Here's to Your Health!

When Congress raises the hood on the tax code, they're usually working to raise money to pay for government. But sometimes they're more interested in nudging us to behave in ways they can't legislate directly. Take the mortgage interest deduction, for example, which "cost" the Treasury $69.7 billion in 2013. That deduction encourages millions of Americans to spend billions of dollars buying homes, building homes, renovating money pits, and keeping their homes looking spiffy — all of which returns billions more through our overall economy.

Here's the catch. Everyone knows that medical and dental expenses are "deductible." But look a little closer and you'll see that code section 213 lets you deduct them only if you itemize, which leaves about 90% of Americans sitting on the bench. And even if you itemize, you can only deduct the amount of expenses over 7.5% of your adjusted gross income. So, on its face, the new deduction won't mean much.

It turns out, however, that millions of Americans who can't itemize can still benefit from tax-advantaged flexible spending accounts, medical expense reimbursement plans, and health savings accounts. The bill lets you reimburse PHIT expenses from those accounts. 

The Congressional Budget Office estimates the bill would cost the Treasury save taxpayers $3.5 billion over the next decade. That's enough to get special interests interested. The Wall Street Journal reports that "Fitbit, Inc., the American Heart Association and the American Sports and Fitness Association have all lobbied for the bill." And Planet Fitness stock climbed more than 4% the day the bill passed.

Ooops!

 Back in 1985, a group of ambitious lawmakers set out to reform the federal income tax code. House Ways & Means Chair Dan Rostenkowski introduced the legislation. (This was before he became inmate #25338-016 at the Oxford Federal Correctional Institution.) Congress held dozens of hearings, cast 29 roll call votes, and debated 111 amendments on philosophical questions like Dan Quayle's proposal "to provide that the period during which an individual is in the United States competing in a charitable sporting event shall not be taken into account in determining whether such individual is a resident alien."

Ten months and 18 days later, President Reagan signed the Tax Reform Act of 1986 into law. Two years after that, Congress passed a "technical corrections" bill to fix hundreds of drafting errors that made it into the final text.

Drafting errors and "technical" corrections certainly make tax planning harder. But they don't make it any less important. We can't let the perfect be the enemy of the good. So call us when you're tired of wasting money on taxes you don't have to pay, and let's see if we can show Congress how to do it right. 

Can You Keep A Secret?

Benjamin Franklin famously said that "three may keep a secret, if two of them are dead." And that was before the National Security Agency and other government agencies could track your phone calls, browsing history and even your driving habits. Keeping secrets is especially hard in politics — just ask Carlos Danger or Client Number Nine! But now a couple of Senators think they've found a way to rewrite the entire tax code behind closed doors. What could possibly go wrong?

Senate Finance Committee chair Max Baucus (D-MT) wants to pass a tax reform bill before he leaves office at the end of next year. He and ranking minority member Orrin Hatch (R-UT) recognize that the actual rate you pay doesn't matter much if you use special preferences and loopholes to avoid reporting taxable income in the first place. So they've boldly decided to start with a "blank slate," wiping out a trillion dollars' worth of deductions, credits, loopholes, and strategies off the books. Then their colleagues can propose adding back goodies like tax-free health benefits, education credits, and tax-deductible charitable contributions and justify why they belong in the new Code.

Sounds great in theory, right? The problem, of course, is that tax reform is an intensely political process. K Street lobbyists circle Washington like Predator drones, waiting to fire on any member who dares challenge their clients' pet interests. Any senator who proposes dropping the mortgage-interest deduction, for example, guarantees immediate fire from any group that benefits from home ownership. (This includes obvious constituencies like banks, builders, and real estate agents, but also less-obvious folks like Home Depot, Martha Stewart, and Bob Vila). So, Baucus and Hatch came up with a plan to cover their colleagues' vulnerable rear ends from the inevitable backlash. How likely do you think it is to work?

• They'll start by giving each Senator's written proposal a unique identifying number, a confidential seal, and a special encryption. Then they'll archive the files on a special password-protected server and keep paper copies in locked safes. (Of course, there's no guarantee that hackers won't come along and leak the files all over the internet.)

• Only Senators Baucus and Hatch, along with 10 handpicked staffers, can get their curious little fingers on the proposals. (If Ben Franklin didn't think three could keep a secret, what do you think he would make of a dozen? Might as well just splash the proposals on the front page of Politico! And what happens when those 10 staffers inevitably leave "the Hill" for well-paid lobbying gigs of their own?)

• The National Archive will keep the proposals under seal until December 31, 2064. (The goal, obviously, is to protect them until all of the current members have left office. But with Senators serving longer and longer terms, there's no guarantee it will happen. South Carolina's Strom Thurmond took office shortly after the Civil War and served until long after his hair had turned the color of Tang.)

• Finally, Harry Potter will cover each proposal with an invisibility cloak until He-Who-Must-Not-Be-Named is defeated. (Ok, we admit we just made that one up. But it's about the only idea with any chance of success.)

Here at our office, we understand the real secret to paying less tax isn't a secret at all — it's proactive tax planning. That's why we don't just settle for helping you record history — we help you write it, with a complete menu of court-tested, IRS-approved strategies. Come to us for a plan, and you won't need to wait for Congress to act!