Tax Reform

Strange and Funny Tax Laws Throughout History

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Tax season concluded late this year, with the filing deadline on July 15th. Between the COVID-19 pandemic and the economic instability that resulted from it, we are all a little stressed.

To lighten the mood, we decided to put together a list of funny and strange tax laws that have been levied throughout history. We’ve also included some strange tax laws that are still in place today.

In history:

In the past, governments taxed anything they could to make more revenue. This led to some very strange and interesting tax laws. Here are some of our favorites:

  • In 1660, England placed a tax on fireplaces, which drove the population to cover their fireplaces with bricks to conceal them. The law was repealed in 1689.

  • In 1705, Peter the Great placed a tax on beards in Russia, hoping to get more men to adopt a clean-shaven appearance that was common in Western Europe.

  • In 1696, England put a tax on windows, which taxed houses based on how many windows they had. The result of this was housing with fewer windows, which in turn caused health issues. Despite this, the law was not repealed until 1851.

  • In 1712, England passed a tax on printed wallpaper. Builders started hanging plain wallpaper, then painted designs on it to dodge the tax.

  • Japan imposed a tax on whiskey that was based on the percentage of alcohol by volume. European whiskey paid the price on this because they were not allowed to dilute their whiskey. Japanese makers did dilute their whiskey, so they had the advantage.

Today:

There are still some strange laws floating around today. Most of these examples are laws specific to states in America with a few exceptions. Check them out:

  • England has a tax on televisions. Everyone who has a television at home has to pay a yearly fee, which is called a television license fee. That fee is currently £157.50 ($197.96 USD) a year and £53($66.61) for black and white TV sets. This tax is used to find the BBC news service. If a blind person owns a TV, they only have to pay half the tax. You face a fine if you don’t pay the fee.

  • NYC has a special tax for prepared foods and for food. So something like a sliced bagel is taxed as both food and as a prepared food.

  • Tennessee began requiring drug dealers to anonymously pay taxes on the illicit substances they sell back in 2005. Alabama taxes the sale of illicit drugs by requiring sellers to have tax stamps. If someone from Alabama is caught with a large quantity of drugs, they will not only face drug charges, but also tax evasion charges.

  • In California, you pay a 33% tax on fruit you buy from a vending machine.

  • Double amputees in Oregon get a $50 tax credit.

  • If you’re over 100 in New Mexico, you are tax exempt, unless you are a dependant.

Why do you think these laws were created? What’s the story behind them? Did you enjoy the list?

 

Important Dates In American Tax History Post-1812 Up to The Civil War

We start today’s journey through tax history the year after the war of 1812 with Great Britain. Congress doubled the tariff schedule to fundraise the war.  But it turns out, trading across oceans is very difficult when your navy is just 18-years-old. Comparatively, the British fleet had the power of being the world’s most powerful seafaring nation.

Photo by Dirk Spijkers on Unsplash

Photo by Dirk Spijkers on Unsplash

It was able to effectively strangle commerce on the eastern seaboard, which made up the entirety of young America’s trade paths with other parts of the world.

1813

Due to the conflict and Congress’ need to raise revenue to continue to fund the war, it levied about $3 million in internal taxes on things like refined sugar, distilled spirits, and carriages. These were designed to be repealed after the war was over. To collect this tax, the federal government offered a 15% tax discount for those states that collected the taxes themselves, which caused many states to take advantage of the arrangement.

1816

With the conflict with the British and French behind them, Congress passed the Tariff Act of 1816, which levied 25% duties on items to encourage local manufacturing.

1819

This was the year of the Panic of 1819, which is the crisis sparked by a drop in world agriculture prices. This caused more protectionist policies to be pushed to keep cheap European agricultural interests from flooding the market.

1820

The house pushed a bill that would enact a 5 percent tariff on cotton, wool, clothing, iron, and hemp. The law was never enacted, but it set the stage for similar laws to be passed. The North was split on its opinions of the tariff, but the South was firmly against it. It was losing its voting power in Congress regionally as the population dropped slightly there and rose slightly above the Mason-Dixon line.

1824

Henry Clay served as speaker of the House this year and appointed John Tod, a die-hard protectionist, to head the Committee on Manufactures. He implemented a 35% tariff on imported iron, wool, cotton, and hemp.  This caused American-produced goods to finally be cheaper than the British goods, which in turn stirred up support in states that had been against protectionist measures in the past.

1828

This year, the tariff on imported goods expanded to cover hemp, wool, fur, flax, liquor, and imported textiles. It was also raised to 50% of the value of the goods. This was good for the north and Ohio valley, but bad for the South. They didn’t get the benefits of manufacturing these products in their region. The reduction of cheap British goods isn’t a positive either, as the South relied on the British to buy their cotton in exchange for those cheap goods.  That cotton was often sold back to the states as finished goods, so the tariffs significantly disrupted this system.

