IRS Cautions Taxpayers to Watch for Summertime Scams
The Internal Revenue Service today issued a warning that tax-related scams continue across the nation even though the tax filing season has ended for most taxpayers. People should remain on alert to new and emerging schemes involving the tax system that continue to claim victims.
“We continue to urge people to watch out for new and evolving schemes this summer,” said IRS Commissioner John Koskinen. “Many of these are variations of a theme, involving fictitious tax bills and demands to pay by purchasing and transferring information involving a gift card or iTunes card. Taxpayers can avoid these and other tricky financial scams by taking a few minutes to review the tell-tale signs of these schemes.”
A new scam which is linked to the Electronic Federal Tax Payment System (EFTPS) has been reported nationwide. In this ruse, con artists call to demand immediate tax payment. The caller claims to be from the IRS and says that two certified letters mailed to the taxpayer were returned as undeliverable. The scammer then threatens arrest if a payment is not made immediately by a specific prepaid debit card. Victims are told that the debit card is linked to the EFTPS when, in reality, it is controlled entirely by the scammer. Victims are warned not to talk to their tax preparer, attorney or the local IRS office until after the payment is made.
The IRS does not call and leave prerecorded, urgent messages asking for a call back. In this tactic, scammers tell victims that if they do not call back, a warrant will be issued for their arrest. Those who do respond are told they must make immediate payment either by a specific prepaid debit card or by wire transfer.
Private Debt Collection Scams
The IRS recently began sending letters to a relatively small group of taxpayers whose overdue federal tax accounts are being assigned to one of four private-sector collection agencies. Taxpayers should be on the lookout for scammers posing as private collection firms. The IRS-authorized firms will only be calling about a tax debt the person has had – and has been aware of – for years. The IRS would have previously contacted taxpayers about their tax debt.
Scams Targeting People with Limited English Proficiency
Taxpayers with limited English proficiency have been recent targets of phone scams and email phishing schemes that continue to occur across the country. Con artists often approach victims in their native language, threaten them with deportation, police arrest and license revocation among other things. They tell their victims they owe the IRS money and must pay it promptly through a preloaded debit card, gift card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls” or via a phishing email.
Tell Tale Signs of a Scam:
The IRS (and its authorized private collection agencies) will never:
For anyone who doesn’t owe taxes and has no reason to think they do:
For anyone who owes tax or thinks they do:
How to Know It’s Really the IRS Calling or Knocking
The IRS initiates most contacts through regular mail delivered by the United States Postal Service. However, there are special circumstances in which the IRS will call or come to a home or business, such as:
By Sahil Kapur
The long-awaited Obamacare replacement plan from Senate Republicans wouldn’t do much to preserve coverage for millions of poor and working-class people, but it would deliver tax cuts to the wealthiest Americans.
To appeal to their moderate members, GOP leaders initially faced pressure to maintain some of the Obamacare taxes that funded expanded Medicaid coverage. Instead, the Senate version mirrors the House bill in seeking to repeal almost all of the Obamacare taxes, which largely affect the highest earners.
The draft repeals retroactively a 3.8 percent tax on net investment income for individuals with incomes above $200,000 or couples above $250,000—effective Dec. 31, 2016. It also scraps a 0.9 percent Medicare surtax on wages above those thresholds after 2022.
“What Republicans are doing is using health-care reform as a way to push through tax cuts for high-income households,” said William Gale, a senior fellow and tax expert at the nonpartisan Brookings Institution.
Orrin Hatch, chairman of the tax-writing Senate Finance Committee applauded the bill for getting rid of taxes he has said are harmful to the economy. Senate Majority Leader Mitch McConnell characterized the Obamacare taxes as costs that had been passed to consumers and said there would be pressure to reduce premiums thanks to their elimination.
Meanwhile, Democrats used the tax cuts to attack the bill as helping the rich to get richer at the expense of working Americans.
“The Senate bill, unveiled today, is not a health-care bill. It’s a massive transfer of wealth from middle-class and poor families to the richest people in America,” former President Barack Obama wrote in a Facebook post. “It hands enormous tax cuts to the rich and to the drug and insurance industries, paid for by cutting health care for everybody else.”
