Tricky Wordplay Sets Trap for Tax Filers

By Samuel Handwerger 

SMITH BRAIN TRUST — A client of mine in my role as CPA recently asked me how to take advantage of something a financial website describes as a “$42 billion consumer rebate program” that Congress passed in December 2015. Under the program, the website boasts, “119 million taxpaying Americans can now get a rebate on virtually every single 2016 purchase.”

Pleading ignorance, I decided I would look into it. Enlisting the help of David Hao Li, an MS in Accounting student, to help research this mystery, we found it to be both a rumor and a potential pyramid scheme from the Oxford Club, a self-described “wealth protection/growth club.” Its parent company, Baltimore-based newsletter conglomerate Agora Inc., has a history of being accused of “crossing the line between aggressive salesmanship and deception,” according to this recent profile at Mother Jones.

In this, case the Oxford Club appears to be disguising a standard tax rule as its “secret sauce” – available through a $49 subscription. The club’s promo, here, says, “If you have a huge spending year in 2016 (even on credit), in rare cases you could conceivably claim upward of $100,000… For most people, the cash rebate will be smaller… Some will collect maybe $1,230… Others bring in up to $12,900.”

Here are the facts: President Barack Obama signed a new tax bill, the "Protecting Americans from Tax Hikes Act” into law on December 18, 2015. It made permanent more than 20 temporary deductions, credits and other tax provisions. But the Oxford Club is focusing on just one of those tax breaks — a provision for individual income tax filers who itemize their expenses to deduct either the greater of their state and local sales tax or their state and local income tax. 

Taxpayers have long been able to deduct their state and local income tax. So, this option is intended to balance the tax burden for residents living in states with extremely high sales tax rates or in no-income tax states Alaska, Florida, Nevada, New Hampshire South Dakota, Texas, Tennessee, Washington and Wyoming. That aforementioned $42-billion figure represents the government’s total, projected tax revenue loss over the next 10 years, caused by the provision.

But the Oxford Club makes it sound like the IRS will rebate cash on every single purchase. Here are some examples from the Club of what I consider deceptive wordplay:  The Internal Revenue Code states that the now-permanent option refers to deducting “state and local sales tax.” But the club refers to this as “dollars spent on purchases.” There is a huge difference. The former is payment to government. The latter is base of tax calculation. In zero-percent sales tax states such as Oregon and New Hampshire, residents pay proportionately more in property tax and income tax to fund local governmental entities. Residents in those states who act on the club’s “dollars spent on purchases” selling point and increase their spending, therefore, would be left holding the bag, so to speak, at tax time. 

Deductions vs. Cash Rebate

The club appears to mix the concepts of “a deduction from taxpayers’ adjusted gross income” and a “dollar-for-dollar credit/reward.” Though Congress in the past has moved to stimulate the economy by giving out checks, as it did in 2001 and 2008, there’s no free meal this time around.

A number of folks who have worked out the math on their own over these past 10 years could have been unaware of this potential filing option, but for most tax filers, weighing credits against deductions, credits — especially refundable ones (e.g. Child Tax Credit and Earned Income Tax Credit), more directly offset tax bills or boost tax refunds. In this instance, we are talking about a deduction.

For determining which is the better option, sales or income tax: first, choose the higher of income tax or sales tax, with the latter including use tax. Second, total all itemized deductions, which include real estate tax, mortgage interest, unreimbursed business expenses and other miscellaneous itemized deductions.

Pursuing the sales tax deduction route and “rebate” program would be a nonstarter for most low- to moderate-income families (defined as having annual household income under $53,000). These tax filers typically are renting, working for multiple employers, including in seasonal and other temporary jobs, and have small savings and investments. And the sales tax they pay in a year will typically amount to a few hundred dollars. So, for these tax filers the “alternative” standard deduction of $6,300 to $12,600 is nearly always preferred.

Samuel Handwerger is a lecturer in the Department of Accounting and Information Assurance. David Hao Li, who contributed to this report, is an MS in Accounting student.