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November

Four Things to Know about Taxes and Starting a Business

 

New business owners have tax-related things to do before launching their companies. IRS.gov has resources to help. Here are some items to consider before scheduling a ribbon-cutting event.

 

Choose a business structure

When starting a business, an owner must decide what type of entity it will be. This type determines which tax forms a business needs to file. Owners can learn about business structures at IRS.gov. The most common forms of businesses are:

·      Sole Proprietorships

·      Partnerships

·      Corporations

·      S Corporations

·      Limited Liability Company

 

Determine business tax responsibilities

The type of business someone operates determines what taxes they need to pay and how to pay them. There are the five general types of business taxes.

 

·      Income tax – All businesses except partnerships must file an annual income tax return. They must pay income tax as they earn or receive income during the year.

 

·      Estimated taxes – If the amount of income tax withheld from a taxpayer’s salary or pension is not enough, or if the taxpayer receives income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, they may have to make estimated tax payments.

 

·      Self-employment tax – This is a Social Security and Medicare tax. It applies primarily to individuals who work for themselves.

 

·      Employment taxes – These are taxes an employer pays or sends to the IRS for its employees. These include unemployment tax, income tax withholding, Social Security, and Medicare taxes.

 

·      Excise tax – These taxes apply to businesses that:

o    Manufacture or sell certain products

o    Operate certain kinds of businesses

o    Use various kinds of equipment, facilities, or products

o    Receive payment for services

 

Choose a tax year accounting period

Businesses typically figure their taxable income based on a tax year of 12 consecutive months. A tax year is an annual accounting period for keeping records and reporting income and expenses. The options are:

·      Calendar year: Jan. 1 to Dec. 31.

·      Fiscal year:12 consecutive months ending on the last day of any month except December.

Set up recordkeeping processes

 

Being organized helps businesses owners be prepared for other tasks. Good recordkeeping helps a business monitor progress. It also helps prepare financial statements and tax returns. See IRS.gov for recordkeeping tips.

 

 

 

Handle With Care: Mutual Funds and Taxes

Many people overlook taxes when planning their mutual fund investments. But you’ve got to handle these valuable assets with care. Here are some tips to consider.

 

Avoid year-end investments

Typically, mutual funds distribute accumulated dividends and capital gains toward the end of the year. But don’t fall for the common misconception that investing in a fund just before a distribution date is like getting “free money.”

 

True, you’ll receive a year’s worth of income right after you invest. But the value of your shares will immediately drop by the same amount, so you won’t be any better off. Plus, you’ll be liable for taxes on the distribution as if you had owned your shares all year.

 

You can get a general idea of when a particular fund anticipates making a distribution by checking its website periodically. Also make a note of the “record date” — investors who own fund shares on that date will participate in the distribution.

 

Invest in tax-efficient funds

Actively managed funds tend to be less tax efficient. They buy and sell securities more frequently, generating a greater amount of capital gain, much of it short-term gain taxable at ordinary income rates rather than the lower, long-term capital gains rates.

 

Consider investing in tax-efficient funds instead. For example, index funds generally have lower turnover rates. And “passively managed” funds (sometimes described as “tax managed” funds) are designed to minimize taxable distributions.

 

Another option is exchange-traded funds (ETFs). Unlike mutual funds, which generally redeem shares by selling securities, ETFs are often able to redeem securities “in kind” — that is, to swap them for other securities. This limits an ETF’s recognition of capital gains, making it more tax efficient.

 

This isn’t to say that tax-inefficient funds don’t have a place in your portfolio. In some cases, actively managed funds may offer benefits, such as above-market returns, that outweigh their tax costs.

 

Watch out for reinvested distributions

Many investors elect to have their distributions automatically reinvested in their funds. Be aware that those distributions are taxable regardless of whether they’re reinvested or paid out in cash.

Reinvested distributions increase your tax basis in a fund, so track your basis carefully. If you fail to account for these distributions, you’ll end up paying tax on them twice — once when they’re paid and again when you sell your shares in the fund.

 

Fortunately, under current rules, mutual fund companies are required to track your basis for you. But you still may need to track your basis in funds you owned before 2012 when this requirement took effect, or if you purchased units in the fund outside of the current broker holding your units.

 

Do your due

Tax considerations should never be the primary driver of your investment decisions. Yet it’s important to do your due diligence on the potential tax consequences of funds you’re considering — particularly for your taxable accounts.

 

Sidebar: Directing tax-inefficient funds into nontaxable accounts

If you invest in actively managed or other tax-inefficient funds, ideally you should put these holdings in nontaxable accounts, such as a traditional IRA or 401(k). Because earnings in these accounts are tax-deferred, distributions from funds they hold won’t have any tax consequences until you withdraw them. And if the funds are held in a Roth account, those distributions will escape taxation altogether.

 

 

 

 

Are Frequent Flyer Miles Ever Taxable?

If you recently redeemed frequent flyer miles to treat the family to a fun summer vacation or to take your spouse on a romantic getaway, you might assume that there are no tax implications involved. And you’re probably right — but there is a chance your miles could be taxable.

Generally, miles awarded by airlines for flying with them are considered nontaxable rebates, as are miles awarded for using a credit or debit card. The IRS even addressed the issue in Announcement 2002-18, where it said:

 

Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.

 

There are, however, some types of miles awards the IRS might view as taxable. Examples include miles awarded as a prize in a sweepstakes and miles awarded as a promotion.

 

For instance, in the 2014 case of Shankar v. Commissioner, the U.S. Tax Court sided with the IRS in finding that airline miles awarded in conjunction with opening a bank account were indeed taxable. Part of the evidence of taxability was the fact that the bank had issued Forms 1099 MISC to customers who’d redeemed rewards points to buy airline tickets.

 

The value of the miles for tax purposes generally is their estimated retail value. If you’re concerned you’ve received miles awards that could be taxable, please contact us.

 

 

 

Five Things to Know about Estimated Taxes and Withholding

With 10 million taxpayers a year facing estimated tax penalties, the IRS offers some simple tips to help prevent a surprise at tax time.

 

People pay taxes on income through withholding on their paycheck or through estimated tax payments. Taxpayers who pay enough tax throughout the year can avoid a large tax bill and penalties when they file their return.

 

Taxpayers should make estimated tax payments if:

 

·      The tax withheld from their income does not cover their tax for the year.

 

·      They have income without withholdings. Some examples are interest, dividends, alimony, self-employment income, capital gains, prizes or awards.

 

 

Here are five actions taxpayers can take to avoid a large bill and estimated tax penalties when they file their return. They can:

 

·      Use Form 1040-ES. Individuals, sole proprietors, partners and S corporation shareholders can use  this form to figure estimated tax. This form helps someone calculate their expected income, taxes, deductions and credits for the year. They can then figure their estimated tax payments.  

 

·      Use the Withholding Calculator on IRS.gov. This tool helps users figure how much money their employer should withhold from their pay so they don’t have too much or too little tax withheld. The results from the calculator can also help them fill out their Form W-4. Taxpayers whose income isn’t paid evenly throughout the year, can check Publication 505 instead of the calculator.  

 

·      Have more tax withheld. Taxpayers with a regular paycheck can have more tax withheld from it. To do this, they must fill out a new Form W-4 and give it to their employer. This is a good option for taxpayers who participate in a sharing economy activity as a side job or part-time business.  

 

·      Use estimated payments to pay other taxes. Self-employed individuals can make estimated tax payments to pay both income tax and self-employment tax. Self-employment tax includes Social Security and Medicare.  

 

·      Use Form W-4P. Generally, pension and annuity plans withhold tax from retirees’ payments. Recipients of these payments can adjust their withholding using Form W-4P and give it to their payer.

 

 

 

Some of America’s richest families help Trump target estate tax

By Ben Steverman

 

The White House cited research from a “family business” group to support its push for repealing the federal estate tax. But don’t mistake family business owners for small business owners.

Directors of the group, called Family Enterprise USA, include Preston Root. His family fortune derives from creating the curvy green bottle that Coca-Cola made iconic a century ago. Another board member, Jamie Richardson, married into the hamburger business. Specifically: sliders. His wife is the great-granddaughter of the man who founded the White Castle fast-food chain.

 

Members of the little-known nonprofit, which appeared in a White House email this month, say they represent the people the estate tax hurts most—family-owned businesses that they say are taxed in an unfair and intrusive way.

 

 “No one is opposed to paying their fair share of taxes,” Root said in an interview. The estate tax, however, hits families at the worst possible time, when someone has died. “It's about timing,” he said.

 

The fate of the estate tax—a debate that has dominated Washington for years—remains unclear less than 48 hours before House Republicans release the text of a planned tax-overhaul bill. Pat Soldano, another Family Enterprise board member, said she thinks the House bill will include a repeal provision—but the Senate may change that.

 

Regardless, the debate may come back to one central fact: Just two out of every 1,000 Americans who die end up with an estate tax bill. If you’re single and you die with less than $5.49 million to your name, you—or rather, your heirs—don’t have to worry. Couples can shield $10.98 million from the estate tax, and the right planning can shield millions more. The official rate is 40 percent, though IRS data show that the effective tax rate is more like 17 percent.

 

Though its repeal has been central to Republican tax philosophy for years, some GOP senators, including Susan Collins of Maine, have expressed skepticism about ending the tax, which brought in $18 billion last year. Keeping it could help offset the deep business and individual income-tax rate cuts Republicans want.

 

Democrats, meanwhile, are ready to portray an estate-tax repeal as a giveaway to the rich at a time of surging wealth inequality. The top 0.1 percent controlled just 7 percent of U.S. wealth in 1978, according to Emmanuel Saez and Gabriel Zucman, economists at the University of California-Berkeley. By 2012, that group controlled 22 percent of wealth.

 

“If anything, I think we should be strengthening the estate tax,” said New York University professor Lily Batchelder, who worked in former President Barack Obama’s administration. “It’s the most progressive tax we have.”

 

The Trump administration says the estate tax hurts the economy. In an email this month, it cited research from Family Enterprise USA to say that “close to 20 percent of family business owners say planning for the death tax affects their ability to create jobs.”

 

That statement stems from a survey of fewer than 200 people. Family Enterprise USA found the survey participants through a network of family offices—businesses that manage the wealth of rich families. Family offices generally have assets of at least $100 million. More than half the survey participants’ businesses had annual revenue of $11 million or more.

 

Even among that less-than-representative group of business owners, the survey suggests that 80 percent think the estate tax poses no problem for creating jobs. The White House email also cited the survey’s estimate that family business owners spent $74,940 on insurance and $170,800 in planning costs last year because of the estate tax. Those figures were based on responses from fewer than 20 participants.

 

Richardson, 51, who serves as head of government and shareholder relations at White Castle System in Columbus, Ohio, said the estate tax forces large business owners to spend decades planning for it.

 

There are some easy ways to avoid it: Give to charity or transfer small amounts of money to the next generation tax-free. Current law allows you to give $14,000 every year to as many different people as you want—and you can also cover anyone’s medical bills and tuition. Many nonprofits worry that repeal of the estate tax and other tax changes could reduce the incentives for philanthropy.

 

For more complicated maneuvers, the rich need the help of professionals, who can recommend trusts, life insurance and other strategies to minimize estate tax bills. Trusts can serve a double purpose: shielding assets from the estate tax, while also protecting fortunes from heirs’ divorces, bankruptcies, drug problems and other issues that can bleed fortunes dry.

 

The estate tax is due within nine months of death—though there are ways to extend payments over time. Regardless, family-owned businesses worry about coming up with tax payments all at once. Before Root’s mother’s death, the prospect of a large estate tax bill made her afraid to make long-term commitments to charities she cared about, he said.

 

“If you’re caught unexpectedly by this unfair tax, you likely could lose everything, and you would be penalized for a lifetime of hard work,” said the 65-year-old Root, who spends most of his time on family charitable-giving efforts.

 

Estate tax opponents say it’s particularly unfair because it taxes wealth twice—once when it’s earned and again when the earner dies. But that’s hardly true. In estates worth more than $100 million, the Federal Reserve estimates, most of the value is in investment gains that have never been taxed. That’s because investors pay capital gains taxes only when they sell an asset—at a top rate of 23.8 percent for long-term investors. Investors who don’t sell can avoid capital gains taxes forever.

 

And beyond that, current law holds that when you die, the unrealized capital gains on assets you never sold are simply wiped away. Your heirs start fresh, a process known as “stepped-up basis.” For that reason, the only tax ever paid on such gains is the estate tax.

 

If Congress repeals the estate tax, it’s unclear whether it would also change the stepped-up basis rules. Trump suggested such a change during his campaign—but that proposal hasn’t reappeared since he took office. If there’s no change, “that would be a huge benefit to very, very rich estates,” said Hunter Blair, a budget analyst at the left-leaning Economic Policy Institute.

 

Family Enterprise USA would be content with a change in the basis rules, said Soldano, the former owner of a multi-family office company who now runs the nonprofit’s operations.

 

Repealing the estate tax but keeping the current basis rules “doesn’t seem quite fair and costs a lot of money,” she said. The group favors a compromise that would end the estate tax and the stepped-up basis allowance—except for smaller estates that aren’t subject to the estate tax now.

Richardson said that ending the tax would help preserve family businesses—which he said can operate more thoughtfully than their publicly traded competitors. For example, White Castle has long offered retirement benefits, profit sharing and health insurance to its employees, who repay the company with “incredible loyalty,” he said. “We believe there’s a unique benefit that family business models provide.”

 

 

 

U.S. tax cheaters line up against their accused ex-Swiss banker

By Chris Dolmetsch

 

American taxpayers who opted to disclose their offshore accounts to avoid prosecution paraded into a New York courtroom this week.

 

They came to testify against their former Swiss banker who is on trial for helping customers conceal millions of dollars from the Internal Revenue Service as the U.S. began cracking down on tax evasion. The taxpayers told jurors how Stefan Buck, 37, former head of private banking for Bank Frey & Co., advised them to open accounts at the Zurich-based financial institution after UBS Group AG admitted in 2009 that it fostered tax cheats and paid a $780 million penalty.

Prosecutors allege Buck conspired with a Swiss lawyer, Edgar Paltzer, to open and maintain undeclared accounts on behalf of U.S. taxpayers who were forced to close accounts at other banks.

 

Buck is one of the few foreign bankers, lawyers and advisers charged in the U.S. effort to tackle Swiss-aided offshore tax evasion who is defending himself in court. A handful of the defendants, including Paltzer, have pleaded guilty and agreed to cooperate, while at least two have been convicted and two others were acquitted.

 

Client Testimony

Christine Warsaw, a 67-year-old from Carefree, Arizona, testified that Buck convinced her and her late husband, Steve, to move about $1 million to Bank Frey from Credit Agricole SA, where employees told them it was “kicking out the American accounts” because of concern about U.S. scrutiny.

 

“We didn’t want the IRS to be notified,” Warsaw said. “It would open us up to investigation.”

Warsaw said Buck told them he didn’t have to report their holdings to the IRS if they allowed Bank Frey to have discretionary management of the account, and that it couldn’t hold U.S.-based securities or investments. They opened two accounts at Bank Frey, which Warsaw said they closed after getting a subpoena in 2011.

 

The couple entered a voluntary offshore disclosure program and paid more than $1 million in taxes, interest and penalties on the accounts, she said in federal court in Manhattan

 

The 2009 UBS settlement led to more than 50,000 voluntary disclosures to the IRS and the repatriation of billions of dollars. It also led 80 other Swiss banks to reach non-prosecution agreements with the Justice Department to resolve potential liability in the U.S. for tax-related criminal activity.

 

Buck’s attorney, Marc Agnifilo, tried to shift the blame onto the taxpayers during his opening statements, saying that many of them have been evading taxes since the 1970s, while his client was only born in 1980. Buck was a low-level employee at Bank Frey who was simply following orders from his superiors, Agnifilo said.

 

“This case involves a massive and unwarranted shift in personal responsibility,” Agnifilo said. “All but one of them got a pass, a complete pass from criminal prosecution. The rest of them broke the laws of this country with total impunity. All they had to do was point at Switzerland.”

The case is U.S. v Paltzer, 13-cr-00282, U.S. District Court, Southern District of New York (Manhattan).

 

 

 

 

9 instant takeaways from the GOP tax proposal

By Tim Steffen

 

Changes to the tax proposal released by House Republicans are assuredly likely, especially since a plan that may be quite different is expected from the Senate in the coming days. Those two versions would have to be reconciled and approved before legislation could be sent to President Trump for his signature. But for now, what big takeaways should advisors and clients focus on?

 

·      The top tax rate stayed the same at 39.6%, but it only applies to income over $1 million for a married couple, more than twice the level that applies now. That means those at the top level would have more than $500,000 of income taxed at 35% rather than 39.6%, a savings of about $25,000.

 

·      Higher-income taxpayers would get the benefit of the new lower tax rates on lower tiers of income. For example, income now taxed at the 28% and 33% tax rates would be taxed at 25%. There does appear to be a clawback in place that would prevent high-income taxpayers from benefiting from the 12% bracket, however.

 

·      The new lowest rate of 12% would replace the current 10%, so that would appear to be an increase on those at the lowest income levels. The larger standard deduction and expanded child credits should address that potential increase.

 

·      A $300 per taxpayer personal tax credit is scheduled to expire after five years, but it will be hard to take away once it's out there.

 

·      The estate tax exemption would double, with a plan to repeal the tax after six years; however, this is likely to be lost during the final negotiations. Estate taxes are viewed as a tax only on the rich, not exactly a sympathetic group. It's hard to see that one lasting.

 

·      After a lot of mixed signals, retirement plan savings provisions appear to be unchanged. That would be a positive for savers although, with lower marginal tax rates for most taxpayers, the current tax benefit of those savings would be reduced – thus making Roth-style plans marginally more attractive.

 

·      The planned repeal of AMT would go a long way toward simplification. But like the estate tax repeal, AMT is viewed as a tax on the highest-income earners, so it will be hard to see it surviving to the final bill.

 

·      The deduction for property taxes would be capped at $10,000, but the state income tax deduction would go away. This element is one that will be strongly debated, and I expect this to change.

 

·      There are good incentives for businesses: the lower corporate tax rate and a new, immediate deduction for the cost of new equipment. Also, the deduction for interest remains in place. The application of the new corporate rate would be complicated, though. The new rate would be 25%, but only on income not attributed to labor. The default assumption is 70% of the income would be exempt from the lower rate. For service firms, like lawyers, accountants and many financial advisors, the assumption would be 100%. They may be able to fight that, but it appears by default those business wouldn't benefit from the lower rate.

 

 

 

Year-end tax planning moves for individuals and businesses

By Jeffrey Pretsfelder

 

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Until Congress passes tax reform legislation, these tips should help many tax clients.

 

The following article highlights the opportunities and challenges that affect year-end planning for 2017 and includes two checklists of actions that can cut taxes for clients for this year and in the years to come. The first checklist describes actions individuals can take to save taxes. The second checklist describes actions businesses and business owners can take to save taxes.

 

Year-End Tax Planning Moves for Individuals

• Higher-income earners must be wary of the 3.8 percent surtax on certain unearned income. The surtax is 3.8 percent of the lesser of:

1. Net investment income (NII), or

2. The excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

 

As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8 percent surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

 

• The 0.9 percent additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.

 

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

 

• Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions. Regardless of what happens in Congress, this strategy could enable you to claim larger deductions, credits and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2017. For example, this may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status).

 

• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so.

 

Keep in mind, however, that such a conversion will increase your AGI for 2017.

 

• If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

 

• It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way. This could cut as well as defer your tax if Congress reduces tax rates beginning in 2018.

 

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don't pay your credit card bill until after the end of the year.

 

• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017 if you won't be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.

 

• Take an eligible rollover distribution from a qualified retirement plan before the end of 2017 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2017. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2017, but the withheld tax will be applied pro rata over the full 2017 tax year to reduce previous underpayments of estimated tax.

 

• Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.

 

• You may be able to save taxes by applying a bunching strategy to pull "miscellaneous" itemized deductions, medical expenses and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.

 

• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

 

• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

 

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5-percent company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50 percent of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if you turn age 70-½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018—the amount required for 2017 plus the amount required for 2018. Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.

 

• Increase the amount you set aside for next year in your employer's health flexible spending account if you set aside too little for this year.

 

• If you become eligible in December of 2017 to make health savings account contributions, you can make a full year's worth of deductible HSA contributions for 2017.

