Pub. 3 2021 Issue 3

M A Y / J U N E 2 0 2 1 14 nebraska cpas BY SHARON KREIDER, CPA C P A I N S I D E R ADVISING PRESIDENT BIDEN ON DEDUCTIONS AND CREDITS I think we all have ideas on what tax reform should look like. I’m putting a few items in writing as if I were advising President Biden. There are three basic assumptions considered in this discussion of President Biden’s tax proposals: 1. Our country has run up a big COVID-related deficit, and we will have to pay the deficit down someday. 2. Our economy is fragile because of COVID, so legislators will need to consider the immediate impact on our economy of all proposed tax increases. 3. Tax law changes require congressional action, with all of the political problems involved. Itemized Deductions. President Biden has proposed two changes to itemized deductions. The President’s plan would cap the tax benefit of itemized deductions at 28% for those earning more than $400,000. He would also reinstate the “Pease” limitation. The Pease limitation, named after the late Congressman Donald Pease, reduced itemized deductions by 3% of AGI above a threshold. Presumably, the threshold in the Biden plan would be $400,000. Tax Practitioner Note: Although removing the Pease reduction to itemized deductions was a benefit to high-income itemizers, the Tax Cuts and Jobs Act cut itemized deductions when the legislation limited Schedule A taxes to $10,000 and eliminated miscellaneous itemized deductions subject to the 2% of AGI limit. 28% Benefit. If I were advising the President, I’d say that dropping the tax benefit of itemized deductions to 28% is drastic. At the least, the change should be phased in over the next four years. (It’s not coincidental that four years matches the President’s first term.) SALT. To soften the blow of reducing the tax benefit of itemized deductions, consider increasing the Schedule A state and local tax (SALT) deduction limit. It would be nice to suggest to President Biden that he propose the repeal of the SALT limit, but the Joint Committee on Tax estimates that repealing the SALT limit for just one year would cost $88 billion. That’s out if we want to tackle our budget deficit. Perhaps the SALT deduction could be increased from $10,000 to $20,000 to provide a little relief to taxpayers in high tax states, like me living and practicing in California. Yes, I am prejudiced, but before you in the low tax states say “no” to raising the SALT deduction, remember you and your clients may be next in wanting a change. Many state budgets (red and blue) have been hit hard by COVID. Income taxes, sales taxes, gas taxes, hotel taxes, etc. are all down. Expenses of running the state and local government are up. Thus, state taxes are going up. PEASE. From a tax practitioner’s and a taxpayer’s point of view, the Pease limit was always a stealth tax. Enter all of the itemized deductions on Schedule A, then surreptitiously reduce the “total” of itemized deductions by 3% of the excess AGI. President Biden, please drop this proposal. Qualified Business Income Deduction. The QBI deduction is simple to understand and easy to implement for those