Democratic leaders, such as Representative Richard Neal, the Massachusetts Democrat on the Ways and Means Committee, have said they’ll zero in on upper-income breaks pitched by Trump and House leaders as part of a tax overhaul to make it politically difficult for Republicans to support them. Trump campaigned on the promise to fight for working Americans and provide a tax cut for the middle class.
“This bill has nothing to do with health care,” Senator Bernie Sanders of Vermont, the runner-up for the 2016 Democratic presidential nomination, said in a statement. “It has everything to do with an enormous transfer of wealth from working people to the richest Americans.”
The Senate draft bill also echoed the House version in delaying the so-called Cadillac tax on high-cost insurance plans from 2020 to 2026. That would help the bill’s revenue score when it’s evaluated by the Congressional Budget Office, helping it meet congressional rules that would allow its passage in the Senate with no Democrats’ votes. The nonpartisan budget office said Thursday it plans to release a score for the Senate bill early next week.
The elimination of Obamacare taxes in the House version of the bill would add $664 billion to the federal deficit over a decade, according to previous estimates by the CBO.
The anti-tax activist Grover Norquist released a statement saying the Senate bill was abolishing Obamacare taxes on the middle class, such as the individual mandate penalty for buying insurance. Under the Affordable Care Act, “taxes increased. Health care costs increased. Obamacare failed,” Norquist said.
The Senate draft legislation also axes a tax on health insurers and, beginning in 2018, a 2.3 percent tax on medical device sales that Congress suspended in 2015. Industry groups have waged aggressive campaigns in recent years to remove both. An indoor tanning tax would be scrapped starting in October 2017.
In passing Obamacare, Democrats imposed about a trillion dollars in tax hikes over a decade to finance insurance coverage for about 20 million people, the government estimates, largely through a Medicaid expansion and premium subsidies. The tax hikes were a focus of Republican ire during the 2009 to 2010 debate over health care, and the GOP has pushed for seven years to repeal them, along with the coverage subsidies they helped finance for low- and middle-income Americans.
Senate Democratic Leader Chuck Schumer called the Senate Republican bill “mean” and “heartless” toward millions of Americans who stand to lose their health insurance.
“Why are they doing all of this? To provide a giant tax break to the wealthiest Americans. Simply put, the bill will result in higher costs, less care,” Schumer said Thursday at a press conference. “Every American should be asking their Republican senators one simple question this weekend: Why did the wealthy deserve a tax cut more than we deserve health care?”
The Senate Republican bill hit an early obstacle as a quartet of Republican senators—Rand Paul of Kentucky, Mike Lee of Utah, Ron Johnson of Wisconsin and Ted Cruz of Texas—said in a joint statement that they weren’t ready to vote for it, arguing that it doesn’t fully repeal Obamacare or sufficiently lower costs for Americans.
More moderate Republicans voiced other concerns about the draft legislation, such as the defunding of Planned Parenthood.
By Michael Cohn
Four Senate Democrats have written a letter to one of the companies hired by the Internal Revenue Service to collect tax debts after complaints that some of its employees encouraged people to use money from their 401(k) retirement funds or take out a second mortgage to pay off their tax debts.
Sen. Elizabeth Warren, D-Mass., Sherrod Brown, D-Ohio, Jeff Merkley, D-Ore., and Benjamin Cardin, D-Md., sent a letter Friday to the heads of Pioneer Credit Recovery and its parent company Navient questioning them about their employees pressuring taxpayers into making risky financial transactions and violating the Fair Debt Collection Practices Act and provisions of the tax code. They also said they are concerned that Pioneer may be failing to adequately protect customers from criminals posing as IRS agents, and may be violating IRS guidelines and provisions of Pioneer’s IRS contract.