1832

In July, Congress reduced tariff rates slightly, but kept the high rates on products like iron and manufactured cloth. South Carolina passed a Nullification Convention, which declared the tariffs unconstitutional and ceased collecting them in the state.

1833

In response, Jackson passed the Compromise Tariff, which reduced tariffs automatically between 1833 and 1842. Simultaneously, he levied the Force Bill, which said that the president could use force and arms to collect tariffs.

1837

By 1837, an extended economic depression had settled in, driven by a financial panic from the reduction of British investment in the states. The depression lasted until 1843. This caused the Whig Party to gain national support for some of its economic development strategies (which included higher tariffs).

1840

In 1840, the Whigs won the presidential seat and implemented revenue tariffs that were to be partially distributed to the states to build roads and canals.

1842

The Compromise Tariff was abandoned due to the states’ need for revenue and many tariffs were returned to their prior rate or slightly lower than the prior rate.

1846

The Walker Tariff was passed, which slashed all duties to the minimum necessary for revenue. In Britain, Parliament repealed the Corn Laws, which levied tariffs on imported bread. Both measures set the stage for freer world trade.

1848

The custom and commerce programs were running so well that the American government was able to pay off the entirety of its debts in the Mexican War before the Civil War even started.

1850

Slavery was becoming a highly political issue and the Northern and Southern states were growing increasingly polarized. The economy was booming but the interests of the Northern and Southern states grew increasingly misaligned.

1857

Tariffs were lowered even further by the Democratic party, which plunged the nation into an economic panic. Government revenues plummeted 30%, which caused Republicans to demand tariffs be increased.

 

How The Tax Cuts and Jobs Act (TCJA) Affects Fantasy Sports

Fantasy sports is becoming increasingly popular, with 59.3 million people playing in the United States and Canada, creating a $7 billion industry. With this though, comes tax implications for winners.  The Tax Cuts and Jobs Act (TCJA) provides tax opportunities and drawbacks that fantasy players should understand.

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There is currently an ongoing debate how winnings should be classified and where they should be reported. Are the winnings considered gambling income or hobby income? The TCJA does not clarify the definition of gambling and to date the IRS has not weighed in as to whether fantasy sports winnings are hobby or gambling income. If fantasy sports are not considered gambling, then the hobby loss rules would apply. In this case, the TCJA eliminates the taxpayers’ ability to deduct any fantasy expenses even if there is fantasy income. Prior to the TCJA, hobby losses were deductible as miscellaneous deductions subject to the 2% adjusted gross income (AGI) floor.

Many have argued that fantasy sports are ‘wagering transactions’ thereby allowing fantasy sports losses to be deductible to the extent of their winnings. Previously, gambling losses were assumed to be the cost of placing the wager, but TCJA suggests that other expenses that are ordinary and necessary to execute wagering transactions are deductible. For traditional gamblers, this includes the ability to deduct expenses related to travel, lodging, etc., to the extent of winnings – but fantasy players may have different ‘ordinary and necessary’ expenses. Potentially deductible fantasy sports expenses under TCJA include: fantasy-related online subscriptions and magazines; cost of any office equipment/space exclusively dedicated to fantasy sports; 50% of food costs at fantasy sports draft parties; and cost of any punishments for losing in a fantasy sports league. Losses from other gambling activities, like traditional casinos, could also be used to offset fantasy sports winnings.

For casual fantasy players, the increase in the standard deduction under the TCJA will reduce the number of taxpayers that itemize, thereby eliminating any potential benefit of fantasy-related expenses, since the deductions allowed are classified as “other itemized deductions” on the schedule A.

For the serious fantasy player, treating gambling as a trade or business may be useful. It is important to remember that taxpayers who recognize profits on their schedule C will be subject to both income and self-employment taxes, so it may not always be beneficial to consider yourself a professional. In the case of the serious professional fantasy player, income and expenses will be reported on schedule C, negating the need to itemize in order to take advantage of the deductions.  The TCJA does have one downfall for professional gamblers; prior to the new tax law, gambling expenses such as travel and lodging were not considered gambling losses, which meant they were not limited to gambling winnings. This allowed professional gamblers to have a net loss on gambling activities. Under the TCJA, these expenses are defined as wagering losses, therefore are limited to the extent of gambling winnings. Those who identify themselves as professionals have the burden to prove their activity is regularly pursued full-time, and to produce a livable income. Taxpayers should expect to hear from the IRS when claiming to be a professional.

Whether a taxpayer is a professional or a casual player, it is very important to keep all records as the burden of proof is on the taxpayer. While gambling is reported on W-2G, fantasy sports sites typically issue 1099-Misc to players winning more than $600. The IRS suggested that the net method of reporting (reports winnings from contests less the entry fees for any contest won) was the appropriate way to calculate winnings, but not all fantasy sports sites comply. It is important for a taxpayer to know how the site they are using reports winnings.

