (which would happen automatically, but I wanted to talk to them) and requested a bit more time for the balance, as he is presently battling a second round of prostate cancer. His attention is … shall we say … elsewhere, understandably.

Understandable for you or me, but not for Collections. One would have to wheel in the Gran Telescopio Canarias telescope to find empathy in that universe. I may as well have been speaking with Arthur Fleck.

If Mr. Tartt disagrees that he owes tax (or some of it), his advisor will have to reopen his file. There may be several possibilities, depending on the facts and the amount of time lapsed, and he should seek professional advice.

That will not happen fast enough to get Mr. Tartt to the Dominican Republic or Cayman Islands in the near future, however.

I hope it works out for Mr. Tartt.

Use Certified Mail With The IRS

I am looking at Baldwin v U.S., at least as much as I can between the September and October 15^th due dates.

In the blog equivalence of cinematic foreboding, the case comes out of the Ninth Circuit.

The Baldwins filed a 2007 joint tax return showing an approximate $2.5 million loss from a movie production business.

They filed to carry the loss back to 2005 for a refund.

They had three years to file the refund claim. The three years started with the filing of their 2007 return – that is, the year that showed the loss. They filed their 2007 return on extension, so three years later would be October 15, 2011.

They filed the refund claim on June 21, 2011.

Seems plenty of time.

They filed using regular mail.

The IRS said they never received the refund claim.

Problem.

The three years expired. Sorry about your luck, Baldwins, purred the IRS.

You know this went to court.

It went to a California district court.

And we get to talk about the mailbox rule.

There is a provision in the tax Code that timely-mailing-equals-timely filing with the IRS. That is the reason you hear (not as much now in the era of electronic filing) of people heading to the post office on April 15^th. Folks want to get that “April 15” stamped on the envelope, as that stamp means the return is considered timely filed with the IRS.

By the way, that provision did not enter the Code until 1954.

What did folks do before 1954?

They relied on common law.

Common law allows one to presume that a properly-mailed envelope will arrive in the ordinary time required to get from here to there. One would have to prove that one mailed the envelope, of course, but once that was done the presumption that the mail arrived in normal time would kick-in.

In 1954 Congress added the following:

§ 7502 Timely mailing treated as timely filing and paying.

(a)  General rule.

(1)  Date of delivery.

If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.

Section (c) is important here:

(c)  Registered and certified mailing; electronic filing.

(1)  Registered mail.

For purposes of this section , if any return, claim, statement, or other document, or payment, is sent by United States registered mail-

(A)  such registration shall be prima facie evidence that the return, claim, statement, or other document was delivered to the agency, officer, or office to which addressed; and

(B)  the date of registration shall be deemed the postmark date.

Section (c) is why accountants encourage the use of certified mail with tax returns.

But the Baldwins did not certify their mailing.

They instead argued that they met the common-law standard for timely filing.

Seems a solid argument.

The IRS went low.

There are Court cases out there (Anderson, for example) that decided that the common law standard continued to exist even after the codification of Section 7502. It makes sense – at least to me - as that is what common law means.

The IRS argued that Section 7502 did away with the common-law standard, and the cases deciding otherwise were decided erroneously.

Sounds like a truckload of fine-cut bull manure to me.

Let’s load the truck.

There was a case in 1984 called Chevron. From it came the Chevron doctrine, an administrative law principle that a government agency’s interpretation of an ambiguous or unclear statute should be respected by a court.

I get the concept.

The first thing the agency has to do is show that the statute is ambiguous or unclear.

Does Section 7502 appear ambiguous or unclear to you?

We are going to need a jump to get this truck going.

Let’s introduce National Cable & Telecommunications Association v Brand X. That case has to do with the internet and whether it is an information service or a telecommunication service.

Sounds boring.

Let’s look at the Ninth Circuit’s take-away from Brand X:

But [a] court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”

Let me translate that word salad:

Since the prior Court decisions (let’s use Anderson as an example) did not specifically say that the statute was unambiguous, the statute is therefore ambiguous.

Huh?

So, if I do not make clear that I am not a Robert Howard sword-and-sorcery, skilled, powerful and fearless giant weapon-wielding barbarian, then it can be deduced that I am that very said barbarian?

Cool!

Brand X lets me say that Section 7502 is ambiguous, at which point Chevron kicks-in and allows me to argue that the underlying statute means anything I want it to say.

There is an aisle for this at Borders. It is called “Fiction.”

The Baldwins did not get to rely on common-law. Since they could not meet requirements of Section 7502(c), they lost out altogether. No carryback refund for them.