In December 2015, Congress passed highway repair legislation that included a provision ordering the IRS to hire private debt collectors for some of its uncollected tax receivables. The IRS had previously tried using private debt collection agencies twice before, only to discontinue the programs after finding the debt collectors failed to pull in the amount of revenue anticipated and prompted complaints of taxpayer harassment. But after Congress required it to give the private debt collection program another try, the IRS selected four private contractors last September: Pioneer, CBE Group, Conserve and Performant, to collect these tax debts (see IRS picks private debt collection contractors). In April, the IRS began assigning accounts to Pioneer (see IRS revives private debt collection program).
“Pioneer is unique among IRS contractors in pressuring taxpayers to use financial products that could dramatically increase expenses, or cause them to lose their homes or give up their retirement security,” Warren and the other senators wrote. “Pioneer’s ‘Initial Demand’ script advises its agents to ‘Give the Taxpayer ideas on where/how to borrow’ to pay their debts. As ‘Money Sources,’ Pioneer suggests that agents list traditional sources such as banks, stocks, and CDs when indicating to taxpayers how they might resolve the debt. But Pioneer’s script also includes three options that are extraordinarily dangerous for taxpayers’ financial security: ‘Credit Card,’ ‘2nd Mortgage,’ and ‘Borrow against 401K.’ Similarly, the Pioneer ‘Resolution Script’ advises Pioneer employees to ‘suggest that liquidating assets or borrowing money may be advantageous,’ and also suggests a second mortgage or 401K loan. No other debt collector makes these demands.”
The senators are worried that taxpayers might fall prey to scammers pretending to be IRS employees if Pioneer continues to follow the same call script it has been using. “One way to protect taxpayers from IRS impersonators is to ensure adequate time for a taxpayer to verify the identity of a debt collector and—if needed—receive a new copy of the unique authentication number by mail if the original notice has been discarded or was not received,” the lawmakers wrote in the letter, posted by The New York Times. “Because scammers will not provide taxpayers with reasonable timelines, this is also one way taxpayers can distinguish between scammers and IRS contractors. Other contractors used by IRS adhere to this practice, discontinuing contact and placing an account on hold for a 60 day period ‘if the taxpayer indicates that there is doubt as to the liability’ or waiting for the taxpayer to call them back if the collector needs to resend the authentication letter. But Pioneer does not adhere to this practice. In cases where taxpayers have not received the initial contact letter from Pioneer, the call script directs Pioneer employees to ‘update the account, request a certified letter, and suspend the collection activities’ only ‘for 5 calendar days’ to allow the taxpayer to receive the letter. This brief five-day period would allow Pioneer to call taxpayers twice in the same week, even if the taxpayer has not been able to authenticate the caller. Pioneer’s failure to allow taxpayers adequate time to receive authentication materials by mail may prevent taxpayers from distinguishing IRS impersonators from Pioneer’s own debt collectors.”
The National Treasury Employees Union, the union representing IRS employees, along with consumer watchdog groups, National Taxpayer Advocate Nina Olson, and Treasury Inspector General for Tax Administration J. Russell George have all previously expressed concerns about the potential for impersonation scams with the revived IRS private debt collection program.
The NTEU reiterated its concerns Friday. “This program is only a few weeks old, and already there is proof that one of the companies hired by the IRS is breaking the rules and treating taxpayers atrociously,” said NTEU national president Tony Reardon in a statement. “This company has a poor record and previously lost its contract with the U.S. Department of Education, a fact that the Treasury Secretary recently testified that he was not aware of when the company was hired by the IRS. Instead, NTEU has urged Congress and the IRS to leave the collection work to the public servants of the IRS. These professional federal employees have a variety of legal tools available to assist taxpayers that don’t involve threatening them or forcing them into unwise financial decisions.”
Navient defended Pioneer's practices. “Pioneer has followed all IRS protocols in working with the Internal Revenue Service to recover millions of dollars in taxes that have gone unpaid for years,” said an email from Navient spokesperson Nikki Lavoie. “Pioneer has satisfied an extensive list of IRS-conducted audits and tests, encompassing all facets of the program including receiving approval from the IRS on all scripts and procedures.”