 

• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

 

• If you were affected by Hurricane Harvey, Irma or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty loss rules and eased access to your retirement funds. In addition qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas aren't subject to the usual charitable deduction limitations.

 

Year-End Tax-Planning Moves for Businesses and Business Owners

Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, air conditioning and heating units, and qualified real property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and midsized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.

 

Businesses also should consider making buying property that qualifies for the 50 percent bonus first year depreciation if bought and placed in service this year (the bonus percentage declines to 40 percent next year). The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50 percent first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2017.

 

Businesses may be able to take advantage of the "de minimis safe harbor election" (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2017.

 

Businesses contemplating large equipment purchases also should keep a close eye on the tax reform plan being considered by Congress. The current version contemplates immediate expensing—with no set dollar limit—of all depreciable asset (other than building) investments made after Sept. 27, 2017, for a period of at least five years. This would be a major incentive for some businesses to make large purchases of equipment in late 2017.

 

If your business was affected by Hurricane Harvey, Irma, or Maria, it may be entitled to an employee retention credit for eligible employees.

 

A corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. This could certainly be the case if Congress succeeds in dramatically reducing the corporate tax rate, beginning next year.

 

A corporation should consider deferring income until next year if doing so will preserve the corporation's qualification for the small corporation AMT exemption for 2017. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn't qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

 

A corporation (other than a "large" corporation) that anticipates a small net operating loss for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.

 

If your business qualifies for the domestic production activities deduction for its 2017 tax year, consider whether the 50-percent-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2017 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2017, even if the business has a fiscal year. Keep in mind that the DPAD wouldn't be available next year under the tax reform plan currently before Congress.

 

To reduce 2017 taxable income, consider deferring a debt-cancellation event until 2018.

 

To reduce 2017 taxable income, consider disposing of a passive activity in 2017 if doing so will allow you to deduct suspended passive activity losses.

 

These are just some of the year-end steps that can be taken to save taxes.

 

 

 

House bill would tax offshore corporate profits at up to 12%

By Lynnley Browning and Laura Davison

 

U.S. companies that have accumulated trillions of dollars of overseas earnings would be taxed on that stockpiled income at a rate as high as 12 percent under the tax-overhaul bill that House Republicans released Thursday.

 

The measure addresses a quirk of the U.S. corporate tax system that has allowed multinational companies to stockpile their foreign earnings offshore—beyond the reach of U.S. taxes.

 

Earnings that companies hold offshore as cash and cash equivalents would be taxed at 12 percent. Income invested in less liquid assets—including plants and equipment—would be taxed at 5 percent under the bill. Both taxes would be mandatory, not optional, but companies would have as long as eight years to make their payments.

 

U.S. companies have stockpiled as much as $3.1 trillion offshore, according to an estimate by Goldman Sachs in a recent research note. Under current law, the U.S. taxes multinationals on their global earnings, but allows them to defer taxes on foreign earnings until they bring them back to the U.S., or “repatriate” them.

 

The “deemed repatriation” tax imposed by the bill would clear the way for many of those companies to bring their earnings back to the U.S.

 

 

 

Tax credit for Tesla, other electric cars axed in GOP bill

By Ryan Beene, Ari Natter and Keith Naughton

 

The push by Tesla Inc., General Motors Co. and other carmakers to boost sales of electric vehicles was dealt a blow by House Republicans who on Thursday proposed eliminating a $7,500 per vehicle tax credit that has helped stoke early demand.

 

If adopted, the repeal would take effect after the 2017 tax year, according to a summary of the bill released Thursday by the House Ways and Means Committee as part of a sweeping overhaul of the U.S. tax code that would eliminate some deductions and cut the corporate tax rate to 20 percent. The Senate is crafting its own version.

 

Automakers from Detroit to Yokohama are betting big on an electric future with plans to spend billions of dollars on new pure-electric models to be rolled out in the coming years despite limited sales to date. Availability of the credit has been capped at the first 200,000 qualifying vehicles sold by each manufacturer. No automaker has reached that cap yet.

 

“That will stop any electric vehicle market in the U.S., apart from sales of the highly expensive Tesla Model S,” said Xavier Mosquet, senior partner at consultant Boston Consulting Group, who authored a study on the growth of battery powered vehicles. “There’s no Tesla 3, no Bolt, no Leaf in a market without incentives.”

 

With a 238-mile range and a $37,500 starting price, the Chevrolet Bolt set new benchmarks for a coming wave of electric vehicles that cost less and can drive further on a charge than most of today’s models. GM spokesman Pat Morrissey said in a statement that the company "believes in an all-electric future" and will work with lawmakers to maintain the incentive.

 

"In so many ways this is a shell game that when it ends hurts a lot of jobs in Michigan and middle class families and the benefits go to the wealthiest Americans," said Michigan Democrat Senator Debbie Stabenow, a senior member of the chamber’s tax writing committee. "It’s not a good deal."

 

A premature end could have outsized impact for Tesla, which is striving to scale up production of its least expensive electric car, the $35,000 Model 3 sedan. The company has said it has hundreds of thousands of would-be buyers holding reservations for the vehicle.

 

Tesla shares extended declines after Bloomberg reported on the proposed elimination, plunging as much as 8.9 percent to $292.63, the lowest intraday since May 4, before rebounding. The company declined to comment on the GOP proposal.

 

Eliminating the credit will also impact other carmakers offering electric vehicles such as GM and Nissan Motor Co. Ltd., which according to the Alliance of Automobile Manufacturers collectively offer more than 30 electric vehicle models in the U.S. market. Carmakers are under pressure to sell vehicles in higher volumes each year under an electric car sales mandate administered by regulators in California. Ten other states also follow that policy.

 

That puts the auto industry "in the middle between contradictory government policies," Alliance spokeswoman Gloria Bergquist said in a statement.

 

"There is no question that the elimination of the federal electric vehicle tax credit will impact the choices of prospective buyers and make the electric vehicle mandate in 10 states—about a third of the market—even more difficult to meet," said Bergquist, whose trade association represents a dozen automakers including GM, Ford Motor Co. and Volkswagen AG.

 

Ford didn’t immediately respond to a request for comment. Nissan declined to comment.

Sales of electric vehicles have been held back by a lack of variety of electric models, high sticker prices fueled by expensive battery packs and limited driving ranges compared to gasoline-fueled vehicles. Yet automakers expect those challenges to ease in the coming years.

 

"The EV tax credit repeal would cede US leadership in clean vehicles, putting our companies at a competitive disadvantage and threatening jobs while costing drivers more at the pump and increasing pollution," Luke Tonachel, director of the Natural Resources Defense Council’s Clean Vehicles and Fuels Project, said in a statement.

—With assistance from Craig Trudell and Dana Hull

 

 

 

 

House tax bill trims wind tax credit; extends nuclear provision

By Ari Natter

 

Tax credits cherished by the wind and solar industry remain under a rewrite of the tax code revealed by House Republicans, but the measure would trim the wind energy’s production tax credit by more than a third.

 

The bill, unveiled by House GOP leaders Thursday, also extends an estimated $6 billion tax credit for the nuclear industry, which would benefit Southern Co. Without the extension, the credit may have gone unused before the 2021 deadline. Southern’s Vogtle project in Georgia faces construction delays and is not on track to be completed before the deadline.

 

The bill also adds tax credits for other energy sources, such as geothermal, small-scale wind and fuel cells that were left out of a 2015 budget and spending deal.

 

The House tax overhaul cuts the wind industry’s 2.3-cent-per-kilowatt hour tax credit to 1.5 cents. The solar industry’s 30 percent tax credit remains unchanged. Under that 2015 deal the wind credit begins phasing down this year before expiring in 2020 and the solar industry’s credit winds down before expiring in 2022. Those phaseouts continue as planned, but projects would now need to be completed by those dates to qualify.

 

“We have more work to do on clean energy policy in tax reform, but I am pleased with this baseline because we worked hard to preserve those tax credits for renewables,” said Florida Representative Carlos Curbelo, a member of the tax-writing Ways and Means Committee.

 

House Republican leaders began rolling out a tax bill Thursday that contains sweeping changes for business and individual tax rates, including a measure to cut the corporate tax rate to 20 percent.

 

The legislation would end a $7,500 tax credit provided for consumers who purchase electric vehicles. Also, a 10 percent investment tax credit for the solar and geothermal industries would end in 2027. In addition, it ends some minor tax breaks received by the oil industry, including a tax credit for marginal wells.

 

That credit, which only applies when prices dip below certain levels, allows companies to claim a $3-per-barrel credit for the first three barrels of daily production from marginal, low-production wells—generally those that produce fewer than 15 barrels per day. It also applies to natural gas from marginal wells, with a 50 cent credit for the first 18 thousand feet of daily gas production. Also eliminated is a tax credit for so-called enhanced oil recovery, which involves pumping water or carbon dioxide to help get more oil out of depleted or aging reservoirs.

But the oil industry would keep its largest targeted tax measures, as the bill would preserve the intangible drilling cost deduction, which allows for accelerated deduction of drilling costs, and the special accounting rules known as “last-in first-out,” which allows oil stockpiles and other inventories to be valued at the most recent price when calculating net profit and taxable revenue.

It’s possible the bill could change quickly as Representative Kevin Brady, the Texas Republican who chairs the Ways and Means Committee, indicated he may rewrite the bill ahead of a Monday committee vote, where amendments making further changes could be adopted. Also, the changes to the wind credit could face opposition in the Senate, where Iowa Senator Chuck Grassley has been a staunch defender of it.

 

To qualify for the investment tax credits, developers of wind, solar, geothermal and fuel cell energy properties will need to show continuous activity from the time construction begins until it’s complete. That could introduce uncertainty for some projects.

—With assistance from Jennifer A. Dlouhy and Christopher Martin

 

 

 

Details of the Tax Cuts and Jobs Act

Jared Walczak  & Amir El-Sibaie

 

Today, House Ways and Means Chairman Kevin Brady (R-TX) released the “chairman’s mark” of the federal tax reform plan contemplated in the Big Six’s Tax Framework. While changes are likely in committee markup, and the Senate will certainly bring its own priorities to the process, today’s release is the first bill text we’ve seen from a tax-writing committee. The tables below outline the major details of the legislation.

 

Individual Income Taxes

Tax Brackets

Consolidates the current seven brackets into four, with a bottom rate of 12 percent (aided by a higher standard deduction) while retaining the current top marginal rate of 39.6 percent. An income capture provision (“bubble rate”) will phase out the 12 percent bracket for filers with income in excess of $1,000,000 ($1,200,000 for joint filers).

Single

Married

Head of Household

12.0% > $0

12.0% > $0

12.0% > $0

25.0% > $45,000

25.0% > $90,000

25.0% > $67,500

35.0% > $200,000

35.0% > $260,000

35.0% > $230,000

39.6% > $500,000

39.6% > $1,000,000

39.6% > $500,000

 

Indexing Provisions

Indexes tax bracket and other provisions to the Chained CPI measure of inflation.

 

 

Standard Deduction

 

Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers (currently $6,350 for single filers, $9,350 for heads of households, and $12,700 for married filers). Eliminates the additional standard deduction and the personal exemption.

Itemized Deductions

 

Retains the mortgage interest and charitable deductions, as well as the property tax deduction (capped at $10,000), but repeals the remainder of the state and local tax deduction and other itemized deductions.

Other Deductions and Exclusions

 

Caps the mortgage interest deduction at $500,000 of principal for new home purchases. Eliminates the moving deduction, educator expense deduction, and exclusions for employer-dependent care programs, among others. Makes changes to the exclusion of capital gains on home sales.

Family Tax Credits

 

Replaces the personal exemption for dependents with an expansion of the child tax credit from $1,000 to $1,600, while increasing the phaseout threshold (from $115,000 to $230,000 for married filers). The first $1,000 would be refundable, increasing with inflation up to the $1,600 base amount. Also creates a new $300 nonrefundable personal credit and a $300 nonchild dependent nonrefundable credit, subject to phaseout. The $300 credit expires after 5 years.

 

Alternative Minimum Tax

Eliminates the individual alternative minimum tax.

 

Business Taxes

Corporate Tax Rate

Lowers the corporate income tax rate from 35 to 20 percent.

 

Pass-Through Rate

Creates a new 25 percent maximum tax rate on pass-through business income, subject to anti-abuse rules.

 

Pass-Through Anti-Abuse Rules

 

Begins with assumption that 70 percent of income derived from a business is compensation subject to ordinary rates and 30 percent is business income subject to the maximum 25 percent rate for active owners. Businesses can “prove out” of the 70/30 split based on demonstrated return on business capital at the short-term applicable federal rate (AFR) plus 7 percent. Certain specified service industries, like health, law, financial services, professional services, and the performing arts are excluded from the 70/30 split and can only claim the benefit of the lower pass-through rate to the extent that they can “prove out” their business income.

Capital Investment

 

Allows full expensing of short-lived capital investment (currently subject to “bonus” depreciation), such as equipment and machinery, for five years. Increases Section 179 expensing from $500,000 to $5 million and increases the phaseout threshold from $2 million to $20 million.

Tax Treatment of Interest

 

Limits the deductibility of net interest expense on future loans to 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA), with a five-year carryforward, for all businesses with gross receipts of $25 million or more.

Net Operating Loss Provisions

 

Allows Net Operating Losses (NOLs) to be carried forward indefinitely and increased by a factor reflecting inflation and the real return to capital, while restricting the deduction of NOLs to 90 percent of current year taxable income and eliminating NOL carrybacks, except for one-year carrybacks for certain disaster losses.

Business Credits and Deductions

 

Eliminates the Section 199 manufacturing deduction and the New Market Tax Credit, along with like-kind exchanges for personal property (retained for real property), and deductions for entertainment. Eliminates credits for orphan drugs, private activity bonds, energy, rehabilitation, and contributions for capital, among others.

 

Alternative Minimum Tax

Eliminates the corporate alternative minimum tax.

International Income

 

Moves to a territorial tax system, in which foreign-source dividends and profits of U.S. companies are not subject to U.S. tax upon repatriation. However, 50 percent of excess returns (those greater than a routine return, defined as AFR plus 7 percent) earned by controlled foreign corporations (CFCs) are included in U.S. shareholders’ gross income. In addition, payments made from US corporations to a related foreign corporation are subject to a 20 percent excise tax unless the US corporation claims the transaction as effectively connected income (ECI). ECI is added to the taxable income of the US corporation, but the related foreign corporation’s expenses can be deducted from this income.

Deemed Repatriation

 

Enacts deemed repatriation of currently deferred foreign profits, at a rate of 12 percent for cash and cash-equivalent profits and 5 percent for reinvested foreign earnings.

Tax Foundation

 

 

 

 

 

Eight Important Changes in the Tax Cuts and Jobs Act

Jared Walczak  & Amir El-Sibaie

 

Earlier today, House Ways and Means Committee Chairman Kevin Brady (R-TX) unveiled the committee’s tax reform legislation. The widely anticipated tax reform bill includes hundreds of structural changes to the tax code, a summary of which is available here. However, some changes are more significant than others. Thus, here are the eight most important provisions in the House Ways and Means Tax Plan in no particular order.

 

1.   The corporate income tax rate would be reduced to 20 percent. The bill would lower the current statutory corporate income tax rate from 35 to 20 percent. This would bring the U.S. in line with the rest of the other 34 industrialized countries in the OECD, which have an average statutory corporate income tax rate of 21.97 percent. For a comparison of corporate income tax rates around the world, click here.

 

2.Pass-through business income would be taxed at a maximum rate of 25 percent. In the U.S., small companies are generally organized as pass-through businesses. This means that their income is taxed on their owners’ tax returns and not at the business level. While economists widely agree that C Corporations are less tax-advantaged than pass-through businesses under current law, the House Ways and Means Tax Plan attempts to bring both business types closer to rate parity by setting a maximum rate on pass-through business income.

However, without appropriate anti-abuse rules this could create incentives for individuals to reclassify their personal income as business income to take advantage of the lower rate. Therefore, the plan includes a number of anti-abuse rules, beginning with the assumption that 70 percent of pass-through business income is compensation (subject to ordinary rates) while 30 percent is business income (subject to the lower pass-through rate). Certain specified service industries (including health, law, financial, and professional services) would only be permitted to claim the lower rate to the extent that they can “prove out” the share of income that constitutes business income. Even with these guardrails, the provision is likely to create opportunities for tax arbitrage, and it adds complexity to the tax code. For more on the taxation of pass-through income, click here.

 

3.Some of the tax code’s disincentives to investment would be rolled back. Specifically, machinery and equipment could be fully expensed (temporarily). Meanwhile, pass-through businesses would be able to take advantage of higher section 179 caps.

Corporate income taxes are intended to be imposed on net income after expenses, which is why businesses deduct the costs of compensation and most other expenses. Capital expenditures, however, are a special case. When businesses invest in capital expansion, instead of writing down the cost immediately, they must do so across a depreciation schedule that stretches anywhere from three to 39 years. The House Ways and Means Tax Plan would change that—temporarily and in part.

Under the plan, short-lived capital expenditures (currently subject to “bonus” depreciation) could be fully expensed, though this provision would be slated to sunset in five years. Section 179 expensing for pass-through businesses would increase from $500,000 to $5 million, with a higher phaseout threshold. These provisions would remove some of the tax code’s current bias against investment, though the temporary and limited nature of the provisions may mute the economic impact. For more on the economic and budgetary impacts of temporary expensing and other possible approaches to depreciation, click here.

 

4.   The U.S. would move to a territorial tax system. In much of the industrialized world, domestic corporations are taxed on their domestic income alone (a so-called territorial tax system). In the U.S., by contrast, companies are taxed on their worldwide income, with credits for taxes paid to other countries (a so-called worldwide tax system). If tax liability is lower in another country in which a controlled foreign corporation operates, the residual amount is paid to the United States. This increases overall liability and makes the U.S. comparatively unattractive as a home for multinational corporations. The proposed tax plan would convert the U.S.’s worldwide tax regime into a territorial system, enhancing competitiveness and undercutting the traditional rationales that encouraged corporate inversion and the offshoring of corporate income. For more on territorial taxation, click here

 

5.   Many itemized deductions would be eliminated. For individuals, the mortgage interest, and charitable deductions, as well as the property tax portion of the state and local tax deduction (capped at $10,000), would remain, but other itemized deductions would be eliminated. The elimination of many itemized deductions would broaden the individual income tax base as a means to pay for lower overall rates. Their elimination would also be offset by an increase in the standard deduction and a higher child tax credit. For more on itemized deductions, click here. For more on the state and local tax deduction, click here or here.

 

6.   The estate tax would be repealed. The federal estate tax, which raises very little revenue but encourages significant tax arbitrage and avoidance activity, would be repealed under the plan after six years. The plan immediately increases the exemption to $10 million. Economists tend to see the estate tax as one of the most economically harmful taxes per dollar of revenue raised. For more on the estate tax, click here and here.

 

7.   The tax treatment of interest would change. The U.S. tax code is intended to include deductions on interest paid while taxing interest received, but in practice, a substantial portion of interest is untaxed. This results in a tax advantage for debt financing over equity financing, providing a subsidy for some investments while distorting business decision-making. The House Ways and Means Tax Plan would limit business net interest deductibility to 30 percent of a business’s earnings before interest, taxes, depreciation, and amortization (EBITDA) with a five-year carry-forward basis. Businesses with less than $25 million in gross receipts would be exempt from the limitation. For more information on the tax treatment of interest, click here.

 

8.   Tax expenditures would be curtailed. The plan would eliminate multiple tax expenditures including the section 199 manufacturing deduction, deductions for like-kind exchanges of personal property, and deductions for entertainment. Credits for orphan drugs, private activity bonds, rehabilitation, and contributions to capital would also be eliminated. With lower business income rates and better treatment of capital expenditures, there would be less need to rely on targeted incentives or industry-specific fixes embedded in the tax code.

Overall, the House Ways and Means Tax Plan represents a move in the direction of greater neutrality and global competitiveness. As the bill goes through markup, and as the Senate takes up tax reform legislation, every provision is subject to change. What happens with these eight proposed changes could be a good benchmark for the degree to which any final plan constitutes meaningful tax reform. 

 

Tax Foundation

 

Five Facts about Charitable Contributions

 

With the holidays around the corner, many people will be making donations to benefit charitable organizations. However, come tax time, the person who made the donation might also benefit. That’s because taxpayers who donate to a charity may be able to claim a deduction for the donation on their federal tax return.

