There Is No Tax Relief If You Are Robbed

 

Some tax items have been around for so long that perhaps it would be best to leave them alone.

I’ll give you an example: employees deducting business mileage on their car.

Seems sensible. You tax someone on their work income. That someone incurs expenses to perform that work. Fairness and equity tell you that one should be able to offset the expenses of generating the income against such income.

The Tax Cut and Jobs Act of 2017 (TCJA) did away with that deduction, however. Mind you, the TCJA itself expires in 2025, so we may see this deduction return for 2026.

There are reasons why Congress eliminated the deduction, we are told. They increased the standard deduction, for example, and one could not claim the mileage anyway if one’s itemized deductions were less than the standard deduction. True statement.

Still, it seems to me that Congress could have left the deduction intact. Many if not most would not use it (because of the larger standard deduction), but the high-mileage warriors would still have the deduction if they needed it.

Here’s another:  a tree falls on your house. Or you get robbed.

This has been a tax break since Carter had liver pills.

Used to be.

Back to the TCJA. Personal casualty and theft losses are deductible only if the loss results from a federally declared disaster.

Reread what I just said.

What does theft have to do with a federally declared disaster?

Nothing, of course.

I would make more sense to simply say that the TCJA did away with theft loss deductions.

Let’s talk about the Gomas case.

Dennis and Suzanne Gomas were retired and living their best life in Florida. Mr. G’s brother died, and in 2010 he inherited a business called Feline’s Pride. The business sold pet food online.

OK.

The business was in New York.

We are now talking about remote management. There are any numbers of ways this can go south.

His business manager in New York must have binged The Sopranos, as she was stealing inventory, selling customer lists, not supervising employees, and on and on.

Mr. G moved the business to Florida. His stepdaughter (Anderson) started helping him.

Good, it seems.

By 2015 Mr. G was thinking about closing the business but Anderson persuaded him to keep it open. He turned operations over to Anderson, although the next year (2016) he formally dissolved the company. Anderson kept whatever remained of the business.

In 2017 Anderson prevailed on the G’s to give her $20,000 to (supposedly) better run the business.

I get it. I too am a parent.

Anderson next told the Gs that their crooked New York business manager and others had opened merchant sub-accounts using Mr. G’s personal information. These reprobates were defrauding customers, and the bank wanted to hold the merchant account holder (read: Mr. G) responsible.

          COMMENT: Nope. Sounds wrong. Time to lawyer up.

Anderson convinced the G’s that she had found an attorney (Rickman), and he needed $125,000 at once to prevent Mr. G’s arrest.

COMMENT: For $125 grand, I am meeting with Rickman.

The G’s gave Anderson the $125,000.

But the story kept on.

There were more business subaccounts. Troubles and tribulations were afoot and abounding. It was all Rickman could do to keep Mr. G out of prison. Fortunately, the G’s had Anderson to help sail these treacherous and deadly shoals.

The G’s never met Rickman. They were tapping all their assets, however, including retirement accounts. They were going broke.

Anderson was going after that Academy award. She managed to drag in friends of the family for another $200 grand or so. That proved to be her downfall, as the friends were not as inclined as her parents to believe. In fact, they came to disbelieve. She had pushed too far.

The friends reached out to Rickman. Sure enough, there was an attorney named Rickman, but he did not know and was not representing the G’s. He had no idea about the made-up e-mail address or merchant bank or legal documents or other hot air.

Anderson was convicted to 25 years in prison.

Good.

The G’s tried to salvage some tax relief out of this. For example, in 2017 they had withdrawn almost $1.2 million from their retirement accounts, paying about $410 grand in tax.

Idea: let’s file an amended return and get that $410 grand back.

Next: we need a tax Code-related reason. How about this: we send Anderson a 1099 for $1.1 million, saying that the monies were sent to her for expenses supposedly belonging to a prior business.

I get it. Try to show a business hook. There is a gigantic problem as the business had been closed, but you have to swing the bat you are given.

The IRS of course bounced the amended return.

Off to Court they went.

You might be asking: why didn’t the G’s just say what really happened – that they were robbed?

Because the TCJA had done away with the personal theft deduction. Unless it was presidentially-declared, I suppose.

So, the G’s were left bobbing in the water with much weaker and ultimately non-persuasive arguments to power their amended return and its refund claim.