In summary, under the TCJA, fantasy players may benefit by treating their fantasy sports as gambling and claiming fantasy-related expenses that were not previously deductible.

Highlights of the New Tax Reform Law

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The new tax reform law, commonly called the “Tax Cuts and Jobs Act” (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.

Below are highlights of some of the most significant changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.

Individuals

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
  • Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) — through 2025
  • Elimination of personal exemptions — through 2025
  • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit — through 2025
  • Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018
  • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
  • New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers) — through 2025
  • Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions — through 2025
  • Elimination of the deduction for interest on home equity debt — through 2025
  • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters) — through 2025
  • Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses) — through 2025
  • Elimination of the AGI-based reduction of certain itemized deductions — through 2025
  • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) — through 2025
  • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year
  • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers — through 2025
  • Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) — through 2025

 

Businesses

  • Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Repeal of the 20% corporate AMT
  • New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
  • Other enhancements to depreciation-related deductions
  • New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
  • New rule limiting like-kind exchanges to real property that is not held primarily for sale
  • New tax credit for employer-paid family and medical leave — through 2019
  • New limitations on excessive employee compensation
  • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

 

More to consider

This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact your tax advisor to learn more about how these and other tax law changes will affect you in 2018 and beyond.

US Senate Presents A Different Take On Tax Reform

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by Mike Godfrey, Tax-News.com, Washington

The Senate Finance Committee released its tax reform plan on November 9, presenting a draft bill with marked differences to that agreed by the House Ways and Means Committee on the same day.

The proposal was drafted by Finance Committee Republicans under the leadership of Senate Finance Committee Chairman Orrin Hatch (R-UT), based on the Unified Tax Framework agreed by the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance in September 2017.

While said to adopt a similar “pro-growth approach” to the House Ways and Means proposal, the Senate plan differs in a number of areas.

The Senate bill would preserve the current seven income tax brackets, compared to the reduced four brackets proposed under the House bill. Under the Senate proposal, the zero tax bracket would be expanded, and a slightly lower 38.5 percent tax rate would be introduced for high-income earners (compared with 39.6 percent in the House Bill, in line with current law).

Both the Senate and House bills include a proposal to double the standard deduction, to USD12,000 for individuals and USD24,000 for married couples; to repeal the Alternative Minimum Tax; and eliminate the state and local tax deductions. Where the House bill would repeal the medical expense deduction, the Senate bill would retain it.

The treatment of the Child Tax Credit is also largely similar in both bills, with the Senate proposing to increase the credit from USD1,000 to USD1,650 (compared to USD1,600 in the House Bill). However, the Senate Bill would preserve the existing mortgage interest deduction, which the House Bill proposes to curb from USD1m to USD500,000.

The Senate bill also proposes to preserve the estate tax, which the House Bill would repeal for persons dying after 2024. The Senate bill also proposes to double both the estate and gift tax exemption for individuals, from USD5m to USD10m.

For businesses, the Senate Bill would also cut the corporate tax cut from 35 percent to 20 percent, but would delay implementation until January 2019. The bill proposes a new 17.4 percent deduction for certain pass-through businesses, which are taxed under the personal income tax regime, and enhanced Section 179 expensing. There is an exclusion from the deduction for specified service businesses, except in the case of a taxpayer whose taxable income does not exceed USD150,000, for married individuals filing jointly, or USD75,000 for other individuals.

The Senate Bill would tax multinationals’ offshore holdings under a repatriation tax proposal at lower rates than under the House bill. Cash holdings would be subject to a repatriation tax of five percent, rather than seven percent under the House proposal, and at 10 percent on non-cash holdings, rather than 14 percent as under the House proposal.

Both bills would cap the deduction for net interest expenses at 30 percent of adjusted taxable income, with exclusions for small businesses.

“This is just the start of the legislative process in the Senate. We expect robust committee debate on the policies in this bill, will have an open amendment process, and hope to report legislation by the end of next week,” said Hatch.

Trump Looks To Democrats To Shore Up Tax Reform Push

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by Mike Godfrey, Tax-News.com, Washington

 US President Donald Trump has reached out to Democrat lawmakers to discuss tax reform, in a bid to obtain bipartisan support to get a package through Congress.

The President met with senators Heidi Heitkamp (D-ND), Joe Donnelly (D-ID), and Joe Manchin (D-WV) over dinner on September 12 to discuss possible support for a tax reform bill.

“I will tell you, for the tax bill, I would be very surprised if I don’t have at least a few Democrats,” Trump told reporters following the dinner.

The White House and Congress have so far failed to propose a joint comprehensive tax plan, despite months of negotiations. Trump has indicated that, if some members of the Republican party hold back reform, he may try to instead bring on board Democrat lawmakers to push through a bipartisan bill.

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