 

Here are five facts about charitable donations:

 

Qualified Charities. A taxpayer must donate to a qualified charity to deduct their contributions. Gifts to individuals, political organizations, or candidates are not deductible. To check the status of a charity, taxpayers can use Exempt Organizations Select Check on IRS.gov.

 

Itemize Deductions. To deduct charitable contributions, taxpayers must file Form 1040 and itemize their deductions. To do this, taxpayers complete Schedule A, Itemized Deductions. They file this form with their tax return.

 

Getting Something in Return. Taxpayers may receive something in return for their donation. This includes things such as merchandise, meals, and event tickets. Taxpayers can only deduct the amount of the donation that’s more than the fair market value of the item they received. To figure their deduction, a taxpayer would subtract the value of the item received from the amount of their donation.

 

Type of Donation. For donations of property instead of cash, a taxpayer can only deduct the fair market value of the donated item. Fair market value is generally the price they would get if they sold the item on the open market. If they donate used clothing and household items, those items generally must be in good condition. Special rules apply to certain types of property donations, such as cars and boats.

 

Donations of $250 or More. If a taxpayer donates $250 or more in cash or goods, they must have a written receipt from the charity. The statement must show: • The amount of the donation.

 

• A description of any property given. • Whether the taxpayer received any goods or services in exchange for their gift, and, if so, must provide a description and good faith estimate of the value of those goods or services.

 

Taxpayers can also use the Interactive Tax Assistant, Can I Deduct my Charitable Contributions? This tool helps determine if charitable contribution is deductible.

 

 

A juicy tax break—and the rules to keep everyone from taking it

By Ben Steverman

 

House Republicans say they’re determined to simplify the U.S. tax code. A long-awaited provision in the massive tax bill they unveiled Thursday, a special rate for “pass-through” businesses, could do exactly the opposite.

 

“The tax code was already overly complicated, and this is going to make it worse,” said Anjali Jariwala, a CPA and financial planner at FIT Advisors in Redondo Beach, Calif., who specializes in doctors.

 

For the wealthiest taxpayers, the provision could create big savings by slashing top rates from 39.6 percent to 25 percent on some income. The vast majority of U.S. businesses—from dry cleaners and sports teams to law firms and even many of President Donald Trump’s personal holdings—are set up as pass-through businesses, in which profits pass through to owners untaxed and then are reported as income on their individual returns. A regular corporation pays its own corporate taxes; shareholders pay another round of taxes on any dividends they receive.

 

The House bill could prompt many more Americans to consider setting up a pass-through business. Along with cutting corporate tax rates, it reduces rates for pass-through businesses to a new maximum of 25 percent. Millions of well-paid workers who pay a top federal rate of 39.6 percent might have an incentive to stop earning a salary and start hiring themselves out as contractors to get the lower rate.

 

The bill’s authors have tried to head off a flood of new pass-through businesses and limit the provisions’ costs to the U.S. Treasury. Under the bill, many service providers—doctors, lawyers, accountants, and people in fields like financial services and the performing arts—are assumed to be excluded from the pass-through rate. Other pass-through businesses would have 70 percent of their income classified as wages, subject to a higher federal rate and to Social Security and Medicare payroll taxes. Just 30 percent of their income would get the low pass-through rate.

 

Business owners could hire accountants to challenge these assumptions. A business could prove to the Internal Revenue Service that it deserves to pay the lower rate on its pass-through income based on how much capital it has invested.

 

This is where the complications come in. The bill offers a series of formulas to determine how much of a business’s income is subject to the pass-through rate, and they’re already making accountants’ heads swim.

 

“It’s way too complicated at this point,” said Johanna Fox Turner, a CPA and financial planner at Fox & Co. Wealth Management in Kentucky who also specializes in doctors. “I just cannot figure out how they’re going to get all that to work.”

 

House Republican leaders cite the example of a lawn care business owned by a married couple that brings in $500,000 in profits a year. The pass-through provision, along with the elimination of the alternative minimum tax, should allow this couple to cut its current tax bill of $128,000 by about $25,000, according to a statement issued by the House Ways and Means Committee.

 

While the bill’s writers try to exclude professionals, such as doctors and lawyers, from the pass-through rate, these taxpayers have every incentive to find a way around the rules. For someone paying an effective tax rate of 33 percent, reclassifying even a small percentage of income at the 25 percent rate can save a lot of money, Jariwala noted.

 

Middle-income business owners, meanwhile, won’t get much benefit, if any, from the new pass-through rate. An unmarried person earning less than $91,900 already pays a top marginal tax rate of 25 percent.

 

That’s why the National Federation of Independent Business, a small-business lobbying group, says it opposes the House bill. “We think the benefits [of the new pass-through rate] should extend to all small businesses,” said spokesman Jack Mozloom. In addition to offering lower preferential rates for smaller businesses, Mozloom said, the bill shouldn’t make distinctions between professional service providers and other pass-through businesses.

 

“We think that’s bad policy, picking winners and losers based on what they do,” he said. “We certainly want manufacturers to get a tax break, but we want their accountants to try to get a tax break too.”

 

Those accountants are now busy poring over the new law, figuring out ways they and all their clients could save the maximum in taxes. Meredith Tucker, a CPA at Kaufman Rossin based in Ft. Lauderdale, Florida, asks, for example, whether a law firm, now organized as a pass-through partnership, could reorganize as a management company to grab the new, lower corporate tax rate of 20 percent?

 

“We’re all going to get our pencils out and figure out how to legally push the envelope,” Tucker said. “That’s what we do.”

 

 

 

Trump’s promised tax overhaul bends toward business benefits

By Sahil Kapur and Steve Matthews

 

President Donald Trump and congressional Republicans billed their tax overhaul for months as a benefit primarily for the middle class, but what they delivered Thursday was designed more to favor large corporations and some closely held businesses.

 

About 60 percent of the tax cuts will be from corporate tax reduction, another 20 percent through the business pass-through reductions, and the remaining 20 percent to individuals, according to an analysis of the initial plan by Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

 

“The bulk of it is through corporate tax changes and changes to pass-through entities. This is really a cut to business,” Zandi said. “The preponderance—the vast majority—of tax cuts go to business.”

 

Trump’s economic advisers have said that cutting the corporate rate will increase wages, lifting average household income by at least $4,000. Other economists question that finding. But beyond that, the specifics in the new House bill would create winners and losers, especially among those who itemize their tax deductions.

 

“If you live in a high tax state, are an itemizer, buy a house with a big mortgage, have medical expenses or casualty losses, you will likely be a loser,” said Howard Gleckman, a senior fellow with the nonpartisan Tax Policy Center. “If you take the standard deduction, are married without kids, and have a pass-through business, you will be a winner.”

 

The proposal unveiled by the House Ways and Means Committee on Thursday is sure to change significantly before it gets a vote by the full House. It will be revised yet again once the Senate, where passage will require delicate compromises, finishes work on its version. Based on what was released on Thursday, here’s a look at who comes out ahead and who gets left behind, according to tax experts.

 

Big corporations lock in lower tax rate

The corporate tax rate is slashed to 20 percent from 35 percent, a sharp reduction that will benefit many businesses that don’t already reduce their tax bills to under 20 percent as a result of loopholes and deductions.

 

“Today, the effective tax rate for the S&P 500 companies is only at 29%. We expect it to end up in a 21-22% range after the tax reform.” Deutsche Asset Management said in a report Thursday. Repatriation of foreign earnings is likely to lead to higher equity buybacks.

 

Cutting the corporate rate was one of Trump’s central tax promises. The White House argues that it ultimately will result in higher wages and, thus would benefit middle-income workers by encouraging companies to keep profits and operations in the U.S.

 

Private equity managers keep tax preference

Private-equity managers, venture capitalists, hedge fund managers and certain real estate investors escaped unscathed. The House bill preserves the carried interest tax preference despite Trump’s promise to do away with it.

 

During his campaign, Trump highlighted carried-interest, labeling some hedge fund managers as “paper pushers” who are “getting away with murder.” As recently as September, Trump economic adviser Gary Cohn said the president was committed to ending the carried interest tax break.

 

Some partnerships, pass-through businesses get tax cut

Partnerships and other “pass-through” businesses that file taxes as individuals enjoy a steep rate cut from 39.6 percent to 25 percent—an overall tax cut of $448 billion over a decade, according to the Joint Committee on Taxation.

 

However it places limits on the kind of income that would qualify. For example, providers of professional services, including doctors, lawyers, accountants and others, wouldn’t automatically qualify for the lower rate.

 

Trump has sold this as a break for small businesses, but the National Federation of Independent Business said it can’t support the plan because it “leaves too many small businesses behind.”

 

Average wage earners who don’t itemize stand to gain

Individual rates would be consolidated from seven to four. Wage earners who use the standard deduction would see it roughly double to $12,000 per person. If they don’t itemize deductions, that would lead to a substantial decrease in their taxable income.

 

“From an individual basis, the average wage earner who’s not itemizing now is probably ahead” due to this tax plan, said Warren Joseph, a tax policy expert with Bloomberg Tax.

 

Andrew Hunter, an economist with Capital Economics, said the combination of the rate structure, the doubling of standard deduction, the higher child tax credit and other provisions would be worth about $1,200 for a family of four making the median income of $59,000 annually. That’s about a two percent increase in disposable income.

 

For millions of taxpayers, filing will get easier with the doubling of the standard deduction and the repeal of the Alternative Minimum Tax.

 

Large families in high-tax states hit hard by changes

Among the biggest losers would be big families with higher incomes who live in states with high income and property taxes. They would lose the state and local deduction (with the exception of a $10,000 cap on deducting property taxes) as well as personal and dependent exemptions worth $4,000 per family member. For many, the doubling of the standard deduction won’t make up their losses.

 

“Upper middle income households in high tax states will be dinged the most,” Zandi said. “For very high income households, it is probably a wash, though they would benefit from the estate tax” elimination.

 

Charitable deduction loss may crimp donations

There are changes in store for charities and other non-profits. By increasing the standard deduction, advocates for those groups say it could erode the deduction for charitable giving, which remains in the tax code.

 

“A lot of charities are having a problem with this,” Joseph said. “Before, you might’ve written a check for $200 to the Leukemia & Lymphoma Society; now you’re not going to get a deduction for it, so maybe you’re only gonna write it for $150.”

 

And the eventual repeal of the estate tax means people would be less likely to give their fortunes away to charity to avoid paying the 40 percent levy, as many wealthy people currently do in their estate planning. Joseph said that for this reason, charitable groups will have "a problem with the estate tax disappearing."

 

No break for high medical expenses

The deduction for out-of-pocket medical costs—including such items as prescriptions, drug-addiction treatment and services for special needs children—would disappear. Almost 9 million taxpayers deducted about $87 billion in medical expenses for the 2015 tax year, according to the Internal Revenue Service.

 

That will negatively “impact people with relatively low income and a lot of medical expenses,” Joseph said

 

Beneficiaries of government programs face risk

The House GOP tax bill is likely to raise the deficit substantially, thereby putting pressure to cut federal safety net programs used by poor people, said Leonard Burman of the nonpartisan Tax Policy Center.

 

“Low-income people might end being worse off because they’re really not getting anything from the bill and they might end up bearing the cost of cutting big safety net programs,” Burman said.

 

Loss of tax credit would hit electric carmakers

The House tax plan would eliminate a $7,500 per vehicle tax credit that has helped stoke early demand for electric vehicles. That likely will hit carmakers offering those vehicles such as Tesla Inc., General Motors Co. and Nissan Motor Co. Ltd.

 

“That will stop any electric vehicle market in the U.S., apart from sales of the highly expensive Tesla Model S,” said Xavier Mosquet, senior partner at consultant Boston Consulting Group, who authored a study on the growth of battery powered vehicles. “There’s no Tesla 3, no Bolt, no Leaf in a market without incentives.”

 

Buyout firms, companies with junk bonds lose deductions

Buyout firms and highly leveraged businesses may be hit by a provision capping the deduction for interest at 30 percent of adjusted taxable income, from 100 percent now.

 

For junk-rated companies, limits on interest deductibility “may outweigh the benefits of a lower corporate tax rate,” said Chris Padgett, a senior vice president at Moody’s Investors Service.

 

Businesses with gross receipts of $25 million or less would be exempt from the new limit. Also exempted would be public utilities and real estate companies.

 

—With assistance from Colleen Murphy, Kaustuv Basu, Erik Wasson and Anna Edgerton

Bloomberg News

 

 

 

Coinbase likely to lose fight to block IRS customer probe

By Joel Rosenblatt

 

Coinbase Inc. customers who haven’t reported their cryptocurrency gains to the Internal Revenue Service, beware.

 

A federal judge is poised to allow a limited investigation into those gains to proceed over the company’s objection that the agency is on “a massive fishing expedition” meant to make itself look tough in the eyes of its critics in Congress.

 

"It’s legitimate for them to investigate whether people are making money on their bitcoin purchases” and paying taxes on any gains, U.S. Magistrate Judge Jacqueline Scott Corley in San Francisco told lawyers for Coinbase at a hearing Thursday. “I have to give tremendous discretion to the agency as to how they investigate,” she added later.

 

Corley indicated she will allow the IRS to investigate Coinbase customers who made money on the currency and bar the agency from probing accounts of those who hadn’t. The judge also said she’ll probably give Coinbase time to appeal her decision before it turns over any customer information. The price of bitcoin fell as much as 1 percent on the news.

 

The company has been sparring since last year with the IRS over its summons—and continued to resist turning over the information even after the agency scaled back its request in July. Coinbase and industry trade groups contend the government’s concerns about tax fraud are unfounded and that its sweeping demand for information is a threat to privacy.

 

“U.S. taxpayers, including Coinbase users, have made use of virtual currencies to avoid the reporting and payment of taxes,” the IRS argued in a court filing. The agency said it needs access to customer records to “gain some degree of visibility into a space where it is already necessarily moving about somewhat in the dark.”

 

Mike Lempres, the chief legal and risk officer for Coinbase, said after the hearing that the company can’t negotiate with the IRS about a “forward-looking, rational reporting system” so long as the agency is suing it.

 

Such discussions aren’t possible “because we’re in this tussle with them where they are improperly searching for private information of our customers with no evidence of wrongdoing,” Lempres said. He declined to comment on Corley’s pending ruling before the company has seen a final order in writing.

 

The IRS persuaded Corley last year to order Coinbase to approve its summons for customer records from 2013 to 2015 for an investigation into whether taxpayers failed to report income. Coinbase resisted, and negotiations between the company and the agency resulted in a narrowed request for information about 8.9 million transactions and 14,355 account holders. Coinbase argued Thursday the inquiry remains unreasonably broad.

 

The case is U.S. v. Coinbase, 17-01431, U.S. District Court, Northern District of California (San Francisco).

 

 

 

These unruly GOP tax factions will put Senate’s plan in question

By Sahil Kapur

 

Senate Majority Leader Mitch McConnell is about to face a legacy-defining test of whether he can keep his unruly caucus in line to deliver President Donald Trump’s coveted goal of “massive tax cuts” in 2017.

 

He needs 50 of 52 members, and they have a variety of competing demands. Some want to limit new deficits, while others want the deepest tax cut possible; some prioritize family tax breaks while others want to give businesses a boost; some have parochial concerns while others tend to be notoriously difficult to win on major pieces of legislation.

 

Senate Majority Whip John Cornyn says he wants a floor vote the week of Nov. 27. That’s two weeks away. Here are the factions McConnell and his team have to navigate:

 

The Fiscal Skeptics

The tax plan going before the Senate Finance Committee Monday would increase the federal deficit by about $1.5 trillion over the next decade—before accounting for any economic growth that it might spur. That complicates the plan’s prospects among some Republicans.

 

Tennessee’s Bob Corker, Arizona’s Jeff Flake and Oklahoma’s James Lankford have all warned against fiscal recklessness in the bill.

 

Corker says he doesn’t want a “penny” in new deficits or he’ll vote against the bill. Lankford says it should be revenue-neutral in the first decade and beyond. Both say they’re willing to assume “reasonable” economic growth that would cushion the deficit impact.

 

After the Senate plan’s rollout Thursday, Flake fired a warning shot: “I remain concerned over how the current tax reform proposals will grow the already staggering national debt,” he said.

Corker and Flake plan to retire next year, freeing them from political pressure to support their party or please GOP donors.

 

The Senate plan will change, but for now, one analysis says it would increase the deficit. On Friday, a conservative-leaning policy group, the Washington-based Tax Foundation, projected that plan would boost the deficit $516 billion over a decade, even after assuming economic growth.

 

The Businessmen

Georgia’s David Perdue is the former CEO of both Reebok and Dollar General. South Dakota’s Mike Rounds is a former partner for an insurance and real estate firm. For both, the business side of the tax plan is paramount.

 

If any new revenue measures went after businesses to boost offsets, that could be a problem for them.

 

So far, Congress’s proposal to cut the corporate tax rate to 20 percent from 35 percent has gotten the most attention among business provisions. The House bill would deliver that cut next year, but the Senate plan would delay it until 2019. That won’t sit well with Perdue, who has said that “delays on tax would damage our economy.”

 

“We need to have a sense of urgency like never before in order get this done this year,” he has said of tax cuts.

 

Rounds said last month that he wants an “equitable” 25 percent tax rate for partnerships, limited liability companies and other so-called pass-through businesses—a provision that doesn’t include income limits on which firms get the low rate.

 

But the Senate plan would go a different route, providing a 17.4 percent deduction for such businesses’ non-wage income. That break would not be available to many types of service businesses—except for those whose taxable income falls below $150,000 for joint filers or $75,000 for all others.

 

The Cut, Cut, Cut Corps

President Donald Trump is reported to have suggested that the name of the tax legislation should be the “Cut, Cut, Cut” Bill. He might find common cause with Pennsylvania’s Pat Toomey, Texas’s Ted Cruz and Kentucky’s Rand Paul.

 

All three senators have emphasized that they want the steepest and longest-lasting tax cut possible. Deficits are of less concern to them; they believe Congress should focus on boosting the economy and deal with deficits by cutting spending.

 

Toomey downplayed the tax plan’s estimated $1.5 trillion cost, saying Sunday on NBC’s “Meet the Press” that the legislation would lead to “greater economic growth, a larger economy, and therefore, more revenue to the federal government.”

 

Paul, a libertarian purist who’s not fond of compromise, has called for a tax bill in which “everyone gets a tax cut”—ideally “at least 15% for every taxpayer.” McConnell and other GOP leaders have already said they can’t meet that standard, acknowledging that under a broad overhaul there will be outliers who see a tax hike.

 

Cruz last month urged his party to be “unapologetic” for tax cuts, arguing on CNBC that “we should be going much bigger and bolder” than the $1.5 trillion limit.

 

The Family Guys

Utah’s Mike Lee and Florida’s Marco Rubio insist their main tax priority is to double the Child Tax Credit from $1,000 to $2,000. The Senate plan would raise it to $1,650. Both senators say that’s not enough.

 

“While we are glad to see an increase to the child tax credit, like the House bill, it is simply not enough for working families,” they said in a joint statement. The two senators also want to apply the credit against payroll taxes as well as income taxes.

 

Simply raising it to $1,650 costs $582 billion over 10 years, according to Congress’s Joint Committee on Taxation. Going higher would only worsen the red ink, unless tax writers find other offsetting revenue.

 

Would Lee and Rubio scuttle a tax bill if they don’t get their way? That’s unclear, but they have staked out a position, and any retreat would come with some political cost.

 

“The Senate is not going to pass a bill that isn’t clearly pro-family,” the pair said in their statement.

 

The Moderates

Maine’s Susan Collins and Alaska’s Lisa Murkowski showed they’re not afraid to deal Trump or Republican leaders a devastating defeat this year when they cast pivotal votes to block an Obamacare repeal bill.

 

Collins has made a few tax-related demands that have already been met—including no repeal of the estate tax and no increase in the lowest individual income tax rate of 10 percent. But she also said people making over $1 million shouldn’t get a tax cut, and the Senate proposal would cut the top rate modestly to 38.5 percent from 39.6 percent.

 

Murkowski has said little about the tax effort so far, and she tends to be cryptic about her intentions on major legislation before casting her vote. Republican leaders gave her an enticement in the budget vehicle for the tax debate: a fast-track vote to permit oil drilling in Alaska’s Arctic National Wildlife Refuge.