Even the judge was aghast:

Plaintiffs were the undisputed victims of a complicated theft spanning around two years, resulting in the loss of nearly $2 million dollars. The thief — Mrs. Gomas’s own daughter and Mr. Gomas’s stepdaughter — was rightly convicted and is serving a lengthy prison sentence. The fact that these elderly Plaintiffs are now required to pay tax on monies that were stolen from them seems unjust.

Here is Court shade at the IRS:

In view of the egregious and undisputed facts presented here, it is unfortunate that the IRS is unwilling — or believes it lacks the authority — to exercise its discretion and excuse payment of taxes on the stolen funds.

There is even some shade for Congress:

It is highly unlikely that Congress, when it eliminated the theft loss deduction beginning in 2018, envisioned injustices like the case before this Court. Be that as it may, the law is clear here and it favors the IRS. Seeking to avoid an unjust outcome, Plaintiffs have attempted to recharacterize the facts from what they really are — a theft loss — to something else. Established law does not support this effort. The Court is bound to follow the law, even where, as here, the outcome seems unjust.

To be fair, Congress changed the law. The change was unfair to the G’s, but the Court could not substitute penumbral law over actual law.

The G’s were hosed.

Seriously, Congress should have left theft losses alone. The reason is the same as for employee mileage. The Code as revised for TCJA would make most of the provision superfluous, but at least the provision would exist for the most extreme or egregious situations.

COMMENT: I for one am hopeful that the IRS and G's will resolve this matter administratively. This is not a complementary tale for the IRS, and – frankly – they have other potentially disastrous issues at the moment. It is not too late, for example, for the IRS and G’s to work out an offer in compromise, a partial pay or a do-not-collect status. This would allow the IRS to resolve the matter quietly. Truthfully, they should have already done this and avoided the possible shockwaves from this case.

Our case this time was Gomas v United States, District Court for the Middle District of Florida, Case 8:22-CV-01271.

"I Never Heard Of The Alternative Minimum Tax"

 

I am looking at a case that involves the alternative minimum tax.

While it still exists, much of the steam has thankfully been taken out of the AMT. It started off as Congressional reaction to a handful of ultrawealthy families paying little to no income taxes decades ago. Congress’s response was to require a second tax calculation, disallowing certain things – such as exemptions for your dependents.

Yes, you read that correctly, you large-family tax scofflaw.

Now, it wouldn’t be so bad if this thing had been scaled to only reach the wealthy and ultrawealthy, but that is not what Congress did. Congress instead gave you a spot, and then you were on your own. For 2017 that spot was approximately $84 grand in income for marrieds filing jointly.

I used to see the AMT as often as a Gibson’s employee sees donuts.

Thankfully the Tax Cut and Jobs Act of 2017 did a couple of things to defang the AMT:

(1) It increased the exemption (that is, the spot) for everyone. Marrieds now have an exemption of approximately $115,000, for example.

(2)  More importantly, it adjusted a previous rule that phased-out the exemption as one’s income increased. For example, marrieds in 2017 would start phasing-out when their income reached approximately $160,000. Now it is over $1 million, which makes a lot more sense it if was truly targeted at the wealthy.

Why the absurdly low previous income thresholds for the AMT, especially since it was supposed to target the “rich?” Think of it as Congressional addiction to paper crack – the paper being your dollar bills.

The tax law is a little saner until 2026, when the TCJA goes “poof.” Much prior tax law will then resurrect – including the previous version AMT.

Robert Colton and Alina Mazwin (R&A) filed a joint return for 2016.

The IRS did its computer matching and sent them a notice. There was $125,000 reported by JP Morgan Chase Bank. The IRS wanted taxes on it.

R&A explained to the IRS that the $125,000 was a legal settlement, and that half of it went to Mr Colton’s ex-spouse.

The IRS said OK, but we want taxes on the $62,500.

Let’s take an aside here. You may have heard that lawsuit settlements are not taxable. That is only partially true. The lawsuit has to involve physical injury (think a car crash, for example) to be tax-free.

It appears that Mr Colton’s settlement was of the non-car crash variety, meaning that it was taxable.

R&A then amended their 2016 return, picking up the $62,500 but also claiming a miscellaneous itemized deduction of $80,075 for attorney fees.

Hah! They might even get a tax refund out of this, right? Take that, IRS.

Except …

Guess what is not deductible for the AMT.