The IRS plans to monitor the new program closely. An IRS spokesperson emailed a statement, saying, “The IRS is committed to running a balanced program that respects taxpayer rights while collecting the tax debts as intended under the law. The IRS will be closely monitoring the private debt collection program and will be working closely with the firms to ensure the fairness and integrity of the initiative.”
A midyear tax checkup will help you to prepare for the tax consequences of life changes.
✔ Evaluate the tax impact of life changes such as a raise, a new job, marriage, divorce, a new baby, or a child going to college or leaving home.
✔ Check your withholding on your paycheck and estimated tax payments to avoid paying too much or too little.
✔ See if you can contribute more to your 401(k) or 403(b). It is one of the most effective ways to lower your current-year taxable income.
In the midst of your summer fun, taking time for a midyear tax checkup could yield rewards long after your vacation photos are buried deep in your Facebook feed.
Personal and financial events, such as getting married, sending a child off to college, or retiring, happen throughout the year and can have a big impact on your taxes. If you wait until the end of the year or next spring to factor those changes into your tax planning, it might be too late.
“Midyear is the perfect time to make sure you’re maximizing any potential tax benefit and reducing any additional tax liability that result from changes in your life,” says Gil Charney, director of the Tax Institute at H&R Block.
Here are 9 questions to answer to help you be prepared for any potential impacts on your tax return.
The amount of tax withheld from your paycheck should increase automatically along with your higher income. But if you’re working two jobs, have significant outside income (from investments or self-employment), or you and your spouse file a joint tax return, the raise could push you into a higher tax bracket that may not be accounted for in the Form W-4 on file with your employer. Even if you aren’t getting a raise, ensuring that your withholding lines up closely with your anticipated tax liability is smart tax planning. Use the IRS Withholding Calculator; then, if necessary, tell your employer you’d like to adjust your W-4.
Another thing to consider is using some of the additional income from your raise to increase your contribution to a 401(k) or similar qualified retirement plan. That way, you’re reducing your taxable income and saving more for retirement at the same time.
If you’re a relatively high earner, check to see if you’re on track to surpass the net investment income tax (NIIT) threshold. The NIIT, often called the Medicare surtax, is a 3.8% levy on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) above $200,000 for individuals, $250,000 for couples filing jointly, and $125,000 for spouses filing separately. In addition, taxpayers with earned income above these thresholds will owe another 0.9% in Medicare tax on top of the normal 2.9% that’s deducted from their paycheck.
If you think you might exceed the Medicare surtax threshold for 2017, you could consider strategies to defer earned income or shift some of your income-generating investments to tax-advantaged retirement accounts. These are smart strategies for taxpayers at almost every income level, but their tax-saving impact is even greater for those subject to the Medicare surtax.
If you plan to open a rollover IRA with money from a former employer’s 401(k) or similar plan, or to transfer the money to a new employer’s plan, be careful how you handle the transaction. If you have the money paid directly to you, 20% will be withheld for taxes and, if you don’t deposit the money in the new plan or an IRA within 60 days, you may owe tax on the withdrawal, plus a 10% penalty if you’re under age 55.
It’s time to plan ahead for the impact of claiming one more or less dependent on your tax return.
Consider adjusting your tax withholding if you have a newborn or if you adopt a child. With all the expenses associated with having a child, you don’t want to be giving the IRS more of your paycheck than you need to.
If your child is a full-time college student, you can generally continue to claim him or her as a dependent—and take the dependent exemption ($4,050 in 2017)—until your student turns 25. If your child isn’t a full-time student, you lose the deduction in the year he or she turns 19. Midyear is a good time to review your tax withholding accordingly.
College tuition can be eye-popping, but at least you might have an opportunity for a tax break. There are several possibilities, including, if you qualify, the American Opportunity Tax Credit (AOTC). The AOTC can be worth up to $2,500 per undergraduate every year for four years. Different college-related credits and deductions have different rules, so it pays to look into which will work best for you.
Regardless of which tax break you use, here’s a critical consideration before you write that first tuition check: You can’t use the same qualified college expenses to calculate both your tax-free withdrawal from a 529 college savings plan and a federal tax break. In other words, if you pay the entire college bill with an untaxed 529 plan withdrawal, you probably won’t be eligible for a college tax credit or deduction.