 

The Wildcards

Senator John McCain of Arizona showed his vote can’t be taken for granted with a momentous thumbs-down on the Senate floor that killed Obamacare repeal in July. He has a mixed record on taxes, having voted against Republican tax-cut efforts in 2001 and 2003, citing deficit concerns. McCain, 81 and battling brain cancer, has demanded a bipartisan process through regular order on a tax overhaul.

 

He tweeted Thursday that he’s “pleased” with the tax effort so far. “I’ve long believed we need to fix our burdensome tax system & am reviewing the Senate bill to ensure it benefits the people of #Arizona,” he wrote.

 

A different kind of maverick is giving Republican leaders heartburn lately, and he’s not even a senator—at least not yet.

 

Roy Moore, the GOP nominee for a Dec. 12 special election Alabama, is fending off allegations that he had sexual contact with a 14-year-old girl almost four decades ago. The former judge has denied those allegations, and others that he pursued dates with three other teenagers when he was in his 30s.

 

Recent polls show Moore slipping in the race against Democrat Doug Jones. A loss would cut the GOP’s margin for error in half—to just one senator.

 

One way to avoid that problem: Get both the House and Senate to hammer out compromise legislation before Moore—or his Democratic opponent—is sworn in.

 

 

 

Year-end tax planning moves for individuals and businesses

By Jeffrey Pretsfelder

 

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Until Congress passes tax reform legislation, these tips should help many tax clients.

 

The following article highlights the opportunities and challenges that affect year-end planning for 2017 and includes two checklists of actions that can cut taxes for clients for this year and in the years to come. The first checklist describes actions individuals can take to save taxes. The second checklist describes actions businesses and business owners can take to save taxes.

Year-End Tax Planning Moves for Individuals

 

• Higher-income earners must be wary of the 3.8 percent surtax on certain unearned income. The surtax is 3.8 percent of the lesser of:

 

  1. Net investment income (NII), or

 

  1. The excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

 

As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8 percent surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

 

• The 0.9 percent additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.

 

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

 

• Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions. Regardless of what happens in Congress, this strategy could enable you to claim larger deductions, credits and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2017. For example, this may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status).

 

• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2017.

 

• If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

 

• It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way. This could cut as well as defer your tax if Congress reduces tax rates beginning in 2018.

 

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don't pay your credit card bill until after the end of the year.

 

• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017 if you won't be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.

 

• Take an eligible rollover distribution from a qualified retirement plan before the end of 2017 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2017. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2017, but the withheld tax will be applied pro rata over the full 2017 tax year to reduce previous underpayments of estimated tax.

 

• Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.

 

• You may be able to save taxes by applying a bunching strategy to pull "miscellaneous" itemized deductions, medical expenses and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.

 

• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

 

• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

 

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5-percent company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50 percent of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if you turn age 70-½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018—the amount required for 2017 plus the amount required for 2018. Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.

 

• Increase the amount you set aside for next year in your employer's health flexible spending account if you set aside too little for this year.

 

• If you become eligible in December of 2017 to make health savings account contributions, you can make a full year's worth of deductible HSA contributions for 2017.

 

• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

 

• If you were affected by Hurricane Harvey, Irma or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty loss rules and eased access to your retirement funds. In addition qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas aren't subject to the usual charitable deduction limitations.

 

Year-End Tax-Planning Moves for Businesses and Business Owners

Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, air conditioning and heating units, and qualified real property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and midsized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.

 

Businesses also should consider making buying property that qualifies for the 50 percent bonus first year depreciation if bought and placed in service this year (the bonus percentage declines to 40 percent next year). The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50 percent first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2017.

 

Businesses may be able to take advantage of the "de minimis safe harbor election" (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2017.

 

Businesses contemplating large equipment purchases also should keep a close eye on the tax reform plan being considered by Congress. The current version contemplates immediate expensing—with no set dollar limit—of all depreciable asset (other than building) investments made after Sept. 27, 2017, for a period of at least five years. This would be a major incentive for some businesses to make large purchases of equipment in late 2017.

 

If your business was affected by Hurricane Harvey, Irma, or Maria, it may be entitled to an employee retention credit for eligible employees.

 

A corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. This could certainly be the case if Congress succeeds in dramatically reducing the corporate tax rate, beginning next year.

 

A corporation should consider deferring income until next year if doing so will preserve the corporation's qualification for the small corporation AMT exemption for 2017. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn't qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

 

A corporation (other than a "large" corporation) that anticipates a small net operating loss for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.

 

If your business qualifies for the domestic production activities deduction for its 2017 tax year, consider whether the 50-percent-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2017 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2017, even if the business has a fiscal year. Keep in mind that the DPAD wouldn't be available next year under the tax reform plan currently before Congress.

 

To reduce 2017 taxable income, consider deferring a debt-cancellation event until 2018.

To reduce 2017 taxable income, consider disposing of a passive activity in 2017 if doing so will allow you to deduct suspended passive activity losses.

 

These are just some of the year-end steps that can be taken to save taxes.

 

 

 

One tax loophole untouched so far: the Trump golf-course break

By Dan Wilchins and Prashant Gopal

 

Republican lawmakers pushing to close dozens of tax loopholes have left open one that’s been good to President Donald Trump: the golf break.

 

With Senate Republicans expected to unveil the outline for a sweeping tax rewrite on Thursday, a lucrative break for golf-course owners—including the president—remains firmly in place in the House version of the measure. The Obama administration estimated in 2014 that closing the controversial loophole would save more than $600 million over a decade.

 

While Republicans are eliminating many write-offs, the House version of the bill allows golf-course owners to claim deductions for promising never to build on their links. The Trump Organization, which owns a dozen courses in the U.S., has taken advantage of the break in the past, using a law that’s supposed to help preserve open space.

 

The golf deduction is just one example of how Trump businesses would benefit under the House Republican plan. Interest expenses for loans on commercial real estate, for instance, would also remain deductible in many cases, even as that benefit is reduced for most other industries.

“The commercial real estate industry is looking at this and saying, ‘I love it,’” said Daniel Shaviro, a tax-law professor at New York University. “Despite his efforts to prevent us from knowing about his tax returns, it’s clear this is a huge plus for Trump.”

 

‘Big Loser’

Trump said the proposed House tax reform would hurt him on balance. When administration officials met with Democratic senators on Tuesday, Trump, who was in Seoul, phoned in an appeal for them to pass the bill. He said that his own accountant told him he would be a “big loser” if the deal is approved as written, according to the Washington Post, which cited people in the room who heard the president on the phone.

 

During that same trip, in a speech to South Korea’s National Assembly, Trump plugged his private golf club in New Jersey as he praised the achievements of the Asian nation’s professional golfers. Trump has taken advantage of the tax benefit for golf courses and other open spaces for at least four of his properties, including the Trump National Golf Club in Bedminster, New Jersey, and the course at the private Mar-a-Lago Club in Palm Beach, Florida, according to the Wall Street Journal.

 

The golf-course deduction in particular has drawn scrutiny before in Washington from both sides of the aisle. Former President Barack Obama included restrictions on the deduction in his budget for at least three years. In April, Republican Senator Jeff Flake listed the golf course deduction in a report he wrote entitled, “Tax Rackets: Outlandish Loopholes to Lower Tax Liabilities.”

 

Representatives for Trump and the House Ways and Means Committee, which is working on the House’s version of tax-cut legislation, didn’t respond to requests for comment.

 

Easement Donation

Here’s how it works: a golf-course owner agrees to restrict development on his or her property in perpetuity, which is known as creating a conservation easement, and to donate that easement to either a land trust or a local government. He or she can continue to own the golf course.

 

The property owner then gets two appraisals: one for the value of the property if it were sold on the market to the highest bidder without any restrictions on development, such as a homebuilder that would subdivide it, and the other for the property with the easement intact. The difference between those two values can be deducted from the golf course owner’s income for tax purposes.

The laws allowing for conservation easements were meant to protect forests, farmland and other open space for the benefit of the public. Golf courses are just one of many types of land that use the easements.

 

“For what I see and hear about golf easements, 98 percent of the time it’s not what the tax code was intended to provide a benefit for,” said Steve Small, a tax lawyer who worked in the chief counsel’s office at the Internal Revenue Service from 1978 to 1982 and wrote regulations on conservation easements.

 

Sale Temptation

In some cases, the tax benefit can make sense. There are communities where golf courses are some of the only open space available. Without the easements, an owner might be tempted to sell out to the highest bidder, which might develop housing on the space, said Sylvia Bates, director of standards and educational services at the Land Trust Alliance, a conservation group.

 

But in practice, the deductions that land owners take for golf courses are enormous compared with the conservation value, said Ruth Madrigal, a tax lawyer who worked on conservation easements for the U.S. Treasury department during the Obama administration. A developer can build homes and a nearby golf course, get a conservation easement on the links and claim a deduction that can pay for the entire development, she said.

 

“The Obama administration wanted to cut the deduction because it viewed the policy’s costs in total as far exceeding the conservation benefits,” Madrigal said.

 

Getting rid of tax deductions for golf course owners may make sense, but that doesn’t mean it will happen, said Dean Zerbe, a tax lawyer for Alliant Group who worked on the Senate Finance Committee from 2001 through 2008. The House Committee needs to make up for trillions of dollars lost from its planned tax cuts over the next decade, and the gains from changing golf-course rules may not be big enough to be worth the time, he said. But eliminating the benefit would look good to the public, he added.

 

“I like the optics of getting rid of the easement for golf courses,” Zerbe said. “They have to raise a lot of money.”

—With assistance from Hannah Levitt

 

 

2017 tax reform: Proposed individual tax changes in the Tax Cuts and Jobs Act

By Catherine Murray

 

The Tax Cuts and Jobs Act, released on Nov. 2 and approved, as amended, by the Ways and Means Committee on Nov. 9, would make major changes to individual income taxation.

 

These include, among many others, a reduction in the number of tax brackets, an increase in the standard deduction, repeal of personal exemptions, a reduced maximum rate on business income, an increase in the child tax credit and a new family tax credit, a new limit on mortgage interest, and a dollar limit on property tax deductions.

 

Changes to Tax Rates and Brackets

New brackets & break points. The Act would reduce the number of tax brackets (ranging from 10% to 39.6%) from seven to four: 12%, 25%, 35%, and 39.6%. (Act Sec. 1001(a))

 

The 25% bracket would begin at: $90,000 for joint returns/surviving spouses, $67,500 for heads of household, half of the joint amount for any other individuals (i.e., $45,000), and $2,550 for an estate or trust. (Income under this amount would be subject to the 12% rate.) (Act. Sec. 1001(b)(1))

 

The 35% bracket would begin at: $260,000 for joint returns/surviving spouses, half of the joint amount for a married individual filing separately (i.e., $130,000), $200,000 for any other individuals, and $9,150 for an estate or trust. (Act Sec. 1001(b)(2))

 

The 39.6% bracket would begin at: $1 million for joint returns/surviving spouses, half of the joint amount for any other individual (i.e., $500,000), and $12,500 for an estate or trust. (Act Sec. 1001(b)(3))

 

In addition, the Act would provide for a “phaseout” of the 12% rate under which, as described in the Section-by-Section summary, the benefit of the 12% rate is phased out for taxpayers with AGI over $1 million ($1.2 million for joint filers). (Act Sec. 1001(e))

 

Kiddie tax. Under the Act, for unearned income of children: the 25% bracket threshold amount is the taxable income of such child for the tax year reduced by the net unearned income of the child; the 35% threshold is taxable income reduced by net unearned income plus the 35% bracket threshold for trusts and estates under Act Sec. 1001(b)(2)(D) (i.e., $9,150); and the 39.6% threshold is taxable income reduced by net unearned income plus the 39.6% threshold for trusts and estates under Act Sec. 1001(b)(3)(C) (i.e., $12,500) (Act Sec. 1001(d)) (b)(2)(D))

 

Illustration : As illustrated by the Joint Committee on Taxation: a child subject to these rules has $60,000 taxable income of which $50,000 is net unearned income which would otherwise be treated as ordinary income. The 25% bracket threshold amount for the tax year is $45,000 for an unmarried taxpayer, and the 35% and 39.6% brackets thresholds for a trust are $9,150 and $12,500. The 25% bracket threshold for the child would be $10,000 [i.e., $60,000 less $50,000], the 35% threshold would be $19,150, and the 39.6% threshold would be $22,500. So, the first $10,000 would be subject to a 10% tax, the following $9,150 to 25%, the following $3,350 to 35%, and the remaining $37,500 to 39.6%.

 

Capital gains. The Act generally retains the present-law maximum rates on net capital gain and qualified dividends, retaining the existing breakpoints between the 0%, 15%, and 20% breakpoints (except that the breakpoints would be indexed using chained CPI, as explained below). (Act Sec. 1001(b))

 

Inflation adjustment. The dollar amounts above, as well as other annually adjusted IRS figures, would be indexed for inflation based on chained CPI (Consumer Price Index), as opposed to CPI-U (CPI for all urban customers) under current law. (Act Sec. 1001(c)) This change was originally to go into effect beginning in 2023, but the Chairman's Mark accelerated the date to 2018.

 

Effective date. Except as otherwise provided, the above changes would be effective for tax years beginning after Dec. 31, 2017.

 

Increased Standard Deduction and Elimination of Personal Exemptions

Standard deduction increased. The Act would increase the standard deduction to $24,400 for joint returns and surviving spouses, three-quarters of the joint amount for unmarried individuals with at least one qualifying child (i.e., $18,300), and half of the joint amount in any other case (i.e., $12,200). (Act Sec. 1002(a).

 

According to the section-by-section summary, this increase would significantly reduce the number of taxpayers who choose to itemize their deductions.

 

For individuals who are claimed as dependents, the Act would limit the standard deduction to the greater of $500 or the sum of $250 and the individual's earned income. (Act Sec. 1002(a))

 

Personal exemptions repealed. The Act would repeal the deduction for personal exemptions (which under current law is scheduled to be $4,150 for 2018, subject to a phase out for higher earners), as well as the personal exemption phase out. (Act Sec. 1003)

 

Effective date. The new standard deductions and repeal of personal exemptions would go into effect for tax years beginning after Dec. 31, 2017.

 

New Maximum Rate on Business Income of Individuals

25% “business income” rate. The Act would provide a new maximum rate of 25% on the “business income” of individuals. (Act Sec. 1004(a)) The Act sets out a formula under which it reduces the tax that would otherwise apply to “qualified business income” in order to achieve this maximum rate.

 

“Qualified business income” is generally defined as the excess (if any) of (i) the sum of 100% of any net business income derived from any passive business activity plus the capital percentage of any net business income derived from any active business activity, over (ii) the sum of 100% of any net business loss derived from any passive business activity, 30% of any net business loss derived from any active business activity, plus any carryover business loss for the preceding tax year.

 

As explained in the section-by-section summary, owners or shareholders could elect to apply a “capital percentage” (defined as 30%) to the net business income derived from active business activities to determine their business income eligible for the 25% rate (with the remaining 70% subject to ordinary individual income tax rates), or they may elect to apply a formula based on the facts and circumstances of their business to determine an amount greater than the 30% capital percentage. The percentage may be increased for certain “capital-intensive business activities.” However, the percentage is zero for certain personal services business—e.g., law, accounting—and taxpayers actively participating in those business wouldn't be eligible for the 25% business income rate.

 

The section-by-section explained that special anti-abuse rule would apply to prevent the recharacterization of actual wages paid as business income.

 

New 25% rate for certain dividends of REITs and cooperatives. The Act would also provide that certain dividends of real estate investment trusts (REITs) and patronage dividends from cooperatives are subject to a 25% rate. (Act Sec. 1004(b) Dividends that meet certain requirements would increase net capital gain and unrecaptured section 1250 gain under Code Sec. 1(h)(11) and Code Sec. 1(h)(6), respectively (both of which set out a 25% rate).

 

Effective date. The above provisions would go into effect for tax years beginning after Dec. 31, 2017 (Act Sec. 1004(d), subject to a transition rule.

 

Enhanced Child Tax Credit and New Family Tax Credit

Increased child tax credit. The Act would increase the amount of the child tax credit under Code Sec. 24 from $1,000 to $1,600. (Act Sec. 1101(a) It would also replace the term “qualifying child” with “dependent” and eliminate the phrase “for which a the taxpayer is allowed a deduction under section 151.”

 

The Act would also provide a $300 credit for non-child dependents, as well as a $300 “family flexibility credit” for the taxpayer (or both spouses, for a joint return). (Act. Sec. 1101(a)) The non-child dependent credit and the family flexibility credit would be effective for tax years ending before Jan. 1, 2023.

 

Phase-out. The Act would also increase the income levels at which these credits phase out. Under current law, the credit is phased out beginning at income levels of $75,000 for single filers and $110,000 for joint filers. The Act would raise these amounts to $115,000 and $230,000, respectively. (Act Sec. 1103(b))

 

Refundable portion. Under current law, the child tax credit is partially refundable. The Act would limit the amount that is refundable to $1,000, and index this amount to inflation based on chained CPI (up to a maximum amount of the $1,600 base credit). (Act Sec. 1103(c)) A taxpayer would be required to provide a Social Security number (SSN) to claim the refundable portion of the credit. (Act Sec. 1103)

 

Effective date. These amendments would apply to tax years beginning after Dec. 31, 2017. (Act Sec. 1101(d))

 

Repeal of Certain Nonrefundable Credits

Repealed credits. The Act would repeal:

 

• the credit for individuals over age 65 or who have retired on disability under Code Sec. 22;

 

• the adoption credit under Code Sec. 23;

 

• the tax credit associated with mortgage credit certificates under Code Sec. 25; and

 

• the credit for plug-in electric drive motor vehicles under Code Sec. 30D.

 

Effective date. The provision repealing qualified plug-in electric drive motor vehicles would be effective for vehicles placed in service for tax years beginning after Dec. 31, 2017. The other provisions would be effective for tax years beginning after Dec. 31, 2017.

 

Changes to Education Incentives

Enhanced AOTC. The Act would reduce the three higher education credits under current law—the American Opportunity Tax Credit (AOTC), the Hope Scholarship Credit (HSC), and the Lifetime Learning Credit (LLC)—to one “enhanced” AOTC. The enhanced AOTC would, like the version under current law, provide a 100% tax credit for the first $2,000 of qualifying higher education expenses and a 25% credit for the next $2,000 of such expenses (for a $2,500 maximum). The HSC and LLC would be repealed.

 

The Act would limit the AOTC to five years of post-secondary education, with the credit for the fifth year available at half the rate as the first four years, with up to $500 being refundable.

No new Coverdell account contributions. The Act would generally prohibit new contributions to Coverdell education savings accounts after 2017. (Act Sec. 1202(a))

 

Section 529 Account distributions. The Act would treat up to $10,000 per year for elementary and high school expenses as “qualified expenses” under the Section 529 plan rules. (Act Sec. 1202(b))

 

Qualified Tuition Program (QTP) distributions for apprenticeships. The Act would add to the term “qualified education expenses” certain books and supplies required for registered apprenticeship programs. (Act Sec. 1202(d))

 

Treatment of discharged student loan indebtedness. Under the Act, any income resulting from the discharge of student debt on account of death or total disability of the student would be excluded from taxable income. The Act would also exclude from income repayment of a taxpayer's loans pursuant to the Indian Health Service Loan Repayment Program. (Act Sec. 1203)

 

Other education provisions repealed. The Act would repeal:

 

• The above-the line deduction for interest payments on qualified education loans for qualified higher education expenses under Code Sec. 221;

 

• The pre-2017 above-the-line deduction for qualified tuition and related expenses under Code Sec. 222;

 

• The exclusion from income of interest on U.S. savings bonds used to pay qualified higher education expenses under Code Sec. 135;

 

• The exclusion from gross income of qualified tuition reductions provided by educational institutions under Code Sec. 117(d); and

 

• Employer-provided education assistance under Code Sec. 127. (Act. Sec. 1204)

 

Effective date. The above provisions would generally be effective after Dec. 31, 2017.