Yep, that miscellaneous itemized deduction.

So – for AMT purposes – their income went up by the $62,500 but there was no deduction for the related legal fee.

How much income did R&A have before the IRS contacted them?

About $40 grand.

Yep, the AMT had been bent so far beyond recognition that it trapped someone amending a return to show perhaps $100 grand in income.

Folks, that income level does not go you invited to the cool parties on Martha’s Vineyard.

Let me share a line from the case:

Petitioners stated in their petition that ‘[they] never heard of [the] alternative minimum tax.”

I get it. I consider it unconscionable that an average person has to hire someone like me to prepare their taxes.  

Our case this time for the home gamers was Colton and Mazwin v Commissioner, T.C. Memo 2021-44.

Deducting State And Local Taxes On Your Individual Return

You probably already know about the change in the tax law for deducting state and local taxes on your personal return.

It used to be that you could itemize and deduct your state and local income taxes, as well as the real estate taxes on your house, without limitation.  Mind you, other restrictions may have kicked-in (such as the alternative minimum tax), but chances are you received some tax benefit from the deduction.

Then the Tax Cuts and Jobs Act put a $10,000 limit on the state income/local income/property tax itemized deduction.

Say for example that the taxes on your house are $5 grand and your state income taxes are $8 grand. The total is $13 grand, but the most you can deduct is $10 grand. The last $3 grand is wasted.

This is probably not problem if you live in Nevada, Texas or Florida, but it is likely a big problem if you live in California, New York, New Jersey or Connecticut.

There have been efforts in the House of Representatives to address this matter. One bill would temporarily raise the cap to $20,000 for married taxpayers before repealing the cap altogether for two years, for example.

The tax dollars involved are staggering. Even raising the top federal to 39.6% (where it was before the tax law change) to offset some of the bill’s cost still reduces federal tax receipts by over $500 billion over the next decade.

There are also political issues: The Urban-Brookings Tax Policy Center ranked the 435 Congressional districts on the percentage of households claiming the SALT (that is, state and local tax) deduction in 2016. Nineteen of the top 20 districts are controlled by Democrats. You can pretty much guess how this will split down party lines.

Then the you have the class issues: approximately two-thirds of the benefit from repealing the SALT cap would go to households with annual incomes over $200,000. Granted, these are the people who pay the taxes to begin with, but the point nonetheless makes for a tough sell.

And irrespective of what the House does, the Senate has already said they will not consider any such bill.

Let’s go over what wiggle room remains in this area. For purposes of our discussion, let’s separate state and local property taxes from state and local income taxes.

Property Taxes

The important thing to remember about the $10,000 limitation is that it addresses your personal taxes, such as your primary residence, your vacation home, property taxes on your car and so on.

Distinguish that from business-related property taxes.

If you are self-employed, have rental real estate, a farm or so on, those property taxes are considered related to that business activity. So what? That means they attach to that activity and are included wherever that activity is reported on your tax return. Rental real estate, for example, is reported on Schedule E. The real estate taxes are reported with the rental activity on Schedule E, not as itemized deductions on Schedule A. The $10,000 cap applies only to the taxes reported as itemized deductions on your Schedule A.

Let me immediately cut off a planning “idea.” Forget having the business/rental/farm pay the taxes on your residence. This will not work. Why? Because those taxes do not belong to the business/rental/farm, and merely paying them from the business/rental/farm bank account does not make them a business/rental/farm expense.

         

State and Local Income Taxes

State and local income taxes do not follow the property tax rule. Let’s say you have a rental in Connecticut. You pay income taxes to Connecticut. Reasoning from the property tax rule, you anticipate that the Connecticut income taxes would be reported along with the real estate taxes when you report the rental activity on your Schedule E.

You would be wrong.

Why?

Whereas the income taxes are imposed on a Connecticut activity, they are assessed on you as an individual. Connecticut does not see that rental activity as an “tax entity” separate from you. No, it sees you. With that as context, state and local income tax on activities reported on your individual tax return are assessed on you personally. This makes them personal income taxes, and personal income taxes are deducted as itemized deductions on Schedule A.

It gets more complicated when the income is reported on a Schedule K-1 from a “passthrough” entity. The classic passthrough entities include a partnership, LLC or S corporation. The point of the passthrough is that the entity (generally) does not pay tax itself. Rather, it “passes through” its income to its owners, who include those numbers with their personal income on their individual income tax returns.