Whether you’re getting married or divorced, the tax consequences can be significant. In the case of a marriage, you might be able to save on taxes by filing jointly. If that’s your intention, you should reevaluate your tax withholding rate on Form W-4, as previously described.
Getting divorced, on the other hand, may increase your tax liability as a single taxpayer. Again, revisiting your Form W-4 is in order, so you don’t end up with a big tax surprise in April. Also keep in mind that alimony you pay is a deduction, while alimony you receive is treated as income.
OK, this isn’t a life-event question, but it can have a big tax impact. Contributing to a qualified retirement plan is one of the most effective ways to lower your current-year taxable income, and the sooner you bump up your contributions, the more tax savings you can accumulate. For 2017, you can contribute up to $18,000 to your 401(k) or 403(b). If you’re age 50 or older, you can make a “catch-up” contribution of as much as $6,000, for a maximum total contribution of $24,000. Self-employed individuals with a simplified employee pension (SEP) plan can contribute up to 25% of their compensation, to a maximum of $54,000 for 2017.
This year’s IRA contribution limits, for both traditional and Roth IRAs, are $5,500 per qualified taxpayer under age 50 and $6,500 for those age 50 and older. Traditional and Roth IRAs both have advantages, but keep in mind that only traditional IRA contributions can reduce your taxable income in the current year.
If your investments are doing well and you have realized gains, now’s the time to start thinking about strategies that might help you reduce your tax liability. Tax-loss harvesting—timing the sale of losing investments to cancel out some of the tax liability from any realized gains—can be an effective strategy. The closer you get to the end of the year, the less time you’ll have to determine which investments you might want to sell, and to research where you might reinvest the cash to keep your portfolio in balance.
If you’re planning to retire this year, the retirement accounts you tap first and how much you withdraw can have a major impact on your taxes as well as how long your savings will last. A midyear tax checkup is a good time to start thinking about a tax-smart retirement income plan.
If you’ll be age 70½ this year, don’t forget that you may need to start taking a required minimum distribution (RMD) from your tax-deferred retirement accounts, although there are some exceptions. You generally have until April 1 of next year to take your first RMD, but, after that, the annual distribution must happen by December 31 if you want to avoid a steep penalty. So if you decide to wait to take your first RMD until next year, be aware that you’ll be paying tax on two annual distributions when you file your 2018 return.
Midyear is still a good time to think about taxes. You might look into ways you can save more toward retirement, gift money to your children and grandchildren to remove it from your estate, or manage your charitable giving to increase its tax benefits and value to beneficiaries. A little tax planning now can save a lot of headaches in April—and maybe for years to come.
Top House Republicans have vowed repeatedly to make sweeping tax reform a reality this year — but that effort won’t be the only chance to see tax action.
Lawmakers will attach tax titles to other legislation before tax reform happens, whether as negotiating tools, technical fixes, or renewals of expiring provisions, according to lobbyists and lawmakers. While House Ways and Means Chairman Kevin Brady, R-Texas, has focused on producing one comprehensive tax bill, some individual bills could be introduced before a deal is reached — especially if tax overhaul efforts begin to languish.
Rep. James B. Renacci, R-Ohio, a member of Ways and Means, said while he also prefers a single tax package, Republicans may need to look at what else can get done first. “I do think it will come up. There’s continuation of other tax bills that people want to at least get on the table while we’re waiting, so I think those will come up,” he said.
Here are four tax provisions that could surface before a tax reform bill.
1. Nuclear Production Tax Credit
The House on June 20 passed a bill (H.R. 1551) to extend an unused production tax credit for new nuclear reactors past the sunset date of 2021. The bill is one of the few tax measures to pass the House this year, and could be attached to legislation such as a debt ceiling bill in order to get Senate passage as well.