 

Changes to Deductions

“Pease” limitation repealed. The Act would repeal the so-called “Pease” limitation on itemized deductions. (Act Sec. 1301)

 

Mortgage interest deduction retained, but with new limits. The Act would retain the home mortgage interest deduction in its current form—i.e., subject to a $1 million cap—for mortgages that already exist on Nov. 2, 2017, as well as for taxpayers who have entered into a binding written contract before that date to purchase a home. However, for newly purchased homes, the deduction will be limited to $500,000 ($250,000 for a married individual filing separately). (Act Sec. 1302)

 

The Act would also limit taxpayers to one qualified residence. (Act Sec. 1302(b))

 

State and local property tax deduction retained, but with new limits. The Act would eliminate the deduction for State and local income or sales tax (see below), but would retain the deduction for real property taxes, subject to a $10,000 maximum. (Act Sec. 1303)

 

Repealed deductions. The Act would repeal deductions for:

 

• Taxes not paid or accrued in a trade or business under Code Sec. 164(b)(5); (Act Sec. 1303)

 

• Personal casualty losses under Code Sec. 165 (subject to an exception for disaster losses under the recent Disaster Tax Relief and Airport and Airway Extension Act of 2017); (Act Sec. 1304)

 

• State and local income taxes and sales taxes; (Act. Sec. 1303)

 

• Tax preparation expenses under Code Sec. 212; (Act Sec. 1307)

 

• Alimony payments under Code Sec. 215

 

• Moving expenses under Code Sec. 217; (Act Sec. 1310)

 

• Contributions to Medical Savings Accounts (MSAs) under Code Sec. 220; existing balances could be rolled over on a tax-free basis into a Health Savings Account (HSA); (Act Sec. 1311)

 

• Medical expenses under Code Sec. 213; and

 

• Expenses attributable to the trade or business of being an employee under Code Sec. 262. (Act Sec. 1312)

 

The Act would also modify the limitation on wagering losses under Code Sec. 165(d) to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, would be limited to the extent of gambling winnings. (Act Sec. 1305)

Modified rules for charitable contributions. The Act would:

 

• increase the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations to 60%;

 

• repeal the special rule in Code Sec. 170(l) that provides a charitable deduction of 80% of the amount paid to a college or university for the right to purchase tickets for athletic events;

 

• adjust the charitable mileage rate under Code Sec. 170(i) for inflation; and

 

• repeal the exception under Code Sec. 170(f)(8) under which a taxpayer that failed to provide a contemporaneous written acknowledgement by the donee organization for contributions of $250 or more is relieved from doing so when the donee organization files a return with the required information. (Act Sec. 1306)

 

Effective date. Except as otherwise noted, the above provisions would be effective for tax years beginning after Dec. 31, 2017.

 

Changes to Exclusions and Taxable Compensation

Employer-provided housing. The Act would limit the exclusion for housing provided for the convenience of the employer and for employees of educational institutions under Code Sec. 119 to $50,000 ($25,000 for a married individual filing a joint return). The exclusion would also phase out for higher-income individuals. (Act Sec. 1401)

 

Additional holding period required for carried interest. The Act, as amended, would impose a 3-year holding period requirement for certain partnership interests received in connection with the performance of services to be taxed as long term capital gain rather than ordinary income. An anti-abuse rule would tax as ordinary income transfers of applicable partnership interests to certain related persons within the 3-year holding period. (Act Sec. 3314)

 

Gain from sale of principal residence. The Act would require that, in order to exclude gain from the sale of a principal residence under Code Sec. 121 (up to $500,000 for joint filers; $250,000 for others), a taxpayer would have to own and use as a home the residence for five out of the previous eight years (as opposed to two out of five years under current law), effective for sales and exchanges after Dec. 31, 2017. In addition, the exclusion could only be used once every five years, and it would be phased out at higher income levels. (Act Sec. 1402)

 

Five-year deferral of private company compensatory option and restricted stock gain. The Act, as amended, would give certain employees of nonpublic companies who receive stock options or restricted stock under widely applicable, written equity compensation plans, and later exercise those options or units, an election to defer income recognition for up to five years. The deferral election would not be available to 1% owners (within the meaning of Code Sec. 416(i)(1)(B)(ii)), CEOs, or CFOs (and their relatives), or to certain highly-compensated officers). Employers would have new withholding and reporting rules related to the deferral stock. Coordinating rules would apply to incentive stock options, employee stock purchase plans, and nonqualified deferred compensation. The deferral election would be available for stock from options exercised, or restricted stock units settled. Until regulations are issued on certain aspects of the deferral election, employers would be expected to operate under a reasonable good-faith standard. (Act Sec. 3804)

 

Repealed exclusions. The Act would repeal current-law exclusions for:

 

• Employee achievement awards under Code Sec. 74; (Act Sec. 1403)

 

• Dependent care assistance programs under Code Sec. 129, beginning in 2023; (Act Sec. 1404)

 

• Qualified moving expense reimbursements under Code Sec. 132; (Act Sec. 1405) and

 

• Adoption assistance programs under Code Sec. 137. (Act Sec. 1406)

 

Effective date. Except as otherwise noted, the above provisions would be effective for tax years beginning after Dec. 31, 2017.

 

Changes to Savings, Pensions and Retirement

Roth IRA recharacterization rule repealed. The Act would repeal the current-law provisions, in Code Sec. 408A, under which an individual may re-characterize a contribution to a traditional IRA as a contribution to a Roth IRA (and vice versa) and may also recharacterize a conversion of a traditional IRA to a Roth IRA. (Act Sec. 1501)

 

Reduction in minimum age for allowable in-service distributions. The Act would permit all defined benefit plans (Code Sec. 401(a)(36), as well as State and local government defined contribution plans (Code Sec. 457(d)(1)), to make in-service distributions beginning at age 59-1/2. (Act Sec. 1502)

 

Modified rules on hardship distributions. The Act would require IRS to, within one year from the date of enactment, change its regs under Code Sec. 401(k) to allow employees taking hardship distributions to continue making contributions to the plan. (Act Sec. 1503)

 

The Act would also let employers choose to allow hardship distributions to include account earnings and employer contributions. (Act Sec. 1504)

 

Extended rollover period for the rollover of plan loan offset amounts in certain cases. The Act would modify Code Sec. 402(c) to provide that employees whose plan terminates or who separate from employment while they have plan loans outstanding would have until the due date for filing their tax return for that year to contribute the loan balance to an IRA in order to avoid the loan being taxed as a distribution. (Act Sec. 1505)

 

Modification of nondiscrimination rules. The Act would amend Code Sec. 401 to allow expanded cross-testing between an employer's defined benefit and defined contributions for purposes of the nondiscrimination rules, effective as of the date of enactment. (Act Sec. 1506)

Effective date. Except as otherwise provided, the above provisions would be effective for tax years beginning after Dec. 31, 2017.

 

Estate and Generation-Skipping Transfer Taxes

Basic exclusion doubled. The Act would double the base exclusion amount—i.e., the amount of transferred property that is exempt from estate and gift tax—of $5 million (as indexed for inflation; $5.6 million for 2018) to $10 million (which will also be indexed for inflation), effective for tax years beginning after Dec. 31, 2017. (Act Sec. 1601)

 

Estate and GST taxes repealed after 2023. The Act would repeal the estate and GST taxes such that they do not apply to the estates of decedents dying after Dec. 31, 2023. The rule under which a beneficiary receives a stepped-up basis in inherited property would not be repealed., while still maintaining a beneficiary's stepped-up basis in estate property. (Act Sec. 1601)

 

Gift tax provisions. The Act would lower the gift tax to a top rate of 35% for gifts made after Dec. 31, 2023, and would provide for a basic exclusion amount of $10 million and an annual exclusion amount of $15,000 (for 2018), as indexed for inflation. (Act Sec. 1602)

 

Alternative Minimum Tax Repeal

AMT repeal. The Act would repeal the AMT—specifically, Code Sec. 55 through Code Sec. 59—generally effective for tax years beginning after Dec. 31, 2017. (Act Sec. 2001(a))

 

Treatment of carryforwards. If a taxpayer has AMT credit carryforwards, the Act would allow the taxpayer to claim a refund of 50% of the remaining credits (to the extent the credits exceed regular tax for the year) in tax years beginning in 2019, 2020, and/or 2021, with the remainder (up to 100%) claimed in the tax year beginning in 2022. (Act Sec. 2001(b))

 

 

 

 

A race against time in Congress

By Roger Russell

 

With few days left in the legislative calendar this year, both the House and Senate are moving to get their bills passed and into Conference Committee to allow enough time to work out a compromise bill before the end of the year – a goal that may be endangered by their cost, and the significant differences between them.

 

The Senate began its markup process on November 13, with an updated chairman’s mark expected November 14. While the Senate markup may take until the Thanksgiving recess, the House is expected to vote on its bill by the end of the week.

 

“I was surprised by how different the two bills were, considering they were working off of the same framework,” said Dustin Stamper, director at Grant Thornton’s Washington National Tax Office. “There are major differences in key areas.”

 

“The way they approach pass-through income is totally different,” he noted. “The House bill generally gives a pass-through a 25 percent rate, but puts limits on how broadly it applies. The Senate provides a deduction against pass-through income. It is allowed against a broader range of pass-through income, but it provides a much shallower effective rate.”

 

Part of the differences can be attributed to the politics of getting the bill through the Senate, Stamper indicated. “There are a lot of different policy approaches, especially in the international area,” he said. “If you’re looking for politics, you can see that the Senate is not as worried about the state and local tax deduction in the House, which has a lot more members from high-tax states.”

 

 “The big story so far is that neither bill is compliant with reconciliation,” he warned. “Both appear for now to be under the $1.5 million budgetary threshold, but that’s the easiest issue. The harder part is making sure that the bill doesn’t lose any money outside of the 10-year budget window. Both of these bills cost a significant amount of revenue, and would lose money beyond 10 years. They haven’t made any attempt to address it yet. We assume that big beneficial pieces will be forced to expire, but it’s hard to assess the bill without knowing which pieces are permanent and which are not.”

 

Stamper noted the special election scheduled for December 12 for the vacant Senate seat from Alabama. “The Republican margin is narrow enough as it is,” he said. “Any additional votes they lose makes it that much harder. It will be challenging to craft a final compromise to appease conservatives in the House and moderates in the Senate. But it can be done – the obstacles are not insurmountable.”

 

Although both bills cut the corporate tax rate to 20 percent, only the Senate bill would include professionals and consultants. “Under the House bill they would be taxed at 25 percent. Both bills try to achieve a carve-out from the highest rates for business income, but they do it in a different manner,” Stamper said.

 

Whatever reform passes will likely benefit lower- to middle- income and high income individuals, according to David De Jong, CPA, Esq., a principal at Rockville, Md.-based Stein Sperling Bennett De Jong Driscoll PC. “But those making in the upper $100,000 range, to those in the upper $700,000 range, in states with high income and property taxes, will likely be losers with this legislation.”

 

The odds

The chances of tax reform passing this year are slightly better than 50-50, according to Linda O’Brien, legal analyst and editorial lead for tax and emerging practice areas for Wolters Kluwer Legal & Regulatory.

 

 “This week will give us a better picture,” she said. “With the House expected to pass its bill this week, all eyes are on the Senate. The biggest hurdle moving forward is dealing with the deficit. There are fiscal hawks in the Senate who would be opposed to anything that added to the deficit, so this is where you’ll see the focus -- whether they will attempt to pay for tax cuts, or will be willing to live with the deficit because it would add to economic growth.”

 

“The other challenge they face is time – it’s not on their side,” she said. “There are very few days left on the legislative calendar, which is why they’re attempting to move forward so quickly.”

 

“If tax reform actually passes and is signed, practitioners should encourage clients to accelerate deductions,” she said. “Businesses would want to defer income until 2018 in anticipation of the lower corporate rate. And if it doesn’t pass this year, taxpayers should balance taxable income and watch for reform later in 2018.”

 

 

 

What's Different (And What's The Same) In The Senate And House Tax Reform Proposals

Kelly Phillips Erb , FORBES STAFF

 

Senate Republican leaders have now released their version of a tax bill, the Tax Cuts and Jobs Act.

 

You can review the Senate's bill summary here and you can review the first version of the House bill here. (Links will download as a pdf). You can read my summary of the House plan here.

 

It would appear that there's still some work to be done to reconcile the Senate and House bills. Here are the key differences (as well as similarities) between the two:

 

Tax rates

We currently have seven (7) tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% (you can see the brackets for 2018 - absent reform - here).

  • The House bill proposed four (4) tax rates: 12%, 25%, 35% and 39.6%.
  • The Senate bill would keep seven (7) brackets and reduce the top marginal rate to 38.5%.

 

Standard Deduction

The standard deduction amounts for 2018 - absent reform - are $6,500 for individuals, $9,550 for heads of households (HOH), and $13,000 for married couples filing jointly.

  • Under the House bill, the standard deduction would increase to $12,200 for individuals, $18,300 for heads of household (HOH), and $24,400 for married couples filing jointly.
  • Under the Senate bill, the standard deduction would be $12,000 for individuals, $18,000 for heads of household (HOH), and $24,000 for married couples filing jointly.

 

Additional Standard Deduction & Personal Exemptions

Under both plans, these would be "consolidated into this larger standard deduction" - meaning they disappear.

 

Mortgage Interest Deduction

Currently, you can deduct qualifying mortgage interest for purchases of up to $1,000,000 plus an additional $100,000 for equity debt. The $1,000,000 cap applies to a mortgage on your primary residence plus one other home.

  • Under the House bill, current mortgages would be grandfathered - meaning they won't be affected - but new mortgages would be capped at $500,000 for purposes of the deduction. Additionally, the deduction would only apply to your primary residence.
  • Under the Senate bill, the deduction would remain in place for mortgages up to $1,000,000 but the deduction for equity debt (meaning re-fis not related to improving your home) would be eliminated.

 

State and Local Income Tax Deduction

Currently, you can deduct state and local income taxes or sales taxes. Both proposals would eliminate the state and local income tax or sales tax deduction for those taxpayers not engaged in trade or business.

 

Property Tax Deduction

Currently, you can deduct state and local property taxes.

  • Under the House bill, the property tax deduction would remain in place but would be capped at $10,000. This was a compromise after Republicans in high tax states made noise (and voted against the budget proposal).
  • Under the Senate bill, the property tax deduction would be eliminated.

 

Charitable Donation Deduction

Currently, you can deduct certain donations to qualified charitable organizations. The charitable donation deduction would remain in place under both bills.

 

Itemized Deductions

If you itemize your deductions, under current law, you can write off certain expenses. Under both proposals, other than those mentioned above (mortgage and charitable), certain itemized deductions for individuals, such as the deductions unreimbursed employee expenses, home office expenses, and tax preparation expenses, would be eliminated.

  • Under the Senate bill, the deduction for medical expenses would remain (thanks to Laurence Vance for the correction).

 

Above The Line Deductions

Currently, you can claim certain above-the-line expenses (meaning that you can claim them even if you do not itemize). Under both proposals, most above-the-line deductions would be eliminated, including those for student loan interest, moving expenses and out of pocket expenses for teachers.

 

Child Tax Credit

The credit is currently $1,000 and is refundable.

  • Under the House bill, the child tax credit would be increased to $1,600 per child under 17 - subject to phaseout - with an additional $300 credit for each parent as part of a consolidated family tax credit. The first $1,000 would be refundable.
  • Under the Senate bill, the child tax credit would be bumped to $1,650, with a much higher phaseout for ($1 million for married couples filing jointly). As with the House bill, the first $1,000 would be refundable.

 

Exclusion Of Gain From Sale Of Your Home

Under current law, you can exclude up to $250,000 ($500,000 for married taxpayers) in capital gains from the sale of your home so long as you have owned and resided in the house for at least two of the last five years. Both proposals would change the "two of five" rule to "five of eight." Additionally, the proposals would limit the use of the exclusion to one sale every five years (instead of one sale every two years).

 

401(k) And Other Retirement Plans

Currently, individuals who save for retirement using certain plans (like 401(k) plans receive tax-favored treatment such as tax deferral.

 

  • Under the House proposal, there are no changes to tax breaks for retirement accounts, including 401(k) plans and IRAs.
  • Under the Senate proposal, there are a few tweaks. First, the proposal would impose the same on elective deferrals and catch-up contributions under section 401(k) plans, section 403(b) plans and governmental section 457(b) plans and impose the rules on early withdrawals across the board. Additionally, the proposal would eliminate catch-up contributions for high-income employees (defined as those who receive wages of $500,000 or more for the preceding year).

 

Obamacare Individual Mandate

The mandate is still in play. There are no specific health care related tax moves (beyond yanking the medical expense deduction) in either bill.

 

Alternative Minimum Tax (AMT)

The AMT is a secondary tax put in place in the 1960s to prevent the wealthy from artificially reducing their tax bill through the use of tax preference items. The AMT would be eliminated under both proposals.

 

Pass-Through Entities

Businesses use structures like limited liability companies (LLCs) or S corporations to pass-through income to the owners, escaping tax at the company level: Income is taxed at individual rates.

  • Under the House proposal, businesses conducted as sole proprietorships, partnerships, and S corporations would be taxed at a rate of 25%. Businesses that offer "professional services" like doctors, lawyers, accountants, designers, and consultants wouldn’t qualify for the reduced rate under the proposal. Other business owners can choose to categorize 70% of their income as wages (and pay the individual tax rate) and 30% as business income (taxable at 25%) OR set the ratio of their wage income to business income based on the level of their capital investment.
  • Under the Senate proposal, pass through income would be allowed a 17.4% deduction. As with the House bill, certain professional services, are excluded from the tax break - except those individuals with income up to $75,000 ($150,000 for married taxpayers filing jointly).

 

Corporate Tax Relief

Corporations which do not pass through their income pay tax on profits at the corporate level.

  • Under the House bill, the corporate tax rate would be lowered to 20% beginning next year.
  • Under the Senate bill, the corporate tax rate would also be lowered to 20%, but it would not be effective until the 2019 tax year.

 

Multinational Corporations

Some companies - like Apple - stockpile assets overseas since bringing the funds over to the U.S. would be taxable. Both the House and Senate bills would impose a one-time "repatriation" tax to encourage companies to bring those funds back. The Senate version would impose a tax of 10% for liquid assets and 5% for illiquid assets.

 

International Income

Under our current system, U.S. companies are subject to tax on all profits, no matter where they are earned. The Senate and House proposals would switch to a territorial system for businesses which means that U.S. companies would only pay tax on profits earned in the U.S.

 

Federal Estate Tax

Currently, the federal estate tax is imposed on estates which exceed $5.49 million, or nearly $11 million per married couple.

  • Under the House plan, the federal estate tax would be phased out and completely disappear after 2024.
  • Under the Senate plan, the federal estate tax would remain, but the exemption for federal estate and gift tax would double.

-

There's lots more to come, folks. The Senate bill is scheduled for markup by the Finance Committee on Monday, November 13, 2017.

 

 

 

 

When a Tax Plan Angers Almost Everyone

Several days ago, Benjy Sarlin, in They’ve Got Issues. Here’s Who Is Mad About the GOP Tax Plan, demonstrated that just about everyone is unhappy with “the GOP Tax Plan.” Context and timing suggest that it’s the House plan that is being examined, though much the same can be said about the Senate tax plan.


Sarlin focuses on eight aspects of the House plan that have encountered significant opposition. That opposition, in many instances, is more than polite commentary and borders on deep anger and even rage. Here is a summary of the people who are annoyed, upset, angry, or enraged about one or more of the proposals in the legislation: liberals, Senator Susan Collins, anti-tax conservatives, liberal groups, Senator Marco Rubio, deficit hawks, unions, Republicans from blue states, the AARP, home builders, realtors, graduate students, Ivy League universities, and teachers unions. That’s a short list. One could add those who believe in separation of church and state, the pro choice movement, environmentalists, some small business owners, many middle-class families, and others.


It is said that the best compromise is one that makes everyone angry, or at least, one that everyone finds objectionable in one way or another. There is some truth to this perspective. If everyone finds the compromise perfect, then no one is completely pleased with it. The problem with the Republican tax plans, in both the House and Senate, is that there are some people who are jumping with joy at the prospect of the plan being enacted.


The primary challenge to crafting effective tax reform is that tax reform requires the elimination of tax breaks. Giving up a tax break is unpalatable to the taxpayers who benefit from it, unless something is received in return. In theory, giving up a tax break in exchange for lower tax rates should, if the numbers play out appropriately, seal the deal. The problem with the Republican tax plans is that not everyone is being asked to give up their tax breaks, even though they are getting the benefit of lower tax rates and other offsets



So the more important question is this: Who is NOT angry about the Republican tax plans? The list begins with owners of carried interests, corporations, multinational investors, and individuals worth more than $5 million. There are others. This so-called “tax reform” is nothing more than a shifting of even more wealth and income from the peasants, artisans, small business owners, and middle class to the oligarchy. It’s the oligarchy that can afford to buy Congress and direct it to enact laws that increase the wealth and power of the puppet-masters. As one member of Congress explained, “My donors are basically saying, ‘Get it done or don’t ever call me again.’” I wonder if he salutes or bows when he is given orders from the oligarchy.


