Reducing the Number of Tax Brackets Doesn't Really 'Simplify' the Tax Code

[Bomb#20]

Do you have any other proposed solution you would prefer to put forward that would address your individual specific situation and would also simplify the taxable income calculation for the rest of the 300m USians?

Sure: do the obvious. Index cost basis to inflation, so that real capital gains are calculated instead of the fictional capital gains calculated under current law, and tax real capital gains the same as any other real income.

While we're at it: abolish either the alternative minimum tax or the regular tax that the alternative minimum tax is supposed to be an alternative to. They make me calculate quantities they don't use and then they file the numbers away forever somewhere in the Raiders of the Lost Ark warehouse.

So, do you think this newly added level of complexity serves the purpose of reducing my taxable income?

Are You Talking About This?

Yes, exactly.

"Unless the return is adjusted to report that additional basis, the taxpayer will include the compensation element in their taxable income twice: once as wages and once as a short-term capital gain."

If so, the answer is most certainly YES!! The IRS doesn't want you to report the cost basis stock option as ordinary income and instead wants you to report it as a capital gain (which is taxed at a lower rate). You're Welcome!

That's what the OLD rule accomplished!! Thank you! (More precisely, they wanted me to report part of it as ordinary income and the remainder as a capital gain.)

According to the NEW rule, they want me to report the capital gain portion as a capital gain, same as before; and they want me to report the ordinary income portion as BOTH ordinary income AND a capital gain!! Are you proposing that I should be thankful because the nonexistent additional income they now want me to report is taxed at a lower rate? [sarcasm]Thank you![/sarcasm] This new level of complexity does not reduce my taxable income. It leaves my taxable income unchanged; it inflicts many hours of extra tax-preparation effort on me; and it increases the alleged taxable income of those such as my unfortunate co-worker who were less vigilant than myself to well above what the law defines.

If I were paranoid I'd infer malicious intent to trick people into overpaying; but more likely the new rule is an administrative convenience for some department with more pull in the IRS bureaucracy than whichever department will have to pick up the pieces.

The problem really seems to be 2-fold:

1) The IRS changed the reporting rules prior to the brokerage houses and HR departments ability to adjust for the 2014 tax year. I doubt you will have a problem going forward.

Well, since I no longer have the stock, right you are. And by the time I've accumulated some with my new employer, the employers and brokerages will no doubt have worked out new procedures for keeping this from screwing people.

2) You seem to be very stuck on your personal experience. What should the IRS have done differently in this circumstance that would have prevented this terrible injustice to you personally but not have negatively impacted the rest of the US.

Ooh, tough one. " Last year most brokerages included the wage component as part of basis when reporting the transaction. Not so this year.

According to revised IRS Regulations 1.6045-1, effective for stock transactions reported for 2014, brokers are prohibited ..."

The IRS should have simply left the rules unchanged from 2013. Who would that have negatively impacted?

Finally, I would say the accountants and finance professionals in your company were delinquent in considering the appropriate tax penalties on each individual stock participant when negotiating the sale of the company. (Or maybe they fully considered it and just screwed the participants over,

Seems likely. (Though for all I know the mass liquidation may have been a legal requirement of the takeover/dismemberment.) In any event, they paid me compensation for the sabbatical I didn't get to take, a special courtesy due to my luckily being in the tenth year of the company's ten-year sabbatical cycle. People in their ninth year or less got their sabbaticals canceled without a dime. That's way more dickish than anything they did to me.

either way they are certainly more culpable in your predicament than the IRS).

Assuming the mass liquidation was a matter of their convenience rather than law, they're culpable for the amount IRS Regulation 1.6045-1 put me at risk of getting overcharged being thousands instead of hundreds, yes. But the existence of the trap in the first place is the IRS's fault.