This is the first issue of IICLE’s FlashPoints on income taxation. We titled this FlashPoints “Tax Law in Plain English” because it will be tailored to lawyers who do not consider taxation to be their primary area of practice. At the same time, even tax lawyers will find reasons to read this FlashPoints.
Few people like paying taxes and even fewer like thinking about the income tax laws. Tax Law in Plain English will make the income tax laws more understandable, relevant and interesting. It will also provide you with information that will help you take advantage of opportunities and avoid problems. While most of the discussions will explore the Federal income tax laws, we will also touch on Illinois income tax laws.
I am delighted to be authoring Tax Law in Plain English FlashPoints for IICLE and encourage you to contact me if you have questions, comments or suggestions.
Through a Tax Glass Darkly:
People tend to view the world through the lens of their own background and experience. When going down a street, an architect notices building styles, a driver notices speed limits and a patrol officer notices expired vehicle stickers. If you are thinking about buying a Mini Cooper, you begin to see Mini Cooper’s everywhere you go.
Since the income tax laws are comprised of hundreds of thousands of details the best way to start is with the big picture view. The goal of this first Tax Law in Plain English FlashPoints is change how you think of our income tax system. You will begin to see how our income tax laws are designed to shape what we do and, to some extent, how we live our lives.
The Unseen Hand:
Regardless of your political, economic, religious, moral and social views, everyone understands that the government needs money to function and perform services. If all the Federal government wanted to do was raise money we could pursue a simpler system, such as a flat tax or Federal sales tax. Instead we have an income tax system comprised of thousands of pages of Federal Statutes, supported by many more thousands of pages of Federal Regulations, IRS Publications and case law. In addition 2 to Federal income tax laws, nearly every state (and even some municipalities) has their own sets of income tax laws.
Our income tax system is designed to encourage and discourage behavior. There are a variety of reasons why Congressmen and the President seeks to control behavior. This includes public policy, economic policy, religious/moral viewpoints and for their own political gain. Some reasons are acknowledged and others are unspoken. For the most part, the tax laws are designed to do the “right thing”, and for the right reasons. In addition to the obvious (i.e. raising money) the income tax laws do the following:
Public Policy. Income tax laws are tools to encourage taxpayers to do some things and to not do other things.
Economic Policy. Income tax laws are tools to speed or slow certain sectors of our economy.
Religious and Moral Policy. Income tax laws are tools to encourage what are consider proper religious and moral conduct while discouraging things that do not conform.
Political Purposes. Income tax laws are subject to “manipulation” for political purposes. Certain tax laws tend to increase the popularity of a politician (or their party). Similarly, some politicians try to portray their opponents in a bad light by associating them with tax laws that are unpopular.
Most Americans will give to charities, have children, want to own their home, and buy certain types of vehicles regardless of income tax benefits. However, all other things being equal, people will tend to act in their own economic best interests. If you pay less in taxes you will have more money and, of course, people like having more money.
Some Examples That You Can Relate To:
Here are four examples of relatively common tax laws together with their impact and possible reasons for enactment.
- Qualified Charitable Organizations: Is it better to give than receive under the tax laws? It’s all good if the non-profit is “qualified” by the IRS. Briefly, a non-profit organization must obtain written approval from the IRS in order to be a “qualified” charitable organization. The determination of whether they are “qualified” is based upon certain criteria set forth in the income tax laws (e.g. approved exempt purpose, no racial discrimination, not a terrorist organization, etc).
- The Giving End: Our government encourages charitable giving through our income tax laws. Taxpayers get an income tax deduction for contributions to “qualified” charitable organizations. Many people would donate to their church, synagogue and wonderful organizations such as Make a Wish Foundation regardless of income tax benefits. However, all other things being equal, the income tax benefits tend to encourage more charitable giving.
Taking this example a step further, giving $100 of clothing to a family who’s house burned down is a clearly a charitable act. However, there is no tax deduction available for this type of charitable gift. You only get a tax deduction if the contribution is made to a “qualified” organization. In this way, the government encourages giving, but only to particular charitable organizations approved by them.
- The Receiving End: Our government encourages certain religious, charitable, educational, environmental and other worthy causes through our income tax laws. Among other things, qualifying organizations are not required to pay income tax on the money that they collect for their charitable purposes. (They may also be exempt from paying sales tax and real estate taxes.)
Does this mean that the government supports certain environmental organizations, charities, religion and educational institutions? Is this the reason why these tax laws were enacted or is it a mere coincidence?
Owning Your Home:
Our government encourages home ownership through the income tax laws. You are entitled to a variety of tax benefits if you own your principal residence. These include Federal income tax deductions for payment of mortgage interest and real estate taxes. If your principal residence is in Illinois, you are also eligible for a credit against your Illinois income tax based upon real estate taxes paid by you. If, on the other hand, you are a renter, you are not entitled to these Federal and Illinois income tax benefits.
Most Americans dream of owning their own home regardless of tax benefits. However, all other things being equal, more people will tend to choose ownership over renting because of the tax benefits. For some, the tax benefits provide the economic edge that allows them to own.
Home mortgage interest and real estate tax deductions are so widespread that they might seem fundamental to our society. You could envision a variety of reasons why legislators enacted these tax laws. One reason that is less obvious is that home ownership discourages people from supporting communism (i.e. you are less likely to “go commie” if you have a home to lose). While the threat of communism may not seem great today, it was a powerful fear in America for much of the 20th century. Who would have thought that our income tax laws fought side by side with Superman in preserving “Truth, justice, and the American way”?
Children: Our government encourages us to have children through the income tax laws. If you have children, you are entitled to a wide variety of deductions (e.g. Dependent Exemption and larger Standard Deduction) as well as credits (e.g. Child Care Credits, Child Tax Credits, and Additional Child Tax Credits). If you do not have children, you do not get these tax benefits.
Most Americans would have children regardless of tax benefits. However, all other things being equal, people will more likely have children (and/or have more children) because of these tax benefits. For some, the tax benefits allow them to better afford to have children.
Vehicular Schizophrenia: Our government encourages people to buy certain types of vehicles through the tax laws. Interestingly, the tax favored vehicles are on opposite ends of the spectrum. If you buy specific hybrid vehicles (not all hybrids make and models qualify) by a certain date, you are entitled to Federal tax credits. For vehicles other than those on the approved hybrid list, or at other times of the year, you do not get a Federal tax credit.
In fact, you are eligible for more tax benefits if you buy a gas guzzling SUV that weighs over 6,000 lbs, and claim business use, than if you buy a fuel efficient car. The tax laws are designed to encourage taxpayers to purchase the tax favored vehicles, even if they may seem to be at cross-purposes.
One could take issue with some of the characterizations in this first FlashPoints. I not only encourage this, I challenge you to think about some of the other factors that have gone into the development of our income tax system. The important part is that you begin to think of the income tax system as something more than just a way to raise money for the government.
Copyright ©, Keith B. Baker – 2009
This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations. Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.
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