Of course almost everyone is annoyed, upset, angry, or enraged when they examine the Republican “tax reform” hoax. What should matter is the collective identities of these individuals. Almost all of them have something in common that should bridge the divides fracturing the nation. They’re not members of, apologists for, or puppets of, the oligarchy. This entire sordid episode tells America quite a bit about its sickness, and what needs to be done to cure it. Failure to administer and take the required medicine will be fatal.

 

# posted by James Edward Maule

 

 

 

If a Tax Plan Doesn’t Work, Keep Using the Same Defective Blueprint

Almost every savvy economist, and others, have figured out that the Republican tax plan will add at least a trillion dollars to the federal budget deficit, something that Republicans would not have tolerated before they shifted to a philosophy of enriching the rich with tax cuts. Rather than explaining why they are willing to do what they once opposed, Republicans are defending their actions by claiming that cutting taxes, and thus cutting revenue, won’t enlarge the deficit. How can that happen?


According to this Bloomberg report, Republican legislator Rob Portman shared his opinion that cutting taxes will decrease the deficit because “it’s going to get the economy moving.” Why does Portman think this is the case? He didn’t say, but it’s easy to figure out. When George W. Bush was president, and this same “tax cuts increase revenue” theory was being used to enact tax legislation that put the nation on a path to the economic meltdown of a decade ago, Portman was directing the White House Office of Management and Budget. So it’s obvious that Portman has been schooled in, and is an acolyte of, the disproven trickle-down supply-side economics approach that doesn’t work. So why, despite its failure, does Portman and his comrades continue to advance this theory? There are several reasons.


It is difficult to let go of long-held beliefs. It is easier to deny facts than to make changes in order to adapt to reality. It is difficult to say no when those who want to hear the word “yes” hold economic and political power and exercise it in self-serving ways. It is pretty much impossible to get elected nowadays without support from very wealthy benefactors, and there is an expectation that they will be repaid.


Plowing money into the hands of those who already have more than enough of it will not get the economy moving. Why? If the wealthy cannot move the economy with what they now have, they’re not going to move it with even more money. They will stash some of the cash abroad as they did at the turn of the century, and the rest will go into the next version of the bad investment scheme.

What moves the economy is consumer spending and consumer investment. Ninety-nine percent of consumers are not in the top one percent. The Republican tax plan does little, if nothing, for the ninety-nine percent. Worse, it actually increases federal tax liability for more than a few members of the ever-shrinking middle class. If all of the tax cuts were directed to low and middle income individuals, in fairly modest amounts, not only would it cost far less than a trillion or more dollars, it will get the economy moving. But that won’t happen? Why? Because no one in the low and middle income brackets has the financial power to put someone into office.

This plan did not work last time around. It will not work this time around. Like last time around, it will appear to work, for a short while. Then its effects will kick in. And who will be in the best economic position to weather the storm? Sadly, many of those who will be hurt most seriously are strong supporters of what is being touted as something other than what it is, namely, a repeat failure.

 

James Edward Maule

 

 

Plan now to Use Health Flexible Spending Arrangements in 2018; Contribute up to $2,650; $500 Carryover Option Available to Many

 

The Internal Revenue Service today reminded eligible employees that now is the time to begin planning to take full advantage of their employer’s health flexible spending arrangement (FSA) during 2018.

 

FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. Because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, many employers this fall are offering their employees the option to participate during the 2018 plan year.

 

Interested employees wishing to contribute during the new year must make this choice again for 2018, even if they contributed in 2017. Self-employed individuals are not eligible.

 

An employee who chooses to participate can contribute up to $2,650 during the 2018 plan year. That’s a $50 increase over 2017. Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.

 

Throughout the year, employees can then use funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details on eligible expenses and claim procedures.

 

Under the use-or-lose provision, participating employees often must incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.

 

Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year — for example, an employee with $500 of unspent funds at the end of 2018 would still have those funds available to use in 2019. Under the grace period option, an employee has until two and a half months after the end of the plan year to incur eligible expenses — for example, March 15, 2019, for a plan year ending on Dec. 31, 2018. Employers can offer either option, but not both, or none at all.

 

Employers are not required to offer FSAs. Accordingly, interested employees should check with their employer to see if they offer an FSA. More information about FSAs can be found in Publication 969, available on IRS.gov.

 

 

 

Individual Taxpayers: Seven Things to Do When an IRS Letter Arrives

 

The IRS mails millions of letters to taxpayers every year for many reasons. Here are seven simple suggestions on how individuals can handle a letter or notice from the IRS:

  1. Don’t panic. Simply responding will take care of most IRS letters and notices.
     
  2. Read the entire letter carefully. Most letters deal with a specific issue and provide specific instructions on what to do.
  3. Compare it with the tax return. If a letter indicates a changed or corrected tax return, the taxpayer should review the information and compare it with their original return. 
  4. Only reply if necessary. There is usually no need to reply to a letter unless specifically instructed to do so, or to make a payment.
  5. Respond timely. Taxpayers should respond to a letter with which they do not agree. They should mail a letter explaining why they disagree. They should mail their response to the address listed at the bottom of the letter. The taxpayer should include information and documents for the IRS to consider. The taxpayer should allow at least 30 days for a response.

When a specific date is listed in the letter, there are two main reasons taxpayers should respond by that date:

§  To minimize additional interest and penalty charges.

§  To preserve appeal rights if the taxpayers doesn’t agree.

  1. Don’t call. For most letters, there is no need to call the IRS or make an appointment at a taxpayer assistance center. If a call seems necessary, the taxpayer can use the phone number in the upper right-hand corner of the letter. They should have a copy of the tax return and letter on hand when calling.  
  2. Keep the letter. A taxpayer should keep copies of any IRS letters or notices received with their tax records.  

 

 

 

 

Reminder to Employers and Other Businesses: Jan. 31 Filing Deadline

Now Applies to All Wage Statements and Independent Contractor Forms

 

 WASHINGTON — The Internal Revenue Service today reminded employers and other businesses of the Jan. 31 filing deadline that now applies to filing wage statements and independent contractor forms with the government.

 

The Protecting Americans from Tax Hikes (PATH) Act includes a requirement for employers to file their copies of Form W-2 and Form W-3 with the Social Security Administration by Jan. 31. The Jan. 31 deadline also applies to certain Forms 1099-MISC filed with IRS to report non-employee compensation to independent contractors. Such payments are reported in box 7 of this form.

 

This deadline makes it easier for the IRS to verify income that individuals report on their tax returns and helps prevent fraud. Failure to file these forms correctly and timely may result in penalties. As always, the IRS urges employers and other businesses to take advantage of the accuracy, speed and convenience of filing these forms electronically.

 

Hints to help filers get ready

                                    

Employers should verify employees’ information. This includes names, addresses, Social Security or individual taxpayer identification numbers. They should also ensure their company’s account information is current and active with the Social Security Administration before January. If paper Forms W-2 are needed, they should be ordered early.

 

An extension of time to file Forms W-2 is no longer automatic. The IRS will only grant extensions for very specific reasons. Details can be found on the instructions for Form 8809.

 

 

 

Coinbase likely to lose fight to block IRS customer probe

By Joel Rosenblatt

 

Coinbase Inc. customers who haven’t reported their cryptocurrency gains to the Internal Revenue Service, beware.

 

A federal judge is poised to allow a limited investigation into those gains to proceed over the company’s objection that the agency is on “a massive fishing expedition” meant to make itself look tough in the eyes of its critics in Congress.

 

"It’s legitimate for them to investigate whether people are making money on their bitcoin purchases” and paying taxes on any gains, U.S. Magistrate Judge Jacqueline Scott Corley in San Francisco told lawyers for Coinbase at a hearing Thursday. “I have to give tremendous discretion to the agency as to how they investigate,” she added later.

 

Corley indicated she will allow the IRS to investigate Coinbase customers who made money on the currency and bar the agency from probing accounts of those who hadn’t. The judge also said she’ll probably give Coinbase time to appeal her decision before it turns over any customer information. The price of bitcoin fell as much as 1 percent on the news.

 

The company has been sparring since last year with the IRS over its summons—and continued to resist turning over the information even after the agency scaled back its request in July. Coinbase and industry trade groups contend the government’s concerns about tax fraud are unfounded and that its sweeping demand for information is a threat to privacy.

 

“U.S. taxpayers, including Coinbase users, have made use of virtual currencies to avoid the reporting and payment of taxes,” the IRS argued in a court filing. The agency said it needs access to customer records to “gain some degree of visibility into a space where it is already necessarily moving about somewhat in the dark.”

 

Mike Lempres, the chief legal and risk officer for Coinbase, said after the hearing that the company can’t negotiate with the IRS about a “forward-looking, rational reporting system” so long as the agency is suing it.

 

Such discussions aren’t possible “because we’re in this tussle with them where they are improperly searching for private information of our customers with no evidence of wrongdoing,” Lempres said. He declined to comment on Corley’s pending ruling before the company has seen a final order in writing.

 

The IRS persuaded Corley last year to order Coinbase to approve its summons for customer records from 2013 to 2015 for an investigation into whether taxpayers failed to report income. Coinbase resisted, and negotiations between the company and the agency resulted in a narrowed request for information about 8.9 million transactions and 14,355 account holders. Coinbase argued Thursday the inquiry remains unreasonably broad.

 

The case is U.S. v. Coinbase, 17-01431, U.S. District Court, Northern District of California (San Francisco).

 

 

 

Year-end tax planning moves for individuals and businesses

By Jeffrey Pretsfelder

 

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Until Congress passes tax reform legislation, these tips should help many tax clients.

 

The following article highlights the opportunities and challenges that affect year-end planning for 2017 and includes two checklists of actions that can cut taxes for clients for this year and in the years to come. The first checklist describes actions individuals can take to save taxes. The second checklist describes actions businesses and business owners can take to save taxes.

 

Year-End Tax Planning Moves for Individuals

 

• Higher-income earners must be wary of the 3.8 percent surtax on certain unearned income. The surtax is 3.8 percent of the lesser of:

 

1. Net investment income (NII), or

 

2. The excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

 

As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8 percent surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

 

• The 0.9 percent additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.

 

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

 

• Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions. Regardless of what happens in Congress, this strategy could enable you to claim larger deductions, credits and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2017. For example, this may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status).

 

• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2017.

 

• If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

 

• It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way. This could cut as well as defer your tax if Congress reduces tax rates beginning in 2018.

 

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don't pay your credit card bill until after the end of the year.

 

• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017 if you won't be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.

 

• Take an eligible rollover distribution from a qualified retirement plan before the end of 2017 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2017. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2017, but the withheld tax will be applied pro rata over the full 2017 tax year to reduce previous underpayments of estimated tax.

 

• Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.

 

• You may be able to save taxes by applying a bunching strategy to pull "miscellaneous" itemized deductions, medical expenses and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.

 

• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

 

• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

 

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5-percent company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50 percent of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if you turn age 70-½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018—the amount required for 2017 plus the amount required for 2018. Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.

 

• Increase the amount you set aside for next year in your employer's health flexible spending account if you set aside too little for this year.

 

• If you become eligible in December of 2017 to make health savings account contributions, you can make a full year's worth of deductible HSA contributions for 2017.

 

• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

 

• If you were affected by Hurricane Harvey, Irma or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty loss rules and eased access to your retirement funds. In addition qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas aren't subject to the usual charitable deduction limitations.

 

 

Year-End Tax-Planning Moves for Businesses and Business Owners

 

Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, air conditioning and heating units, and qualified real property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and midsized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.

 

Businesses also should consider making buying property that qualifies for the 50 percent bonus first year depreciation if bought and placed in service this year (the bonus percentage declines to 40 percent next year). The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50 percent first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2017.

Businesses may be able to take advantage of the "de minimis safe harbor election" (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2017.

 

Businesses contemplating large equipment purchases also should keep a close eye on the tax reform plan being considered by Congress. The current version contemplates immediate expensing—with no set dollar limit—of all depreciable asset (other than building) investments made after Sept. 27, 2017, for a period of at least five years. This would be a major incentive for some businesses to make large purchases of equipment in late 2017.

 

If your business was affected by Hurricane Harvey, Irma, or Maria, it may be entitled to an employee retention credit for eligible employees.

 

A corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. This could certainly be the case if Congress succeeds in dramatically reducing the corporate tax rate, beginning next year.

 

A corporation should consider deferring income until next year if doing so will preserve the corporation's qualification for the small corporation AMT exemption for 2017. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn't qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

 

A corporation (other than a "large" corporation) that anticipates a small net operating loss for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.

 

If your business qualifies for the domestic production activities deduction for its 2017 tax year, consider whether the 50-percent-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2017 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2017, even if the business has a fiscal year. Keep in mind that the DPAD wouldn't be available next year under the tax reform plan currently before Congress.

 

To reduce 2017 taxable income, consider deferring a debt-cancellation event until 2018.

 

To reduce 2017 taxable income, consider disposing of a passive activity in 2017 if doing so will allow you to deduct suspended passive activity losses.

 

These are just some of the year-end steps that can be taken to save taxes.

 

 

 

The ACA: Still with us

By Roger Russell

 

For tax preparers and taxpayers still confused by the complexities of Affordable Care Act reporting from the past filing season, it’s still around to make life complicated in the season ahead. Barring a last-minute repeal in tax reform or end-of-year legislation, it’s still the law.

 

“My guess is they won’t repeal the individual mandate,” said Dustin Stamper, director in Grant Thornton’s Washington National Tax Office. “If they did, it would create problems for the exchanges. ... Since ‘repeal and replace’ couldn’t get done, the Republicans would own health care and would share in the blame if anything disastrous happened to the exchanges.”

 

“For nearly four years, legislation was challenged and revised, deadlines were postponed, state and federal hearings were held, the Supreme Court pronounced it legitimate, Medicare Part D was revised, dependent coverage and pre-existing conditions were clarified, contraception provisions were written, state and federal exchanges were created, federal subsidies were put into place, and Web sites, FAQs and guides were designed,” said Annie Schwab, tax manager at Padgett Business Services. “And we still have it.”

 

“The Qualified Small Employer Health Reimbursement Arrangements, or QSEHRAs, are new for 2017,” she said. “This allows small employers that don’t offer group health plans to reimburse employees for qualified medical expenses, including premiums for health insurance policies, without incurring a penalty. To qualify, the employer must be a small employer with 50 or fewer employees; the employer does not offer a group health plan; and the employee has minimum essential coverage through a different source. Those that qualify must specify the amount on the employee’s W-2.”

 

The sound of silents

 

Filing season issues left over from the past season include the acceptance of “silent returns,” according to Schwab.

 

A silent return is one where the box is not checked indicating an individual’s full-year coverage, or one that does not include Forms 8965 or 8962 indicating that an exemption applies or that a premium tax credit was reconciled or a penalty payment was made. Initially, the IRS said that it would not accept those returns, but reversed itself in February 2017, stating that it would accept them. Now, however, the IRS has reversed itself again, stating that it will enforce the reporting requirements for 2018 filing of 2017 returns.

 

“The IRS will not accept the electronic tax return until the taxpayer indicates whether they had coverage, had an exemption, or will make a shared responsibility payment. In addition, returns filed on paper that do not address the health coverage requirements may be suspended pending the receipt of additional information and any refunds may be delayed,” the agency stated.

 

“This means that each individual must have minimum essential health care coverage or qualify for an exemption or pay a penalty —an individual shared responsibility payment,” said Janice Krueger, subject matter expert at Greatland Corp. “And employers with at least 50 full-time employees, including full-time equivalents, must offer affordable minimum essential coverage.”

 

“Despite all the activity in the last 10 months, including an executive order and several IRS information letters, ACA reporting is still required and taxpayers remain required to follow the law and pay what they may owe,” she observed.

 

“Form 1095-A must be filed by health insurance companies to report coverage information for individuals who purchased insurance through the marketplace and to reconcile any advance payment of the premium tax credit,” Krueger noted. “Form 1095-B must be filed by health insurance carriers or issuers, plan sponsors of self-insured groups, and a government agency that provides coverage under a government plan.”

 

“The purpose of Form 1095-C is to help employees determine whether they can claim a premium tax credit and to assist the IRS in determining whether the employer owes an employer shared responsibility payment,” she said.

 

The following deadlines are in effect for 2017 returns, Krueger said: Form 1095 copies must be furnished to employees by Jan. 31, 2018; paper copies of the 1095 must be sent to the IRS by Feb. 28, 2018; and, if e-filed, Form 1095 must be filed by April 2, 2018.

 

Krueger noted areas of confusion based on the filing of Form 1095-C this past season. “Form 1095-C applies to all applicable large employers, including for-profit, nonprofit and government entity employers,” she said. “If two or more companies have a common owner or are otherwise related, they are combined for purposes of determining whether they employ enough employees to be considered an ALE. For example, if two companies, one with 30 full-time equivalents and the other with 40 full-time equivalents have a common owner, the full-time equivalents are combined to determine if each separate company is an ALE. If the combined total meets the 50 FTE threshold, then each separate company is considered an ALE.”

 

“If an ALE does not offer coverage, the ALE is still required to file Form 1095-C,” she cautioned. “And despite the fact that an employee waives coverage from an ALE, the ALE needs to file Form 1095-C for the employee.”

 

For individuals, certain exemptions are granted by the marketplace, while others are claimed on the individual tax return, Schwab noted. “Hardship exemptions may only be granted by the marketplace,” she said. “A nine-digit code per exemption per taxpayer household is obtained by applying online at healthcare.gov/exemptions.”

 

 

 

 

“Hello, It Has Been Detected That You Are a Scammer….”

Russ Fox, EA

 

After recovering from a bout with the flu I attended continuing education yesterday with the Nevada Society of Enrolled Agents. We had a presentation from a Special Agent with TIGTA (the Treasury Inspector General for Tax Administration). One of the most interesting things he mentioned was that TIGTA is now robocalling IRS scammers, preventing them from calling out. (They’re also conducting lots of investigations of these scammers and have had some successes. Unfortunately, this is a lot like killing weeds: You get rid of one and two more pop up.)

 

There’s at least one individual who created something where he has been calling IRS scammers; by flooding their phone lines it prevents them from calling out. I do need to warn you that if you do this yourself you may be violating the law. Luckily, there’s no problem with TIGTA making these robocalls to block the scammers.

 

Here’s a YouTube video from “Project Mayhem.” (There is some NSFW language.) The advice from Project Mayhem is correct: If you get one of these calls, hang up. If they claim to be from a reputable company (and it’s someone you’re doing business with), hang up, look up their phone number, and you call them. If it’s from the IRS and you think you owe money to the IRS, check with your tax professional or call the IRS up yourself (800-829-1040).

 

GOP tax dissenter ‘encouraged’ on taxes but slams ‘awful process’

By Sahil Kapur

 

Senator Ron Johnson — the first GOP senator to voice opposition to the current tax plan — said he’s encouraged that Republican leaders have been discussing his concerns that pass-through businesses would be treated unfairly.

 

“I’m encouraged by the information and the cooperation I’m getting right now” from the tax-writing Senate Finance Committee, Wisconsin’s Johnson said Monday during an interview with Milwaukee-based WISN radio. He added that he was responsible for bringing the issue of pass-throughs getting less of a benefit than corporations to the forefront of the debate.

 

The Senate plan would slash the corporate tax rate to 20 percent from 35 percent. But the rate for partnerships, sole proprietorships and other pass-through firms would be set by a formula — with rates higher than 30 percent for some.

 

The Senate Finance Committee approved the tax plan last week, and the package is scheduled to head to the Senate floor for a vote as soon as the week of Nov. 27. Many expect Johnson to vote “yes” in the end. During negotiations to repeal and replace Obamacare, Johnson was an early dissenter before ultimately supporting the effort.

 

The Wisconsin lawmaker also reiterated his frustrations with the speed of the proceedings. During the interview, he slammed what he called an “awful rushed process, a desperation to pass anything,” saying it’s “not the best way to pass something that’s going to affect so many peoples’ lives.”

 

 “I would prefer that this bill would’ve been introduced months ago,” Johnson said. “I’m not happy with the rush-rush process on this.”

 

Nonetheless, he added: “But I understand the political reality because we’ve waited so long.”