Sponsor Rep. Tom Rice, R-S.C., said that he hopes the bill will move on its own in the Senate, rather than being bundled with other energy credits. Moving it quickly would provide certainty to Southern Co. and Scana Corp., which are building reactors in South Carolina and Georgia that are behind schedule and may not meet the Dec. 31, 2020, operational deadline to qualify for the credit.
“I think there’s a lot of bipartisan support and there’s a lot of urgency, much more so than the others,” Rice said.
2. Renewable Energy Tax Credits
Some lawmakers, particularly Democrats, have pushed to include the Tax Code Section 48 credits for renewable energy in any legislation with a tax title. So far, they have been unsuccessful.
Proponents are pushing to extend tax credits for solar energy, fuel cells, microturbines and small-scale wind energy through 2021.
“I think this is especially true given that what just moved was an energy credit,” a former GOP aide said, referring to the nuclear credit. “I would watch and see if other proposals are not pushed more aggressively in the energy space.”
Rep. Tom Reed, R-N.Y., has pushed to bundle the renewable energy credits with the nuclear production tax credit. One legislative vehicle for the renewable energy credits and the nuclear credit could be the Federal Aviation Administration reauthorization bill, which is set to expire at the end of September and includes a tax component.
3. Partnership Audit Modifications
The pressure is mounting on lawmakers to pass legislation to delay or modify the new regime for partnership audits, which is to start next year.
The new audit process, intended to make it easier for the IRS to examine partnerships, was included in the Bipartisan Budget Act of 2015 as a last-minute revenue raiser. Since then, tax professionals have asked Congress to make changes to ambiguities in the law. Earlier this month, the American Institute of CPAs urged the Internal Revenue Service and Treasury Department to work with Congress to delay the start date of the rules by a year.
A technical corrections bill that would address industry concerns, which was introduced last session by top tax-writers, has yet to be reintroduced this year. Tax professionals had hoped the bill could be attached to a tax reform package, but as the timeline for a tax bill has slipped, practitioners are worried the IRS will have to scramble to incorporate technical changes in the guidance.
4. Expiring Extenders
The deduction for mortgage insurance premiums, a provision with broad bipartisan support, was extended in the PATH Act but expired at the end of 2016. Other extended but also expired items include the above-the-line deduction for college tuition, the exclusion for forgiven debt on principal homes, the credit for non-business energy-efficient property, and the Section 179D deduction for energy-efficient commercial buildings.
“If tax reform doesn’t eventually move, these extenders will have to get done — and presumably by the time that people start to file their 2017 tax returns,” the lobbyist said.
Brady has been reluctant to touch any extender provision, saying that they will be handled in tax reform. But if tax reform doesn’t happen before taxpayers start filing tax returns next February, lawmakers will face significant pressure to move these items.
The Tax Court has ruled that the owners of the Boston Bruins professional hockey team may deduct the entire cost of away game pregame meals as a de minimis fringe benefit.
During 2009 and 2010 the Boston Bruins played at hotels when visiting “away” cities and contracted with the hotels for the provision of pregame meals to players and team personnel. Jeremy Jacobs and his wife, Margaret Jacobs, own the Bruins through separate S corporations. The team contracted with the hotels they stayed at for the provision of pregame meals, and the Jacobs deducted the entire cost of the meals. The Tax Court held Monday in Jacobs v. IRS, 148 T.C. No. 24 that the provision of pregame meals qualifies as a de minimis fringe benefit under Code section 274(n)(2)(B), and therefore the cost of such meals is not subject to the 50 percent limitation of section 274(n)(1).
The expense would normally be subject to the 50 percent limitation unless it qualifies as a fringe benefit, observed Mike Chittenden, counsel at Miller & Chevalier, who wrote about the case on the law firm's blog. “This would typically apply to occasional group meals, such as an annual awards dinner,” he said. “The reasoning here as to why the meals satisfied the ‘convenience of the employer’ standard—that the team needed its members to be able to perform at peak physical levels—could apply to other employers as well. For example, a healthy meal could aid mental performance as well as physical performance, and could also reduce the amount an employer spends on its health plan.”
