I use the term "tax oddities" to describe tax rules and situations that seem odd because of their convoluted structure, consequences, inappropriate stated purpose, odd outcome, or because they violate multiple principles of good tax policy. There are numerous federal, state and local tax rules that fall within this description. I'll highlight at least one per week here and on the 21st Century Taxation blog to allow you to comment on them and to add more to the list. I'll categorize them as to which level of government created the "tax oddity." It would be nice if these oddities could be removed or modified to no longer be "odd."
Federal Tax Oddities
ACA - Affordability of health insurance and age - Health insurance costs more as we age, yet the Affordable Care Act does not fully factor this into all of its tax provisions. Age is factored in to the PTC in that the credit amount is based on the cost of the second lowest cost silver plan. But age is not factored into affordability factors which are the same for all taxpayers (for 2014, it is 9.5% of household income for the PTC and 8% of household income to meet the unaffordable exemption to the individual mandate. [For more - see my post of 12/31/14.]
Premium Tax Credit Denied to Family if Self-Only Coverage is Affordable - The premium tax credit is available starting in 2014 to individuals who purchase health coverage on the Marketplace (Exchange) and have household income between 100% and 400% of the federal poverty line. There are exceptions including if the individual has other coverage such as Medicare or employer provided coverage that is affordable and minimum value. If the employer offers coverage to the family that is not affordable, but the coverage offered to the employee is affordable and minimum value, the family is not able to get a PTC. [For more - see my post of 12/9/14.]
Special Deduction for K-12 Teachers - In 2003, Congress changed the tax law to allow K-12 teachers to deduct up to $250 per year, above-the-line (so whether or not they itemize), for classroom-related expenses. It was created as a temporary provision, was renewed a few times and last expired on 12/31/09. H.R. 4213 (111th Congress) would extend the deduction one more year (for 2010). While this may seem like a good idea, the problem is that it ignores the fact that teachers are paying out of pocket for state expenses! If the federal government wants to help, why not transfer more funds to states to fund K-12 so teachers don't have to buy classroom expenses. Also, I'm afraid that this type of rule can lead governments, school administrators and the public to think that teachers should be buying classroom supplies. But think about it, can you imagine Best Buy telling its cashiers that they need to buy their own cash register? Also, where will it end? Harper's Index for March 2010 notes that 63% of US public school teachers say they purchase food for hungry students each month. We are asking a lot of our K-12 teachers. I think the special deduction, while helpful given the reality of underfunding schools, is odd as it masks a problem, encourages teachers to spend their own money on state purposes, and still cheats them since it is a deduction rather than a refundable credit. This is not the purpose of a tax law. [For more - see my post of 1/28/09.]
Casualty Loss Related to Drunk Driving Allowed - In Rohrs, TC Summary Opinion 2009-190, the court ruled that public policy did not support denial of a person's casualty loss that arose due to an accident where the driver was drunk. The taxpayer's insurance company had denied the claim.
The IRS denied R's tax deduction because (1) the loss resulted from gross or willful negligence or (2) to allow the loss would be contrary to public policy.
The court allowed the loss finding that there was no gross or willful negligence. The court noted that R arranged for a responsible driver right after drinking and that there was no evidence that R knew his behavior would cause injury. R’s blood alcohol level was slightly over the legal limit. Per the court, R’s “level of intoxication and the manner in which he drove do not suggest that he was consciously indifferent to the hazards of drunk driving.”
The court also found that there was no public policy issue with R claiming a loss deduction. “Where the taxpayer is reasonably unaware that he is doing something wrong, it is less likely that allowance of a casualty loss deduction would so severely frustrate public policy as to require disallowance.” …. “This Court is not empowered to judge petitioner's actions from a criminal perspective or to punish him for his actions. In reaching our decision, we do not reflect upon or in any way condone the act of driving under the influence of alcohol. It is our obligation to decide whether petitioner's actions amounted to gross or willful negligence and/or whether the allowance of a casualty loss deduction in the setting of this Federal income tax case would frustrate public policy.” [see my 5/6/10 blog post]
Messing with Corporate Estimated Tax Payment Rules - For years, a trick used by Congress to help meet a revenue target for legislation is to accelerate individual and/or corporate estimated tax payments. This is not a tax increase and really doesn't help balance a budget unless you look at a fixed time period. These changes also complicate the law. Lately, several changes have been made and continue to be proposed regarding future estimated tax payments for large corporations. For more, see my 7/1/10 blog post.
State Tax Oddities
Gun Tax Holiday - In March 2010, the West Virginia House of Delegates passed a bill for a sales tax holiday on gun sales in the first weekend of October. That means, for guns purchased that weekend, no sales tax would be owed. Why? This is an odd use of the tax law. [For more - see my post of 3/4/10.] This oddity did not become law because the Governor vetoed the bill in April (HB 4521). Many states have sales tax holidays - typically for school supplies or computers (click here to see a few different tax holidays offerred in Virginia). These holidays violate a few principles of good tax policy such as simplicity, neutrality and equity. For more on this, please see a Special Report by the Tax Foundation - Sales Tax Holidays: Politically Expedient but Poor Tax Policy (8/26/09).
Complicated Exemptions - A common cause for complications in the tax law is that lawmakers carve out something from the tax. Then definitions are needed to clearly define what the exemption applies to and that is not always easy to do. For example, for sales tax purposes if all food is either taxed or not taxed, that is the simplest way to draft the law. However, if lawmakers think that some types of food, such as soda or candy, should be taxed (usually because they are not necessities of life and because the state needs revenue), the law must then define that exempted item. This was a serious problem years ago in California when snacks became subject to sales tax. We then learned that, for example, M&Ms are a snack, but chocolate chips are not.
In April 2010, Washington expanded its sales tax to cover candy and bottled water. The Seattle Times uncovered that an employee in the Department of Revenue spent two months listing and examining all types of candy sold in the state to determine if it met the definition in the new law of candy (for example, if something has flour, it is not candy and therefore is exempt). [See The Seattle Times, "Candy man's job can be taxing," by Nicole Brodeur, 5/13/10.]
The Excel spreadsheet created by the Dept. of Revenue can be found here. It may be one of the largest spreadsheets you've seen. Be sure to scroll through all of it so see all of the kinds of candy and what is taxable (most kinds are) and what is exempt, such as licorice because it has flour in it.
Washington is not alone in creating so much regulation to enable taxpayers to comply with the law or in creating more exemptions. I've written about some in California a few times in my blog - for example, see "Toasted sandwiches are taxable" (3/10/10).
These exemptions make the law more complex, less certain and can harm government revenues, because taxpayers and sellers get frustrated with the nonsense and ask that the rule be repealed, as happened in California soon after the snack tax went into effect.
The oddity - unnecessary exemptions and losing sight of the fact that exemptions often lead to undue complexity. [see my post of 5/15/10]
Local Tax Oddities
21st Century Taxation