What do you think: are state and local income taxes paid by the passthrough entity personal taxes to you (meaning itemized deductions) or do they attach to the activity and reported with the activity (meaning not itemized deductions)?

Unfortunately, we are back (in most cases) to the general rule: the taxes are assessed on you, making the taxes personal and therefore deductible only as an itemized deduction.

This creates a most unfavorable difference between a corporation that pays its own tax (referred to as a “C” corporation) and one that passes through its income to its shareholders (referred to as an “S” corporation).

The C corporation will be able to deduct its state and local income taxes until the cows come home, but the S corporation will be limited to $10,000 per shareholder.

Depending on the size of the numbers, that might be sufficient grounds to revoke an S corporation election and instead file and pay taxes as a C corporation.

Is it fair? As we have noted before on this blog, what does fair have to do with it?

We ran into a comparable situation a few years ago with an S corporation client. It had three shareholders, and their individual state and local tax deduction was routinely disallowed by the alternative minimum tax.  This meant that there was zero tax benefit to any state and local taxes paid, and the company varied between being routinely profitable and routinely very profitable. The SALT tax deduction was a big deal.

We contacted Georgia, as the client had sizeable jobs in Georgia, and we asked whether they could – for Georgia purposes – file as a C corporation even though they filed their federal return as an S corporation. Georgia was taken aback, as we were the first or among the first to present them with this issue.

Why did we do this?

Because a C corporation pays its own tax, meaning that the Georgia taxes could be deducted on the federal S corporation return. We could sidestep that nasty itemized deduction issue, at least with Georgia.

Might the IRS have challenged our treatment of the Georgia taxes?

Sure, they can challenge anything. It was our professional opinion, however, that we had a very strong argument. Who knows: maybe CTG would even appear in the tax literature and seminar circuit.  While flattering, this would have been a bad result for us, as the client would not have appreciated visible tax controversy. We would have won the battle and lost the war.

However, the technique is out there and other states are paying attention, given the new $10,000 itemized deduction limitation. Connecticut, for example, has recently allowed its passthroughs to use a variation of the technique we used with Georgia.

I suspect many more states will wind up doing the same.

Excess Business Loss Problems

To a tax accountant, October 15 signifies the extended due date for individual tax returns.

As a generalization, our most complicated returns go on extension. There is a reason: it is likely that the information necessary to prepare the return is not yet available. For example, you are waiting on a Schedule K-1 from a partnership, LLC or S corporation. That K-1 might not be prepared until after April 15. There is only so much work an office of accountants can generate within 75 days, irrespective of government diktats.

More recently I am also seeing personal returns being extended because we are expecting a broker’s information report to be revised and perhaps revised again. It happens repetitively.

Let’s talk about a new twist for 2018 personal returns. There are a few twists, actually, but let’s focus on the “excess business loss” rule.

First, this applies only to noncorporate taxpayers. As noncorporate taxpayers, that could be you or me.

Its purpose is to stop you or me from claiming losses past a certain amount.

Now think about this for a moment.

Go out there, sign a sports contract for big bucks and Uncle Sam is draped all over you like a childhood best friend.

Get booted from the league, however, and you get a very different response.

How can losses happen?

Easy. Let me give you an example. We represent a sizeable contractor. The swing in their numbers from year-to-year can gray your hair. When times are good, they are virtually printing money. When times are bad, it feels like they are taking-on the national debt.

I presume one does not even know the meaning of risk if one wants to be an owner there.

To me, fairness requires that the tax law share in my misery when I am losing money if it also wants me to cooperatively send taxes when I am making money. Call me old-fashioned that way.

The “excess business loss” rule is not concerned with old-fashioned fairness.

Let’s use some numbers to make sense of this.

          Dividends                      100,000

 Capital gains                  400,000

          Schedule K-1                (600,000)

The concept is that you can offset a business loss against nonbusiness income, but only up to a point. That point is $250,000 if you are nonmarried and twice that if you are. Using the above numbers, we have:

 Dividends                       100,000

          Capital gains                  400,000

          Schedule K-1                (600,000)

                                                   (100,000)

          Excess business loss     100,000

         

Interest, dividends and capital gains are the classic nonbusiness income categories. You are allowed to offset $500,000 of nonbusiness income (assuming married) but you are showing $600,000 of business losses. The excess business loss rule will magically adjust $100,000 into your income tax return to get the numbers to work.