“Disallowance of the deduction would have the effect of making meals more expensive for the employer,” Chittenden said. “They would lose the tax deduction on half the value of the meals, but if the meals can qualify as a meal for the convenience of the employer, and can qualify as a de minimis fringe benefit, they will get the full deduction.”
The issue may not end with the Tax Court decision, however. “I expect the IRS will appeal,” Chittenden said. “Also, there has been a project on a priority guidance plan to issue new rules relating to employer-operated eating facilities, so this case may provide an impetus for the project to move forward.”
By Sahil Kapur
Congressional Republicans’ dash to undo Obamacare is about fulfilling a seven-year promise to voters. But it’s also about seizing what may be the party’s last chance to wipe out the 2010 law’s tax hikes on upper income earners.
The Senate version of the health-care bill released last week would reduce federal revenue by $700 billion over a decade, the Congressional Budget Office estimated on Monday, by repealing tax hikes imposed by the Affordable Care Act. One of the biggest revenue declines would come from retroactively repealing a 3.8 percent tax on investment income for individuals earning more than $200,000 or couples above $250,000.
The legislation would also scrap a 0.9 percent Medicare surtax on wages above those thresholds, eliminate fees on health insurance companies, delay the so-called Cadillac tax on high-cost insurance plans to 2026, and lower a hospital insurance payroll tax increase. About 45 percent of the tax benefits in the legislation would go to the top 1 percent of households by income, those making $875,000 a year or more, according to an analysis by the Tax Policy Center, a Washington policy group that’s a joint venture of the Urban Institute and the Brookings Institution.
The legislation’s path grew more complicated Monday after three Republican senators—Susan Collins of Maine, Rand Paul of Kentucky and Dean Heller of Nevada—said they would vote to block the current version of the bill. Republican leaders insisted they still hope to hold a final vote this week.
The House’s top tax writer, Republican Kevin Brady of Texas, said Obamacare taxes will remain if the health-care bill doesn’t pass because including their repeal in a tax-overhaul package would make it harder to lower rates, which is a higher priority for lawmakers.
“We have never planned to import that $1 trillion of taxes into the tax reform effort,” Brady told reporters on Monday, arguing that the taxes are a “a big drag on the economy” and so it’s “critical the Senate complete its work.”
To get around a lack of Democratic support for a tax-code rewrite, Senate Republicans have said they plan to use a legislative maneuver that allows for passing a bill with a simple majority. Under that procedure, however, tax cuts have to be offset so they don’t add to the long-term deficit. Otherwise, the tax changes can only be temporary.
The Affordable Care Act imposed about $1 trillion in tax hikes on high-income households and various health-related industries to help finance a coverage expansion for more than 20 million people so far, according to government estimates.
House Speaker Paul Ryan warned in March that if Republicans fail to unwind the 2010 health-care law, “the Obamacare taxes stay with Obamacare. We’re going to fix the rest of the tax code in tax reform.”
If Republicans are unable to pass their health-care bill on a partisan vote, the fallback option could be to enlist Democratic support to fix structural deficiencies that both parties agree exist in the Obamacare marketplaces. But one thing Democrats are unlikely to support in such a proposal would be tax cuts for upper earners, a senior Senate Democratic aide said, adding that money to stabilize the exchanges should be a priority.
Other Republicans, such as Tennessee Senators Lamar Alexander and Bob Corker, have proposed an amendment to exempt people from the Obamacare individual mandate if their state exchanges provide no insurance options and permit them to use tax credits to buy a plan outside the law’s marketplaces.
William Gale, a senior fellow at the nonpartisan Brookings Institution, said Republicans have many reasons for wanting to undo Obamacare—one of them being that it was enacted by President Barack Obama.
“The fact that it dovetails with tax cuts for high-income households certainly is convenient,” he said.
Tax experts are poring over the Senate version of the Republican health care bill, examining the bill's tax provisions and its differences from the House version of the legislation.
