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1)Describe the tax benefits from “bunching” itemized deductions in one year. Describe the characteristics of the taxpayers who are most likely to benefit from using bunching and explain why this is so.
Some of the taxpayers deduct the standard tax deduction every year because their tax deduction sometimes falls short of the standard deduction, which is why they are unable to get any tax benefits. There is a possibility of getting some tax benefit the itemized deductions. The strategy is to shift the itemized deduction into one year and then deduct the standard deductions in the next year or vice versa. Taxpayers can accelerate the payment into the current year because they are cash-method taxpayers.
Explain why Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax.
Employers and employees of self-employment tax deductions pay social security as well as Medicare tax from employee salaries. But because self-employed taxpayers do not have an employer, they are required to pay self-employment tax. This tax includes both employee’s and employer’s taxes for Medicare and social security. However, self-employment tax is not counted as a business expense for a self-employed individual. To provide them with equality with the employers and employees, they are allowed to deduct the employer portion of the self-employment tax that they are required to pay. Healthcare insurance is a personal expense, but employers are required to pay a portion of healthcare insurance of their employees and are allowed to deduct it as a compensation expense. However, this is not applied to self-employed taxpayers as they are not employees for anyone. To provide equal treatment to them, Congress has allowed self-employees to claim premium health insurance as deductions for AGI for them and their families that include wife/husband and children (Spilker et al., 2020).
References:
Spilker, B., Ayers, B., Outslay, E., Weaver, C., Barrick, J., Robinson, J., & Worsham, R. (2020). McGraw-Hill's taxation of individuals and business entities (2021th ed). McGraw Hill.
2) Congress does allow for self-employed taxpayers to have their employer portion deducted as it relates to their self-employment tax for a specific reason. In a regular employee and employer situation, both would pay their share of Social Security and Medicare taxes (Spilker et al., 2020). Given that a self-employed taxpayer does not have an employer, this makes it so that the taxpayer would have to pay essentially the same amount that an employee and employer would pay together, which is through the self-employment tax (Spilker et al., 2020). This may seem unfair, but Congress recognizes this disadvantage and attempts to make it less burdensome in other ways. This is exactly why Congress allows for the deduction of the employer portion of the self-employed taxpayer (Spilker et al., 2020).
Taxpayers can benefit from “bunching” itemized deductions in a year. Some taxpayers will take the standard deduction, but some will choose itemized deductions instead but the issue with itemized deductions is that they can fall short of what the tax benefit the standard deduction provides (Spilker et al., 2020). In that case, the itemized deductions can be combined from one year to the next with a simple tax planning strategy known as “bunching” (Spilker et al., 2020). So, one year would have two years’ worth of combined itemized deductions and the other year would default to the regular standard deduction, although the shifting of the itemized deductions do have limits The people who would benefit the most from “bunching” are those taxpayers who have a significant amount of activities that can be subsidized through itemized deductions (Spilker et al., 2020). Those activities include homeownership, charitable giving, medical expenses, and interest expense (Spilker et al., 2020). The reason why these taxpayers would benefit the most is that they can benefit more than what the standard deduction can provide them through their activities that can be deducted as itemized deductions.
References
Spilker, B., Ayers, B., Lewis, T., Weaver, C., Barrick, J., Robinson, J., & Worsham, R. (2020). McGraw-Hill's Taxation of Individuals and Business Entities 2021 Edition. McGraw-Hill Education.