It is like a Penn and Teller show.

Let’s tweak our example:

Wages                            100,000

Dividends                       100,000

         Capital gains                  400,000

         Schedule K-1                (600,000)

What now? Do you get to include that W-2 as part of your business income, meaning that you no longer have a $100,000 excess business loss?

Believe it or not, tax professionals are not certain.

Here is what sets up the issue:

The Joint Committee of Taxation published its “Bluebook” describing Congress’ intention when drafting the Tax Cuts and Jobs Act. In it, the JCT states that “an excess business loss … does not take into account gross income, or gains or deductions attributable to the trade or business of performing services as an employee.”        

The “trade or business of performing services as an employee” is fancy talk for wages and salaries.

However, the IRS came out with a shiny new tax form for the excess business loss calculation. The instructions indicate that one should add-up all business income, including wages and tips.

We have two different answers.

Let’s get nerdy, as it matters here.

Elsewhere in the Code, we also have a new 20% deduction for “qualified business income.” The Code has to define “business income,” as that is the way tax law works. The Code does so by explicitly excluding the trade or business of “being an employee.”

There is a concept of statutory construction that comes into play. If one Code section has to EXPLICITLY exclude wages (that is, the trade or business of being an employee), then it is reasonably presumable that business income includes wages.

Which means foul when another Code section pops up and says “No, it does not.”

Of course, no one will know for certain until a court decides.

Or Congress defies all reasonable expectations and actually works rather than enable the Dunning-Kruger psychopaths currently housed there.

Why does this “excess business loss” Code section even exist?

Think $150 billion in taxes over 10 years. That is why.

To be fair, the excess is not lost. It carries over to the following year as a net operating loss.

That probably means little if you have just lost your shirt and I am calling you to make an extension payment on April 15 – you know, because of that “excess business loss” thing.

Meanwhile tax professionals have to march on. We cannot wait. After all, those noncorporate returns are due October 15.

The Kiddie Tax Problem

You may have heard that there are issues with the new kiddie tax.

There are.

The kiddie tax has been around for decades.

Standard tax planning includes carving out highly-taxed parental or grandparental income and dropping it down to a child/young adult. The income of choice is investment income: interest, dividends, royalties and the like. The child starts his/her own tax bracket climb, providing tax savings because the parents or grandparents had presumably maxed out their own brackets.

Congress thought this was an imminent threat to the Union.

Which beggars the question of how many trust fund babies are out there anyway. I have met a few over the decades – not enough to create a tax just for them, mind you - but I am only a tax CPA. It is not like I would run into them at work or anything.

The rules used to be relatively straightforward but hard to work with in practice.

(1)  The rules would apply to unearned income. They did not apply if your child starred in a Hollywood movie. It would apply to the stocks and bonds that you purchased for the child with the paycheck from that movie.

(2)  The rules applied to a dependent child under 19.

(3)  The rules applied to dependents age 19 to 23 if they were in college.

(4)  The child’s first $1,050 of taxable unearned income was tax-free.

(5)  The child’s next $1,050 of taxable unearned income was taxed at the child’s tax rate.

(6)  Unearned income above that threshold was taxed at the parent’s tax rate.

It was a pain for practitioners because it required one to have all the returns prepared except for the tax because of the interdependency of the calculation.

For example, let’s say that you combined the parents and child’s income, resulting in $185,000 of combined taxable income. The child had $3,500 of taxable interest. The joint marginal tax rate (let’s assume the parents were married) at $185,000 was 28%. The $3,500 interest income times 28% tax rate meant the child owed $980.

Not as good as the child having his/her own tax rates, but there was some rationale. As a family unit, little had been accomplished by shifting the investment income to the child or children.

Then Congress decided that the kiddie tax would stop using this piggy-back arithmetic and use trust tax rates instead.

Problem: have you seen the trust tax rates? 

Here they are for 2018:

          Taxable Income                         The Tax Is

Not over $2,550                         10%

$2,551 to $9,150         $ 255 plus 24% of excess

$9,151 to $12,500       $1,839 plus 35% of excess

Over $12,500              $3,011.50 plus 37% of excess

Egad.

Ahh, but it is just rich kids, right?

Not quite.

How much of a college scholarship is taxable, as an example?

None of it, you say.