The two versions of the Senate and House bills are not that far apart, according to Dustin Stamper, a director in Grant Thornton’s Washington National Tax Office. “The tax titles are pretty similar in a lot of ways,” he said. “They’re proposing to do the same things with ACA taxes, with a number of minor differences here and there. The biggest difference is what to do going forward to continue to offer refundable tax credits for purchasing insurance. The Senate draft is much more generous than the House bill.”
Structurally, there are differences too, Stamper noted. The House repeals the premium tax credit but comes out with its own version, while the Senate keeps the premium tax credit structure but makes some changes to it. “The Senate draft would benchmark the credit to a lower value plan,” said Stamper. “They would also cap it at a lower percentage of the federal poverty level. It’s now at 400 percent, but the Senate would take that down to 350 percent. In addition, it would adjust some of the percentages not only by income but also by age, while the House bill only takes age into consideration.”
“The other differences in the tax area are pretty technical,” said Stamper. The Medicaid changes are significant. Of the two related Medicare taxes, both the House and the Senate would repeal the Net Investment Income tax immediately, while they chose to let wage earners keep paying the surtax on earned income for several years.”
“There are a lot of similarities between the House bill and the discussion draft released yesterday by the Senate,” agreed Nicole Elliott, a partner at Holland & Knight and former IRS senior advisor for the Affordable Care Act.
Elliott, the lead executive responsible for overseeing all aspects of the ACA implementation at the IRS, cautioned that what was released was a discussion draft and is likely to change during negotiations.
“Both the House and Senate effectively repeal the individual and employer mandate,” she said. “And they both make significant changes to Medicaid. While the Code will still require applicable individuals to maintain minimum essential coverage, the penalties for filing to do so will be lowered to zero, effective as of Jan. 1, 2016. This means that individuals who may have paid a penalty in 2016 could obtain retroactive relief from such penalties.”
“Both the House and the Senate versions repeal ACA taxes such as the taxes on medical devices, insurance providers, and the tax on high-interest earners,” she noted. “That’s what’s drawing the ire of critics who are claiming it’s in part a tax break for the rich.”
The discussion draft of the Better Care Reconciliation Act of 2017 expands the Affordable Care Act’s “state innovation waivers,” also known as “Obamacare 1332 Waivers,” to provide states additional flexibility to use waivers that exist in current law to decide the rules of insurance and ultimately better allow customers to buy the health insurance they want. The Department of Health and Human Services is allowed to fast-track applications from states experiencing an Obamacare emergency.
“The BCRA contains an interesting provision which would give states the flexibility of 1332 waivers,” said Elliott. “That’s the provision of the ACA that states can opt out just by filing an application. It hasn’t been used a lot because the bar is high—states have to show that what they are planning will not decrease overall coverage. The Senate draft provides funds to work on 1332 waivers and provides fast-track options.”
“The key provision for individual taxpayers is that both the House and Senate versions repeal the 3.8 percent tax on net investment income,” said Howard Wagner, managing director in Crowe Horwath’s National Tax Office. “And the Senate version follows the House bill in that the 0.9 percent additional Medicare tax on wages and self-employment income is not repealed until 2023.”
“The important issue for individuals is that until something is enacted, everything is subject to change,” he added. “If you’re considering a transaction such as the sale of a business or the sale of stock that would result in the imposition of tax on net investment income, don’t do it today on the assumption that the tax will be gone for 2017. Aside from the fact that the bills don’t make it into law, there is always the possibility that negotiations could result in changes to the effective date. The final bill that ultimately passes might not repeal the NII tax until 2018 or later.”
After Senate Republicans released Thursday, the BCRA is slated for negotiation and a vote as early as next week, but four Republican senators have already said they’re not on board. Senate Majority Leader Mitch McConnell, R-Ken., needs 50 votes out of 52 Republicans in the Senate, assuming every Democrat will vote against the bill.
“Senate passage is not a foregone conclusion,” Stamper noted. “They hope to vote on it by the July 4 recess. The difficulty in passing the House version, the American Health Care Act of 2017 (AHCA) was to keep both conservatives and moderates happy, and that won by only a four-vote margin. In the Senate, some of the changes they make might not be acceptable on the House side. Resolving the House and Senate version will be a big hurdle.”