A Brief History of Marriage in the Tax Code: Introduction

This post is part of a long-term project I’ve been working on regarding the history of marriage in the tax code. wedding-rings-150300_1280

As I finish sections of the research paper I’m working on, I’ll post them here. This is a big project, one that will likely take years to finish, so I can’t guarantee when the next post on this topic will appear.

Below is the very first segment.


I started on this document in 2011 when my practice was heavily involved in the tax complications of same-gender marriage.

Back then — up until the Defense of Marriage Act was overturned in June 2013 — couples in same-gender marriages lived a complicated tax life.

They were required to file their federal tax returns as two unmarried people, but they were required to file their state tax returns as a married couple (assuming they lived in a state that recognized their marriage). To create the state return, the couple needed to re-calculate their federal taxes to apply federal tax law for married people.

In working through these recalculations, I discovered that some couples would benefit from filing their federal tax return as married, some would see a minimal difference, and some would be worse off.

But my question was: why? Why does tax law treat married people differently from unmarried people?

Enter my research into the history of marriage in the tax code.

This document is not focused on same-gender marriage, because these are things couples in “traditional” marriages have known all along: getting married does not always mean big savings at tax time.

But again, the question is: why?

To answer, we need to return to the beginning, to 1913 and the start of the income tax in the United States. Stay tuned for the next segment.

Move Up the W-2 Filing Deadline to Combat ID Theft?

www.irs.gov pub irs-pdf fw2-page-001The U.S. Government Accountability Office recently issued a report recommending that the deadline for employers to file Form W-2 with the IRS be moved up, in an effort to combat identity theft.

Since I have a little experience dealing with identity theft, this recommendation caught my eye.


Employers must issue Form W-2 to employees by January 31 each year. But the deadline for the employer to send those W-2s to the IRS is later:

  • February 28/29 if filing paper forms with the IRS
  • March 31 if electronically filing with the IRS

E-filing of W-2s is not required unless the employer is filing 250 or more forms.


The GAO proposal recommends:

  • Moving the deadline for employers to send W-2s to the IRS to January 31
  • Lowering the threshold for requiring the e-filing of W-2s to either 5 or 10

Would this Help Stop ID Theft?

The logic behind this idea is that it would help the IRS perform better computer matching on tax returns that are filed, thus perhaps reducing cases of identity theft.

Currently, if someone gets their W-2 on January 31 they can file their tax return and receive their refund weeks — maybe even months — before the person’s employer sends a copy of the W-2 to the IRS and that information makes it into the IRS’s systems.

My Thoughts

I think this is a good recommendation. I’ve always wondered why there are two different deadlines with W-2s anyway. If the forms are ready to give to employees, they’re ready to give to the IRS.

Maybe the deadlines are different so that employers can make corrections. But if the IRS provided a simple and penalty-free way to make corrections anytime, I don’t think having a January 31 filing deadline would be a problem.

My concern about moving up the deadline is that I’m skeptical of the information actually making its way into the IRS’s systems quickly.

How much re-coding would the IRS need to do to speed up the processing of W-2 information to make sure the information goes where it needs to go? How much re-coding would the IRS need to do to identify cases of identity theft?

It blows my mind that the IRS’s systems are not already set up to spot cases of blatant identity theft. For example, one address in Lithuania somehow received 655 fraudulent refunds before the IRS and their computers figured out that something was amiss.

Moving up the W-2 deadline should be done and it might be a partial fix to the problem of identity theft … but it’s one piece of a solution, not a cure-all.


Using a Line of Credit to Purchase Investments

ID-100207232This questions comes up from clients now and then. Here’s a scenario I dealt with a few years ago.

SCENARIO: Client has their eye on a piece of property they want to buy. They take out a line of credit against their house in order to purchase the property. Then the deal falls through. The LOC exists but the client hasn’t used it.

The client gets the idea that they should purchase stocks with it.

What are the tax implications?


First of all, let’s set aside the financial aspect of whether or not it’s good to borrow like this to purchase investments (a totally different topic worthy of its own blog post) and just focus on the tax consequences.

Line of credit debt is deductible as mortgage interest if the total amount borrowed on the LOC is less than $100,000. This is true regardless of what you do with the money. (One exception: if you purchase tax-exempt securities, no deduction is allowed.)

If the LOC is more than $100,000, I would take the interest on the first $100,000 as mortgage interest, and any remaining interest as investment interest. Whether the remaining interest qualifies as investment interest would depend on what, exactly, you bought with the LOC.