Wrong, padawan. To the extent not used for tuition, fees and books, that scholarship is taxable.

So you have a kid from a limited-means background who gets a full ride to a school. To the extent the ride includes room and board, Congress thinks that they should pay tax. At trust tax rates.

Where is that kid supposed to come up with the money?

What about a child receiving benefits because he/she lost a parent serving in the military? These are the “Gold Star” kids, and the issue arises because the surviving parent cannot receive both Department of Defense and Department of Veteran Affairs benefits. It is common to assign one to the child or children.

Bam! Trust tax rates.

Can Congress fix this?

Sure. They caused the problem.

What sets up the kiddie tax is “unearned” income. Congress can pass a law that says that college room and board is not unearned income or that Gold Star family benefits are not unearned income.

However, Congress would have started a list, and someone has to remember to update the list. Is this a reasonable expectation from the same crew who forgot to link leasehold improvements to the new depreciation rules? Talk to the fast food industry. They will burn your ear off on that topic.

Congress should have just left the kiddie tax alone.

New York And State Donation Programs

You may have read that the new tax law will limit your itemized tax deduction beginning this year (2018).

This is of no concern to you if you do not itemize deductions on your personal return.

If you do itemize, then this might be a concern.

Here is the calculation:

        *  state income taxes plus

        *  local income taxes plus

        *  real estate taxes plus

        *  personal property taxes

There is a spiff in there if you live in a state without an income tax, but let’s skip that for now.

You have a sum. You next compare that sum to $10,000, and

… you take the smaller number. That is the maximum you can deduct.

Folks, if you live in New Jersey odds are that real estate taxes on anything is going to be at least $10 grand. That leaves you with no room to deduct New Jersey income taxes. You have maxed.

Same for New York, Connecticut, California and other high tax states.

Governor Cuomo said the new tax law would “destroy” New York.

Stepping around the abuse of the language, New York did put out an idea – two, in fact:

·       Establish a charitable fund to which one could make payments in lieu of state income taxes. When preparing one’s individual tax return, one could treat contributions to that fund as state taxes paid. To make this plausible, New York would not make the ratio one-to-one. For example, if you paid $100 to the charitable fund, your state tax credit might be $90. Surely no one would then argue that you had magically converted your taxes into a charitable deduction. The only one on the short end is the IRS, but hey … New York.

·      Have employers pay a new payroll tax on employee compensation, replacing employee withholding on that compensation.  Of course, to get this to work the employee would probably have to reduce his/her pay, as the employer is not going to keep his/her salary the same and pay this new tax.

Other states put out ideas, by the way. New York was not alone.

I somewhat like the second idea. I do however see the issue with subsequent raises (a smaller base means a smaller raise), possibly reduced social security benefits, possible employer reluctance to hire, and the psychological punch of taking a cut in pay. Ouch.

The first idea however has a sad ending.

You see, many states for many years thought that there were good causes that they were willing to subsidize.

·       Indiana has the School Scholarship Credit. You donate to a scholarship-granting charity and Indiana gives you a tax credit equal to 50% of the donation on your personal return.

·       South Carolina has something similar (the Exceptional SC), but the state tax credit is 100%.

New York and its cohorts saw these and said “What is the difference between what Indiana or South Carolina is doing and what we are proposing?”

Well, for one thing money is actually going to a charitable cause, but let’s continue.

This past summer the IRS pointed out the obvious: there was no charity under New York’s plan., The person making the “donation” was simultaneously receiving a tax benefit. That is hardly the hallmark of a charitable contribution.

Wait, wait, New York said. We are not giving him/her a dollar-for-dollar credit, so …..

Fine, said the IRS. Here is what you do. Subtract the credit from the “donation.” We will allow the difference as a deductible contribution.

In fact, continued the IRS, if the spread is 15% or less, we will spot you the full donation. You do not have to reduce the deduction for the amount you get back. We can be lenient.

So what have New York and cohorts done to Indiana, to South Carolina and other states with similar programs?

You got it: they have blown up their donation programs.

Way to go.

Why did the IRS not pursue this issue before?

Well, before it did not matter whether one considered the donation to be a tax or a deductible contribution. Both were deductible as itemized deductions. There was no vig for the IRS to chase.

This changed when deductible taxes were limited to $10,000. Now there was vig.

There are about 30 states with programs like Indiana and South Carolina, so do not be surprised if this reaches back to you.