Daniel Hemel: Under the Senate Plan, Millions of Americans Still Will Have to Calculate Their Taxes Twice

Under the Senate Plan, Millions of Americans Still Will Have to Calculate Their Taxes Twice

The new “qualified business income” deduction in the Senate tax plan is a stimulus package for tax lawyers and accountants. As I noted in an earlier post, the definition of “qualified business income” is potentially so expansive that it includes plain-vanilla salary and wages, though as I explain at the end of the post (with an addendum and an h/t to Kirk Stark), it’s doubtful that the IRS is going to allow ordinary employees to claim the QBI writeoff. But beyond the revenue consequences, the QBI deduction — advertised by Senate Republicans as “simple and easy-to-administer” — turns out to be anything but. Even taxpayers whose goal is to comply with the provision in good faith will find that doing so is difficult and risky.

Let’s start with one of the Senate Finance Committee’s example households: a single parent with one child earning $41,000 a year. Let’s assume that $11,000 comes from a bartending job and $30,000 comes from the taxpayer’s housepainting business. Let’s also say that the taxpayer is an employee of the bar but an independent contractor with respect to the homeowners whose houses he paints.

Under current law, the taxpayer’s tax calculation is pretty simple. Adjusted gross income is $41,000. The standard deduction for a head of household is $9,350, and the taxpayer can claim two personal exemptions (one for himself, one for his child) of $4,050 each. So the taxpayer’s taxable income is $41,000 — $9,350 — (2 x $4,050) = $23,550. Under the current tables for heads of household, the tax due is $1,865 + 15% x the amount over $18,650, or $1,865 + 15% x ($23,550 — $18,650) = $2,600.

Under the Senate plan, things get quite a bit more complicated. Some portion of the taxpayer’s income may be qualified business income (QBI). Assuming that the IRS successfully precludes taxpayers from claiming the QBI benefit for wages earned as an employee, the QBI amount might be $30,000 (though it might be less — more on this below).

Read more at Whatever Source Derived

Tax policy