 

 

 

Tax loopholes for Wall Street’s wealthiest loom in House bill

By Zachary R. Mider

 

Lawmakers who sped a bill through the U.S. House last week may have handed a few more goodies to Wall Street’s wealthiest than they realize.

 

Investors in billion-dollar hedge funds might be able to take advantage of a new, lower tax rate touted as a break for small businesses. Private equity fund managers might be able to sidestep a new tax on their earnings. And a combination of proposed changes might allow the children and grandchildren of the very wealthy to avoid income taxes in perpetuity.

 

These are some of the quirks that tax experts have spotted in the bill passed by the House on Nov. 16, just two weeks after it was introduced. Whether they were intentional or accidental, it will be up to congressional tax writers to keep or revise them before a final bill makes it to President Donald Trump’s desk—assuming both chambers can work out a compromise. Senate leaders plan to vote on their own version of tax legislation by the end of this month.

 

 “There sure are a lot of glitches and loopholes, in large measure because there’s so much complexity in this bill that’s being raced through,” said Steven Rosenthal, a senior fellow with the Urban-Brookings Tax Policy Center, a Washington policy group.

 

Loopholes aside, the biggest features of the Republican tax plans in both chambers bear a mix of news for wealthy investors.

 

The good: a potential cut in the top marginal income tax rate; big cuts in business taxes; an end to the alternative minimum tax; and a cut or repeal of the estate tax. The bad: limits or the outright end of individual deductions for state and local taxes and tax hikes on the debt financing that fuels private equity deals.

 

The loopholes are deep in the details.

 

The House bill contemplates a major shift in how most American businesses are taxed. Right now, profits from “pass-through” entities, like sole proprietorships and partnerships, show up on their owners’ individual income taxes. The House bill replaces that with a new, 25 percent top tax rate on pass-throughs’ business income. Supporters describe the change as a boon for small business owners, a way to keep them relatively even with corporations, which stand to see their tax rate drop to 20 percent from 35 percent.

 

Possible Workaround

 

The bill’s drafters probably didn’t mean for investors in partnerships like hedge funds to use the new pass-through rate, according to David S. Miller, a tax partner at Proskauer Rose LLP in New York. Capital gains, the kind of income these funds tend to generate, would be excluded.

But there may be a workaround. In a note published on Nov. 13, Miller highlights what he calls “an unusual set of drafting glitches.”

 

Here’s how it would work, according to Miller: A fund could choose to be taxed the same way a securities dealer is. It would have to mark its portfolio to market regularly and record any profits as ordinary income. Doing so would allow it to characterize the money it makes as “business income” rather than investing income, and qualify for the pass-through rate.

 

For a hedge fund that generates short-term capital gains, this strategy could have the effect of dropping an investor’s tax rate to 25 percent from 39.6 percent. The manager of the fund probably wouldn’t get the full benefit, Miller said.

 

The Senate plan, which is still under discussion and hasn’t yet been put into legislative language, would overhaul taxes for pass-through businesses in a completely different way.

 

Carried-Interest Discrepancy

 

Another provision in the House bill is aimed squarely at fund managers. It targets the so-called carried interest tax break that Trump called for ending during his campaign when he said “hedge fund guys are getting away with murder.”

 

Hedge fund and private equity managers typically get some of their pay in the form of carried interest—a percentage of their investors’ profits. Under current law, if those underlying profits stem from investments held for more than a year, the managers enjoy the same preferential, lower rate on the carried interest that their clients pay on their investments.

 

The House bill preserves this break, but limits it by extending the holding period from one year to three.

 

Even that tax hike might be avoidable, according to Monte Jackel, a senior counsel at Akin Gump Strauss Hauer & Feld LLP. Jackel notes that the provision doesn’t apply to corporations that hold carried interest. So a fund manager could collect his carried interest through a type of corporation that doesn’t itself pay taxes.

 

“It looks like that’s what they’ve written,” Jackel said, adding that it’s the type of discrepancy that’s likely to get fixed once someone notices it. The Senate is working on a similar change in carried-interest taxation, but hasn’t released detailed language.

 

Estate Tax

 

Another quirk in the House bill is so glaring that Richard Levine, a special counsel at Withers Bergman LLP in New Haven, Connecticut, says he can’t believe it was accidental. This one involves the estate tax, a 40 percent levy that applies to the estates of a few thousand of the richest Americans each year.

 

The House bill would limit the tax to even fewer estates right away, and then eliminate it entirely in 2025. But it leaves in place a related measure that allows heirs to sell assets without having to pay income tax on the appreciation that took place before they inherited them.

 

Taken together, that means that a family whose fortune derives from a long-held asset—think Warren Buffett’s Berkshire Hathaway Inc., or the Walton family’s Wal-Mart Stores Inc.—might never have to pay tax on the bulk of that wealth at all. The founding generation could borrow against the stock to meet expenses, and the next generation could sell it income tax-free.

 

The last time the estate tax was repealed, during the single year of 2010, Congress changed the rules on inherited assets to avoid this result, said Robert Gordon, who advises clients on the tax implications of investments at Twenty-First Securities Corp. in New York.

 

He predicted the same thing will happen this time, but that it’s being held back as a negotiating tactic. (The Senate bill would limit the estate tax to fewer people but not repeal it.)

 

Levine helps wealthy individuals with tax planning, and he said the House proposal is “very welcome for my clients.”

 

“As a matter of tax policy it’s completely indefensible,” he said. “It permits income that is obviously income, in a constitutional sense, to go entirely untaxed.”

 

 

 

Which pass-through will pass?

By Roger Russell

 

With both houses of Congress making progress on their respective tax reform bills, experts are turning their eyes to the conference process – where one issue is looking particularly thorny for the conferees.

 

“The House and the Senate bills are not that far apart with regard to the corporate and the individual provisions,” observed Howard Wagner, managing director at Crowe Horwath LLP. “But they’re very far apart on taxation of pass-through income, and that’s where they’ll have to reconcile their differences.”

 

“The Senate bill has a 17.4 percent deduction for qualifying pass-through income, while the House bill taxes it at 25 percent,” he said. “But the House bill has a 70-30 split, and treats active and passive participants differently. For example, suppose I’m a 50 percent investor who is an employee of a pass-through. Only 30 percent of my salary and K-1 income would qualify for the 25 percent rate, while the other 50 percent investor, a passive investor who gets no salary, would receive 100 percent of his income from the business at the 25 percent rate. Capital-intensive businesses can get a greater portion of income eligible for taxation at the default 25 percent rate.”

“The two proposals are quite different,” agreed Mike Antonelli, a tax partner at Edelstein & Co. LLP. “It’s difficult to get into too much detail on potential changes at this point. Even trying to wrap around how they would administer and police this is complicated, because there are different exceptions, different income levels, and varying applicability depending on the type of industry.”

 

“The House bill provides a special reduced tax rate for active owners earning less than $150,000 in taxable income, subject to a phase-out,” said Paul Dougherty, an EisnerAmper tax partner. “Some lawmakers feel this treatment does not go far enough because many small-business owners are not in the highest tax bracket and, consequently, will not feel the impact of this relief.”

 

“The Senate approach, allowing a deduction for pass-through entities in lieu of a change in rates, ostensibly provides relief for all taxpayers,” he added.

 

 “Clearly both the House and the Senate think we need to do something for pass-throughs, but their ideas are radically different,” said Roger Harris, president of Padgett Business Services. “So until we get to conference, it’s hard to know which of these two proposals will prevail – or whether they will come up with a third one we haven’t heard about.”

 

“A lot will be left to the IRS,” he continued. “The Senate does a good job of trying to explain ‘qualified business income,’ but the IRS has to go in and think of every possible crazy scenario and give guidance -- for example, when does salary count? It sounds complicated, and it’s actually more complicated than it sounds.”

 

“Any time you offer special deductions and special tax rates, complexity comes with it because you have to try and prevent people from abusing those rates and deductions. It’s the normal tradeoff we get in taxes,” he explained.

 

The Senate bill now has to go to the full Senate for debate, amendments and a vote, and all this has to be done soon, observed Harris.

 

“With a current 51-49 vote majority, the margin of error will potentially shrink on December 12, [the date of the special election for the vacated Senate seat in Alabama],” he said.

 

Tom Wheelwright, founder and CEO of accounting firm ProVision PLC, offered this example comparing the effects of the Senate and House provisions. “Two companies, one a C corporation and the other a flow-through, each make $1 million,” he said. “Assume for now that they’re not service companies. What the House bill did was give parity to a flow-through vis-a-vis a C corporation. The C corporation will pay $200,000 at the tax rate of 20 percent, and if it distributes the remainder of $800,000 as a dividend to the shareholders, they will pay 15 percent tax, or $120,000. Add the two -- $200,000 plus $120,000 -- equals $320,000, so the effective tax rate is 32 percent.”

 

“With regard to the flow-through, they’ll get a rate break of 25 percent on 30 percent of the income,” he continued. “Twenty-five percent of $300,000 is $75,000, while 35 percent [the individual rate] of $700,000 is $245,000. When you add the two together, you get $320,000, an effective rate of 32 percent which is exactly the same as the C corporation.”

 

“In the Senate bill, the 17.4 percent deduction for flow-throughs applies to everyone, so the Senate proposal actually gives a benefit to lower-income businesses that the House bill does not give. And under the Senate proposal, CPA firms and other service providers can get the benefit of the 17.4 percent deduction on income up to $500,000.”

 

“Moreover, under the Senate proposal, CPA firms would get the benefit of the 20 percent corporate rate if they decided to operate as a C corporation,” Wheelwright said. “So the policy purpose of the 30-70 split in the House bill is to bring the two entities to parity. The Senate bill has no policy purpose, it’s, ‘How do we get this thing passed?’”

 

 

 

Should America’s upper middle class take the biggest tax hit?

By Ben Steverman

 

Humans learn the concept of fairness at a very young age. After all, it doesn’t take long for a child to start whining about a sibling who gets an extra serving of ice cream. As the Republican-controlled Congress tries to push through tax reform this year, one group of Americans may similarly question why it’s coming up a scoop short.

 

The upper middle class gets relatively few benefits and a disproportionate number of tax hikes under the $1.4-trillion Tax Cuts and Jobs Act approved by the U.S. House of Representatives last week. Families earning between $150,000 and $308,000—the 80th to 95th percentile—would still get a tax cut on average. But by 2027, more than a third of those affluent Americans can expect a tax increase, according to the Tax Policy Center.

 

If the House bill becomes law, overall benefits for the upper middle class will start out small, and later vanish almost entirely.

 

Is this fair? Some argue it’s only right for the upper middle class to carry a heavier burden. This is because the top fifth of the U.S. by income has done pretty well over the past three decades while the wages and wealth of typical workers have stagnated. People in the 81st to 99th percentiles by income have boosted their inflation-adjusted pre-tax cash flow by 65 percent between 1979 and 2013, according to the Congressional Budget Office. That’s more than twice as much as the income rise seen by the middle 60 percent. (The top 1 percent, meanwhile, saw their income rise by 186 percent over the same period, but that’s another story.)

 

“Many upper-middle-class families will tell you they do not feel wealthy,” said Brian Riedl, a senior fellow at the Manhattan Institute, a right-leaning think tank. “Their standard of living [is] closer to the middle class than to the top 1 percent.” The income numbers don’t tell the whole story, he explained. The upper middle class is weighed down by high costs: Affluent workers live in expensive areas, pay a lot for real estate and daycare, and are taxed far more than Americans further down the ladder.

 

Richard Reeves, a senior fellow at the left-leaning Brookings Institution, isn’t buying that argument. He’s the author of “Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It.”

 

“There’s a culture of entitlement at the top of U.S. society,” Reeves said. While others focus on rising wealth of the top 1 percent, Reeves argues that the gap is widening between the top 20 percent and everyone else. The upper middle class is guilty of “hoarding” its privileges, using its power to skew the job market, educational institutions, real estate markets, and tax policy for its own benefit, he contends.

 

“The American upper middle class know how to take care of themselves,” Reeves said during a presentation at the City University of New York last week. “They know how to organize. They’re numerous enough to be a serious voting bloc, and they run everything.”

 

So by his measure, the tax legislation’s disproportionate hit to the upper middle class is indeed fair.

 

A family earning $240,000 a year is bringing in four times the U.S. median household income of $59,000, according to the U.S. Census Bureau. All that money, along with the upper middle class’s political power, buys some huge advantages, Reeves said. For example, affluent parents compete for access to the best schools, bidding up home values in the best school districts. Then, they use zoning rules to prevent new construction, keep property values high, and prevent lower-income Americans from moving in. In the process, children of this demographic end up at the most prestigious universities, nab the best internships and jobs, and ultimately join their parents at the top of U.S. society.

 

The very existence of the House tax bill rebuts Reeves’s argument that the upper middle class is in a position to manipulate Washington. (The Senate is considering its own tax legislation, which differs from the House bill in several ways.) Compared with middle class Americans, the upper middle class is less likely to see marginal tax rates fall under the House legislation. The bill also limits or scraps entirely some of the group’s favorite tax breaks, especially deductions for state-and-local taxes, and medical expenses, and tax breaks for education.

 

If you’re part of the upper middle class and concede you should be paying more, don’t count on wealthier groups making the same sacrifice—at least under the House bill.

 

While a repeal of the alternative-minimum tax helps some people with incomes below $300,000, it’s more likely to benefit those on the higher wealth rungs. The very rich, including President Donald Trump, who has been pressing for a legislative victory before the end of his first year in office, would benefit from a repeal of the estate tax, lower corporate tax rates and a lower “pass-through” rate on business income. The House bill explicitly tries to limit the pass-through benefit for doctors, lawyers, accountants, and other high-earning professionals—traditional denizens of the upper middle class.

 

This all may seem terribly unfair to members of the upper middle class, but there are some provisions they can take solace in. The bill leaves untouched some sweet tax breaks that predominately benefit people with lower six-figure salaries, such as 529 college savings plans and 401(k)s and other retirement perks. The CBO calculates that two-thirds of the government’s costs for retirement tax breaks go to the top 20 percent.

 

But beyond these few exceptions, much of the upper middle class will still take it on the chin.

And maybe they should. Higher taxes on the upper middle class make sense to some liberal tax experts—but only if the proceeds are used the right way, they said, for things like better health care, more affordable college, and rebuilding infrastructure. Under the House bill, though, any new tax revenue is used to offset tax cuts—much of which will benefit the super wealthy and corporations, especially over time.

 

“There would be a lot of people in the country who would be willing to chip in for those goals,” said Carl Davis, research director of the left-leaning Institute on Taxation and Economic Policy. In the House plan, however, the upper middle class is “going to pay more for a bill that’s going to grow the national debt, and provide the lion’s share of the benefits to corporations and their shareholders.”

 

Riedl, who has advised Republican candidates, argues the upper middle class should get a more generous tax cut under GOP tax reform. “It’s hard to argue the upper middle class is not currently paying its fair share,” he said. Reeves said the U.S. should ultimately tax the upper middle class more—but “the top 5 percent more still.”

 

Looking at Republican tax plans, Reeves said, “it’s like they only read half my book.”

 

 

 

Tax revamp helps fund managers but leaves their investors to pay

By Rachel Evans and Carolina Wilson

 

Chalk up a win for asset managers in the Congressional battle over reshaping the U.S. tax regime. For everyone else, however, the celebration will have to wait.

 

Thanks to a last minute revision to the Senate’s tax proposal on Thursday, overseers of professionally managed portfolios appear to have received an exemption from a proposed rule that could increase taxes paid by the sellers of securities.

 

But don’t pop the champagne just yet. While “regulated investment companies,” such as mutual funds and exchange-traded funds, catch a break, the provision is still slated to apply to investors in these funds, as well as owners of individual securities.

 

“It’s a step in the right direction,” said Thomas Faust, chairman and chief executive of Eaton Vance Corp., who’s been lobbying against the proposal. But “the effort to get this stricken continues.”

 

The Senate’s tax overhaul plan requires sellers that hold more than one batch of a particular security, known as a ‘‘lot,’’ to sell the one they’ve owned longest first. So, for example, that stake in Facebook Inc. you picked up back in 2012 would have to be sold before the one you bought last week. Called the “first-in, first-out rule,” the tweak might sound minor. But it could massively increase investors’ tax bills because the levy on each sale depends on how much the lot has gained since it was purchased.

 

Tax Inefficiency

 

This isn’t what individual investors want to hear, and many in the fund industry aren’t pleased either. Tax efficiency is often emphasized by issuers who want to convince moms-and-pops that it makes sense to put their money to work in the market rather than leaving it in a savings account.

 

“We believe that all investors should continue to have the ability to manage their taxable gains and losses by selecting particular tax lots of their holdings to sell,” a spokesman for $4.7 trillion Vanguard Group Inc. said in a statement, adding that the company would continue advocating for the proposal to be scrapped. The Investment Company Institute, which lobbies on behalf of the fund industry, is also pushing senators to ditch the proposal.

 

Nonetheless, the exemption has asset managers breathing a sigh of relief—particularly those with large mutual fund businesses. Already under siege from a shift away from stock pickers and toward passive management, mutual funds would have suffered more than ETFs under this regime, according to Marcia Wagner of the Wagner Law Group in Boston.

 

Kill the Bill

 

ETFs typically track an index, so they have less trading to tax than actively managed mutual funds. They are also able to give out securities when they redeem shares, again reducing capital gains.

 

“If the provision did become law, it could be an even bigger boost to ETFs,” according to Jeffrey Levine, chief executive and director of financial planning at BluePrint Wealth Alliance and president of Fully Vested Advice Inc.

 

The Senate’s plan has passed through committee and Republican leaders have said it will be put on the Senate floor the week of Nov. 27. The proposal could change as amendments are added. Then, the bill will have to be reconciled with the version passed by the House on Nov. 16.

Faust is optimistic that somewhere in the process, fund managers can get first-in, first-out ditched altogether.

 

“It would certainly be regrettable—bad for investors, bad for markets, ultimately bad for our economy—if this is allowed to become law,” he said. “I think we have a good shot at getting this pulled out.”

—With assistance from Zachary R. Mider and Ben Bain

 

 

 

Pence promises estate tax repeal, but Senate’s plan doesn’t

By Lynnley Browning and Laura Davison

 

Vice President Mike Pence said Republicans would repeal the estate tax—a step that the Senate GOP tax plan doesn’t currently plan to take.

 

“Death should no longer be a taxable event,” Pence said Thursday night during the annual dinner of the Tax Foundation, a conservative-leaning Washington policy group. He promised that the tax-overhaul plans now under consideration in Congress would eliminate the levy—a long-sought Republican goal.

 

Pence also promised his audience that Congress would repeal the Affordable Care Act’s requirement that individuals buy health insurance—a provision that Senate tax writers have added to their plan but the House hasn’t included.

 

 “We will repeal the death tax once and for all and cut taxes on working Americans when we repeal the Obamacare individual mandate in this bill,” Pence said.

 

He also called for creating a new 25 percent tax rate on partnerships, limited liability companies and other so-called “pass-through” businesses. That’s in the House bill, but not the Senate plan, which would use a different approach.

 

The vice president’s mix-and-match promises contradicted White House Press Secretary Sarah Huckabee Sanders’s earlier response to a question about differences in the two chambers’ plans. Sanders told reporters Thursday afternoon that President Donald Trump likes both the Senate and the House plan, and doesn’t prefer one over the other.

 

The two chambers will have to compromise on a final bill before it could reach Trump’s desk.

The House on Thursday passed an ambitious tax overhaul that would include a provision to repeal the estate tax in 2025. But the Senate plan, which remained under discussion by the Senate Finance Committee Thursday night, would leave the tax in place.

 

Tax Thresholds

 

Under current law, the estate tax applies a 40 percent levy to estates worth more than $5.49 million for single individuals and $10.98 million for couples. The bill approved by the House would double the exemption thresholds for the tax, and then repeal it. The Senate measure would also double thresholds, but that change would be temporary, and end in 2026.

 

The Senate Finance panel is also considering the repeal of the individual mandate that was part of the 2010 health care law known as Obamacare. Abolishing the mandate beginning in 2019 would save the federal government $318 billion over 10 years that would help pay for the deep tax rate cuts that Republicans want to enact. But it would also leave 13 million Americans uninsured by 2027, according to an estimate by the Congressional Budget Office.

 

The chambers are also divided on how to cut taxes for closely held businesses that are organized as pass-throughs. Such businesses don’t pay tax themselves, but pass their earnings to their owners, who then pay tax at their individual tax rates.