One big catch to all this: you’d need to take Alternative Minimum Tax into consideration, because the interest likely wouldn’t be deductible for AMT purposes. If AMT applies, it may be advantageous to elect out of treating the LOC as mortgage interest and instead treat it all as investment interest.

As you can see, this is just just scratching the surface of something that seems like it should have a simple answer.

Image courtesy of Stuart Miles / freedigitalphotos.net

Letting My Hair Grow Back: DIY is Not Always Better

Me, back when I thought a shaved head would save me big bucks.
Me, back when I thought a shaved head would save me big bucks.

In June 2013, I decided to shave my head. My logic was, why should I pay someone $10 or $15 each month just to cut my hair?

I’ll just shave it off and be done with it. No more haircuts, no need for shampoo. I felt like I had made a brilliant decision.

About 6 weeks ago, I scrapped the whole “shaved head thing.” I’m growing my hair back and will be paying someone else to trim it every now and then.


Because the cost savings associated with doing it myself DIDN’T EXIST.

In fact, I believe I spent MORE MONEY shaving my head than I did on paying someone else to cut it.

I ran through razor blades more quickly. I used far more shaving cream. Since I shaved my head in the shower, showers took twice as long, resulting in more water usage.

Those are true dollars-and-cents costs.

What’s the point of this personal anecdote (or “Oprah Crap” as one reader calls my personal stories)?

The point is: DIY is not always better. Paying a professional to help you is not always bad.

With tax preparation, I tell people the following: if you feel comfortable doing it yourself, you know what you’re doing and you have time to do it, then certainly you should try doing it yourself. But know your limitations and know the value of your time.

With business bookkeeping and accounting: at first, it will make sense to keep the books yourself. But as your business grows, you’ll feel the crunch of time, and keeping the books yourself will be a major drag.

DIY is great sometimes, but it’s not always the most efficient or most cost-effective strategy.

What Responsibilities Do Tax Preparers Have in Assessing ACA Penalties?

Robert Flach at his “The Tax Professional” blog asks the following question regarding Affordable Care Act penalties assessed on tax clause-370928_1280returns against people who do not carry health insurance:

What is our legal responsibility as tax preparers when it comes to calculating the new convoluted and potentially expensive Obamacare penalty for clients who are not covered by health insurance?

Or perhaps a more inclusive question –

Are we as tax preparers legally required to assess a client an IRS penalty “up front” when preparing a tax return?

It appears from Robert’s statements elsewhere that he’s “not gonna” when it comes to calculating the penalty on tax returns he prepares. Robert also says he doubts the penalty will apply to any of his clients anyway. I’m in the same situation. I estimate that I might have literally 1 or 2 clients who this will apply to (and it may be 0).

I agree the ACA penalties are convoluted and potentially expensive. But I disagree with a preparer saying they’re “not gonna.”

Just because we think a law is stupid doesn’t mean we don’t deal with it. I think a lot of the things the government makes me do are stupid … but I do them because I don’t want to lose my license!

This reminds me of an ex-client who was operating a business in multiple states. I discovered that he had never filed tax returns in those states nor collected sales tax like he was supposed to. When I told him about this, he launched into a profanity laced tirade toward me about how much he hates the government and how unfriendly the government is to small businesses.

His exact words to me, regarding collecting sales tax, were: “F@ck it. I’m not doing it. I’m not gonna serve as a f@cking collection agency for the G@ddamned government.”

I parted company with that business after that exchange. I understand the anti-government sentiment. I really do. But you can’t just ignore the law.

If “I’m not gonna” was a concerted effort of AICPA or NAEA telling the IRS “Our members aren’t going to calculate this penalty,” then there might be some traction. If either organization were to say this, I would support it and would jump on the “I’m not gonna” bandwagon.

But the lone preparer saying “I’m not gonna” isn’t going to change the world, they’re just going to make problems for themselves and for their clients.

So are we as preparers required to calculate the penalty on people’s tax returns? Probably.

Robert mentions that he never calculates the underpayment penalty on client tax returns. But that’s okay because the instructions to the Form 1040 specifically state, regarding the underpayment penalty:

Because Form 2210 is complicated, you can leave Line 77 blank and the IRS will figure the penalty and send you a bill.

Perhaps the IRS will have similar instructions for the ACA penalties. If not … I think we’ll need to calculate the penalty on tax returns we prepare.

Image courtesy of Geralt on Pixabay.com