Annette Nellen, chair of the AICPA Individual Income Taxation Technical Resource Panel, pleased some members of Congress when she repeated the AICPA’s support for repeal of the alternative minimum tax (AMT) in testimony before the House Ways and Means Committee on April 13.
“That’s music to my ears,” veteran congressman Richard Neal, D-Mass., responded. Committee member Bill Pascrell Jr., D-N.J., concurred, describing the congressional efforts to patch and repeal the AMT as “almost biblical.” Other hearing witnesses also supported the AICPA’s call for AMT reform and for Congress to consider the impact of the AMT when considering new tax incentives. If, for example, some of the intended beneficiaries would not be eligible for a proposed child tax credit solely because of the AMT, Nellen suggested that the committee should consider whether they want to create the credit in the first place.
Nellen also acknowledged that repeal would mean a substantial loss of revenue and urged Congress to consider alternatives to lessen the complexity and impact of the AMT, including indexing for inflation and allowing taxpayers to remain eligible for certain tax breaks, such as the deduction for state and local taxes, that are lost now when they have to pay the AMT.
The AMT issue arose at a House Ways and Means Committee hearing focused on the burdens placed by the tax code on individuals and families and the need for comprehensive reform. Taxpayers and businesses spend 6.1 billion hours a year complying with tax filing requirements, according to government figures. In addition to the AMT, Nellen identified several areas of the tax code that need simplification, including:
- The earned income tax credit (EITC);
- Mileage rates;
- Due dates on reporting requirements for foreign accounts; and
- Education incentives.
“Few, if any, taxpayers are … aware of all the education tax incentives,” Nellen said. “Fewer still can perform the analysis to determine which incentive is most advantageous.” She also noted that “requirements, eligibility rules, definitions and income phaseouts vary from incentive to incentive.”
Due to the complexity of the education tax provisions, a 2008 Government Accountability Office report found nearly one-fifth of eligible taxpayers did not claim either a tuition deduction or a tax credit that could have reduced their tax liability by an average of $219 each.
The EITC is another perennial challenge, both to taxpayers and the IRS, Nellen said. The IRS estimates the EITC overclaim rates for 2005 were between $9.6 billion and $11.4 billion. On the other hand, some eligible taxpayers are not claiming all the benefits to which they are entitled.
The compliance burden on taxpayers could also be reduced by changing the filing due dates for partnership and trust returns because many individuals who are partners and other pass-through owners and beneficiaries must wait for a Schedule K-1 before they can file their personal income tax return. Yet, currently partnerships filing Form 1065 returns do not have to provide a Schedule K-1 to the partners until April 15, the same date each partner’s Form 1040 is due.
Rep. Pat Tiberi, R-Ohio, who chairs the Select Revenue Measures Subcommittee, raised what is becoming a prevalent concern—that enactment of corporate rate reform would come at the expense of pass-through entities and cited a new Ernst & Young study about the impact of corporate-only tax reform on pass-throughs.
In the report, the authors concluded that corporate tax reform would “increase the income taxes paid by individual owners of flow-through businesses, on average, by 8% or $27 billion annually from 2010 through 2014.” The impact would be highest on agriculture and mining businesses, followed by construction, retail trade, manufacturing, finance and insurance.
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