 

The House legislation would tax some such businesses at 25 percent—and provide additional breaks for smaller businesses. The Senate plan would take a different approach, granting pass-through owners a 17.4 percent deduction—up to a certain threshold—before taxing the income at their individual rates.

 

Senate leaders have said they plan to hold a floor vote on their bill during the week of Nov. 27. But several Senators have already expressed concerns about aspects of the proposal—including pass-through tax treatment, the inclusion of the individual mandate repeal, and the impact the entire plan could have on federal budget deficits.

 

Pence said the ultimate tax bill would be the “biggest tax cut in American history” and pass before the end of the year. But recent studies suggest that the tax plans—both of which would reduce federal revenue by $1.4 trillion or so before accounting for any larger economic effects—would be shallower than those enacted in 1981 under then-President Ronald Reagan.

 

 

 

This business tax problem is disrupting the GOP’s overhaul push

By Sahil Kapur

 

The Senate tax plan encountered its first outright Republican opposition this week, from a senator whose concerns might foreshadow the biggest business challenge ahead for the proposal.

Senator Ron Johnson of Wisconsin called the plan—which was approved by the Senate Finance Committee late Thursday—“inadequate” because it would disadvantage many closely held businesses relative to major corporations, or so called C corps.

 

The plan would slash the corporate tax rate to 20 percent from 35 percent. But the rate for partnerships, sole proprietorships and other pass-through firms would be set by a formula—with rates higher than 30 percent for some.

 

 “I realize we have a problem here,” Johnson said in an interview. “I just don’t know yet the extent to the problem, how many dollars it’s going to take to fix it, where that’s going to come from.” Until it’s fixed, he said, he’s a “no” vote on the Senate measure.

 

GOP tax efforts seemed to gain momentum on Thursday as the House passed its tax bill and Republicans on the Senate Finance Committee voted later that night to amend and approve their plan.

 

But Johnson’s misgivings may throw a wrench into President Donald Trump’s top domestic priority. Senate Republicans— who aren’t counting on Democrats to support their plan—can spare the defections of no more than two members before the bill would collapse. Party leaders say they want to address Johnson’s concerns, but admit it will be difficult.

 

Currently, businesses organized as pass-throughs don’t pay income tax themselves, instead passing earnings to their owners, who pay at their individual rates. The top rate is currently 39.6 percent, but the Senate plan would cut it to 38.5 percent.

 

The plan that the Senate Finance panel approved Thursday night would allow all pass-through structures to deduct 17.4 percent from their business income—up to $500,000 for married couples. The income would then be taxed at the owners’ ordinary individual income tax rates.

 

Difficult Vote

 

Johnson was a difficult vote for GOP leaders to corral earlier this year as they tried and ultimately failed to repeal Obamacare. His position zig-zagged as he threatened to vote against various iterations of the Senate plan due to policy and process concerns, and he even feuded with Majority Leader Mitch McConnell. Ultimately, he voted for the bill.

 

On the pass-through issue, “his concerns are valid,” said Senator John Thune, the chamber’s No. 3 Republican. “There is no easy way to deal with pass-through income. We’re trying in the bill to create rough parity between pass-throughs and C corps. And it’s easier said than done. You’re never going to get everybody totally happy with it.”

 

The Finance panel ultimately made no further changes to its pass-through provisions. Thune, a member of the committee, said Senate Republicans are more likely to deal with the issue when the bill comes before the full chamber. GOP leaders have said they want to vote on their tax bill the week of Nov. 27.

 

Some observers question whether a pass-through solution is possible—noting that Senate tax writers have already tried to trim the cost of their plan by setting their individual tax cuts to expire in 2026.

 

Not ‘Fixable’

 

“I don’t think it’s fixable, because you just run into a numbers problem,” said Seth Hanlon, a tax expert at the Center for American Progress, a liberal research and advocacy group. “They’ve already stuffed what’s in essence more than $2 trillion in deficit-increasing tax cuts into a $1.5 trillion box with these sunsets. Anything that Johnson is talking about is going to be hugely expensive. So something has to give.”

 

“The original sin here is promising enormous corporate tax cuts and then thinking you need to create parity with pass-through businesses,” he said.

 

One way to address Johnson’s issue may be to raise the 17.4 percent pass-through deduction to 20 percent, Thune said, but “you have to figure out a way to offset it someplace else.”

“It’s a challenge to find revenues,” he said.

 

The revised pass-through proposal is estimated to reduce revenue by $362 billion over a decade; providing more generous terms would increase that cost. The Senate proposal would cost $1.41 trillion over a decade. Under budget rules that GOP leaders plan to use to fast-track their bill past Democrats’ objections, the revenue cost must stay under $1.5 trillion and it can’t add to the long-term deficit.

 

‘Everybody’s Vote’

 

Deeper tax breaks to pass-through entities could be paid for by raising the corporate tax rate above 20 percent, but that would upset larger corporations, a critical constituency of support for the tax overhaul. Trump and his advisers have said going above 20 percent is non-negotiable.

 

Adding to leaders’ tough task, various GOP senators have outlined other concerns: the deficit impact, the effect that repealing the Obamacare individual mandate repeal would have on the individual insurance market and the need to prevent any middle-class tax increases.

 

On Thursday, Congress’s official tax scorekeeper reported that the Senate measure would lead to a 13 percent tax hike on Americans making between $20,000 and $30,000 a year by 2021. In that year, those earning from $500,000 to $1 million would see the biggest tax cut—8.5 percent—according to the Joint Committee on Taxation.

 

Senate Finance Chairman Orrin Hatch said that it’s “probably more likely” that more pass-through relief would be addressed on the Senate floor, but he kept mum about how he might go about winning Johnson.

 

“We’ll look at it and do what we need to do,” he said. “I want everybody’s vote.”

 

‘Greater Scrutiny’

 

Senator Mike Rounds, a South Dakota Republican, said he can support the tax plan as written, but he said Johnson “correctly points out the discrepancy” between corporations and closely-held businesses.

 

Bridging the gap “would mean either finding additional revenue to provide additional reductions for the pass-throughs, or trade some of the difference between the two,” he said, suggesting that could mean “perhaps a 21 percent” corporate tax rate. “I just intend to see that we get this tax bill through to the president.”

 

Rounds, who previously ran a real estate and investment firm that operated as a pass-through, said that under the Senate bill, his old firm would have considered restructuring as a C corp to get the 20 percent rate.

 

He said the pass-throughs that would have the most difficulty under the existing proposal would be “individuals that are trying to grow and invest—so people that are trying to purchase equipment in competition with C corps, individuals who are trying to hire talent in competition with C corps.”

 

“Those would be the two that I would think would be most impacted,” Rounds said. “Individuals who deal in intellectual properties, where you’re looking at trying to expand and develop an intellectual property.”

 

Johnson—who before his 2010 Senate election made millions of dollars running a pass-through manufacturing business—said he’s still working to identify which types of companies would need more relief, how much help they’d need and how much it would cost. He said he’s meeting with the White House and House Speaker Paul Ryan to discuss solutions.

 

Johnson also complained that the process is moving too quickly.

 

“All this stuff moves pretty fast, which I’m not wild about,” he said. “I would rather take a little bit more time, be a little more thoughtful, subject whether it’s the health-care bill or this one to far greater scrutiny, so every member understands exactly what the intended and unintended consequences of these policies are.”

 

 

 

Your college football team is very worried about GOP tax reform

By Eben Novy-Williams

 

For more than 30 years, colleges and universities have leaned on an obscure tax rule that allows sports boosters to make tax-deductible contributions to their teams. Athletic fundraisers around the country say that’s an advantage that generates millions in annual revenue—and one that’s threatened by Republican tax legislation.

 

The issue revolves around donations that confer the right to buy top-tier football and basketball tickets. Modeled after seat licenses in pro sports, these “contributions” have historically been 80 percent tax deductible and have become one of the three main revenue streams in college sports. Ticket sales and money earned from media rights are the other two.

 

The bill approved by the House Thursday would remove the tax incentive tied to those donations. Congressional tax writers say other kinds of tax relief in the bill are more important. “If seat license revenue is important to state-based colleges and universities, then states themselves can provide this tax benefit rather than federal taxpayers,” a House Ways and Means Committee spokesperson said in an email.

 

A plan being debated in the Senate includes a similar measure. If passed, the change would make effectively make those contributions more expensive, and colleges and universities fear that would have a chilling effect on giving.

 

Take Louisiana State University, for example. Between the athletic department and its foundation, the perennial power receives more than $60 million per year in donations tied to seat licenses. If that drops 20 percent as a result of the new tax code, senior associate athletic director Robert Munson says, “that is a number we cannot possibly absorb.”

 

It could erase the roughly $10 million a year that the Tigers contribute to the academic part of the institution, he said, and could even make the department reliant once again on funding from the school’s general coffers.

 

“On the surface it may look like, ‘Oh, a bunch of rich people don’t get a tax deduction,’ but what it’s really going to do is hurt athletes,” Munson said.

 

Effects Unclear

 

The federal government expects to increase federal revenue by $200 million a year as a result of the change, according to estimates from the Joint Committee on Taxation. It’s not clear how much it will cost colleges and universities.

 

Jon Bakija, an economist at Williams College, calculated that the change could result in a 20 to 30 percent drop in giving. Mark Mazur, director of the Urban-Brookings Tax Policy Center, suggests the change will be negligible. “Demand for those tickets is so high," Mazur said. “These aren’t donations with no strings attached.”

 

Even a small decline could hurt many schools. The University of Virginia receives roughly $20 million in annual athletic donations tied to seat priority, and it still needs millions in student fees to cover its costs. The department doesn’t anticipate getting any more help.

 

“We have zero room for error,” said Dirk Katstra, executive director of the Virginia Athletics Foundation. Like their peers around the country, UVA administrators are working with the university’s governmental affairs team to lobby local senators and representatives.

 

Immediate Change

 

The change would take effect in 2018 if passed, meaning schools would probably change the terms of their existing donor agreements so that the annual cost to the donors remains the same. Future contributions would be a bigger issue.

 

James Maurin, a retired Louisiana businessman who has given more than $1 million to LSU athletics over the years, says it won’t change his giving. “I’m affluent enough, and I’m a big enough fan.” But he said he expects the new tax plan could result in a 30 percent dip in donations overall.

 

“I fear that it will be devastating,” said Maurin, who served as chairman of the school’s Tiger Athletic Foundation from 2011-12.

 

History of a Loophole

 

Previous efforts to make these donations non-deductible have failed. When the Internal Revenue Service tried in 1986, LSU led a successful lobbying effort in opposition. In 1988, Congress voted to explicitly add colleges and donations tied to premium sports tickets to the tax code. That created the 80 percent deduction on the books today.

 

Schools reacted by creating seat licenses if they didn’t have them already, an added benefit to donors that in turn led to greater fundraising. Universities with existing programs made them bigger. LSU has renovated its football stadium three times in the past 20 years to add premium seating, such as suites and skyboxes. Now more than 10,000 seats out of the 102,000 in the stadium require donations.

 

In 2012, Republican presidential candidate Mitt Romney discussed cutting the provision should he win office.

 

 

 

 

Tax reform clears House hurdle, but obstacles remain

By Michael Cohn

 

The passage in the House of Representatives of the Tax Cuts and Jobs Act brings the tax reform process closer to completion – but not necessarily any closer to success.

 

While the House and Senate are following broadly similar approaches to reform, the specific differences between the House legislation (see “Tax Cuts and Jobs Act passes the House”) and the bill the Senate is expected to vote on in the week after Thanksgiving could still prove insurmountable.

 

What’s more, the differences are also leaving tax professionals unable to advise clients.

“The House and the Senate bills are not that far apart with regard to the corporate and the individual provisions,” said Howard Wagner, managing director at Crowe Horwath LLP. “But they’re very far apart on taxation of pass-through income, and that’s where they’ll have to reconcile their differences.”

 

“The Senate bill has a 17.4 percent deduction for qualifying pass-through income, while the House bill taxes it at 25 percent,” he observed. “But the House bill has a 70-30 split, and treats active and passive participants differently. For example, suppose I’m a 50 percent investor who is an employee of a pass-through. Only 30 percent of my salary and K-1 income would qualify for the 25 percent rate, while the other 50 percent investor, a passive investor who gets no salary, would receive 100 percent of his income from the business at the 25 percent rate. Capital-intensive businesses can get a greater portion of income eligible for taxation at the default 25 percent rate.”

 

Another CPA also pointed to the huge differences in the business rates.

 

“At the heart of the House’s bill is a huge tax cut for corporations,” said Anne Zimmerman, co-chair of Businesses for Responsible Tax Reform and owner of Zimmerman & Co CPAs Inc., an accounting firm in Cincinnati and Cleveland. “This is a benefit for big business that is being financed on the backs of small entrepreneurs. For instance, corporations will still be able to deduct state and local taxes on their profits but the owners of small pass-through businesses, where owners’ business income is passed through to their personal income and taxed accordingly, will not. More than 90 percent of small businesses are structured as pass-throughs.”

The Senate is continuing to debate its bill and Democrats have objected strongly to the Republican bill, pointing to new forecasts from Congress’s Joint Committee on Taxation indicating that millions of middle-class taxpayers will ultimately see their taxes go up under the legislation.

 

“Although the House passed its version of ‘tax reform’ without a single Democratic vote and despite a loss of a couple handfuls of Republicans, there is no guarantee that the Senate will approve its pending bill or ultimately compromise legislation,” said David De Jong, CPA, Esq., a principal at Rockville, Md.-based Stein Sperling Bennett De Jong Driscoll PC. “Assuming no Democratic defections in the Senate, three ‘nay’ votes by Republicans would defeat the bill (two if the Democrats pick up a Senate seat in Alabama before the final vote). There are Republican concerns in several areas: the Senate bill would eliminate the deduction for all individual state taxes including the property tax as well as the income tax; the Senate bill would delete the individual mandate for failure to have health insurance coverage; and at least one Republican Senator believes that both bills favor large business at the expense of small and midsized business. Whether we have the biggest overhaul of the tax law since the 1986 Act remains uncertain.”

 

Much will depend on whether there are more than two Republican defections in the Senate.

“The procedural steps being taken this week, including the House passage of the bill and the Senate Finance Committee’s consideration of their version, check off two more major milestones on the road to tax reform,” said Jon Traub, managing principal of tax policy at Deloitte Tax LLP. “Some potholes still lie ahead. Senate passage of the bill is by no means guaranteed, and reconciling the Senate version with the one produced in the House will require real and difficult compromises. Companies are potentially facing implementation issues just around the corner, so would be wise to model and plan for it or risk finding themselves caught flat-footed.”

 

The American Institute of CPAs praised passage of the bill and pointed to some of the accounting and tax changes. “As a long-time advocate for an efficient and pro-growth tax system based on principles of good tax policy, we commend the House for expanding the number of taxpayers who may use the cash method of accounting,” said AICPA President and CEO Barry C. Melancon in a statement. “We also applaud the decision to maintain the current tax treatment of nonqualified deferred compensation. We are encouraged by the progress made by lawmakers in recent days and believe this vote moves the nation one step closer to a fairer, simpler Tax Code.”

 

Entrepreneur Mark Cuban, the owner of the Dallas Mavericks, discussed the tax plan during a panel discussion at Thomson Reuters on Wednesday evening. He predicted the tax reforms would not last long. “No matter what happens with the Trump tax plan, it’s not going to be around more than four years, most likely,” he said. "And there's going to be other geopolitical issues that happen in the interim that cause other changes, whether it's demographic or immigration."

 

Alan Blinder, a professor of economics and economic affairs at Princeton University, presented a long-term view across various presidential administrations going back to 1930. "If you believe that cutting the marginal tax rate leads to growth, nobody’s going to claim that happens in the next five days, or five weeks, or even five months," he said. "It takes time."

 

“As economists and public policymakers, we don’t know how to solve income inequality,” said economist Dr. Dombisa Moyo. “We have tried policies like tax redistribution in Europe and here. That has not succeeded in stemming the tide of income inequality. We have also tried the supply side model of low taxation and the whole agenda of trying to drive economic growth and close the gap, but that has also not solved the income inequality problem. A broader debate needs to occur around how policy itself has to innovate and change.”

 

Mark Zandi, chief economist with Moody’s Analytics, who was on the panel with Cuban and Blinder, predicted the tax reform bill would have a negative impact on the housing market. “Taxes matter a lot,” he said.

 

 

 

GOP tax plan puts lawmakers in bind over Medicare spending cuts

By Erik Wasson

 

Senate Republicans may face a political problem in the final push for their tax-cut plan, and they might need Democrats to help fix it.

 

The Congressional Budget Office says the $1.5 trillion tax-cut proposal would trigger $25 billion in automatic spending cuts next year to Medicare, plus another $111 billion in reductions to other programs, including farm subsidies. That’s because of a law known as Paygo.

 

While some conservative Republicans would welcome the cuts, moderates in the party are likely to balk—and President Donald Trump has promised repeatedly not to cut Medicare.

 

Waiving the automatic cuts could take 60 votes in the Senate, requiring support from at least eight Democrats in a chamber Republicans control 52-48.

 

The GOP could try to waive the cuts as part of the tax bill—although that could anger the party’s deficit hawks—or they could promise to do it later, which could worry moderates who in the meantime would be voting for a bill that cuts benefits to senior citizens.

 

Here’s the dilemma for Democrats: Should they help waive the spending reductions, even though that would help the GOP enact the tax cuts? Or should Democrats continue doing all they can to make the tax-cut plan difficult for Republicans to pass, even though recipients of Medicare and other programs would suffer and they could be blamed?

 

A number of Democratic and Republican lawmakers said Wednesday they weren’t aware of the issue.

 

If the Republicans enact the tax bill without the waiver, the matter would likely become part of a chaotic year-end pileup of legislation, including reauthorizing children’s health insurance and funding the government to avoid a shutdown.

 

If Democrats sense Republican need their votes to waive the cuts, they could use that as a bargaining chip on the spending bill to keep the government open after Dec. 8.

 

"Why should we go along with it?" said John Yarmuth of Kentucky, the top Democrat on the House Budget Committee. “They will need us just like they need us to keep the government open.”

 

Yarmuth and others are seeking immigration policy changes and domestic spending increases in that bill.

—With assistance from Steven T. Dennis

 

 

 

2017 tax reform: Proposed individual tax changes in the Tax Cuts and Jobs Act

By Catherine Murray

 

The Tax Cuts and Jobs Act, released on Nov. 2 and approved, as amended, by the Ways and Means Committee on Nov. 9, would make major changes to individual income taxation.

 

These include, among many others, a reduction in the number of tax brackets, an increase in the standard deduction, repeal of personal exemptions, a reduced maximum rate on business income, an increase in the child tax credit and a new family tax credit, a new limit on mortgage interest, and a dollar limit on property tax deductions.

 

Changes to Tax Rates and Brackets

 

New brackets & break points. The Act would reduce the number of tax brackets (ranging from 10% to 39.6%) from seven to four: 12%, 25%, 35%, and 39.6%. (Act Sec. 1001(a))

 

The 25% bracket would begin at: $90,000 for joint returns/surviving spouses, $67,500 for heads of household, half of the joint amount for any other individuals (i.e., $45,000), and $2,550 for an estate or trust. (Income under this amount would be subject to the 12% rate.) (Act. Sec. 1001(b)(1))

 

The 35% bracket would begin at: $260,000 for joint returns/surviving spouses, half of the joint amount for a married individual filing separately (i.e., $130,000), $200,000 for any other individuals, and $9,150 for an estate or trust. (Act Sec. 1001(b)(2))

 

The 39.6% bracket would begin at: $1 million for joint returns/surviving spouses, half of the joint amount for any other individual (i.e., $500,000), and $12,500 for an estate or trust. (Act Sec. 1001(b)(3))

 

In addition, the Act would provide for a “phaseout” of the 12% rate under which, as described in the Section-by-Section summary, the benefit of the 12% rate is phased out for taxpayers with AGI over $1 million ($1.2 million for joint filers). (Act Sec. 1001(e))

 

Kiddie tax. Under the Act, for unearned income of children: the 25% bracket threshold amount is the taxable income of such child for the tax year reduced by the net unearned income of the child; the 35% threshold is taxable income reduced by net unearned income plus the 35% bracket threshold for trusts and estates under Act Sec. 1001(b)(2)(D) (i.e., $9,150); and the 39.6% threshold is taxable income reduced by net unearned income plus the 39.6% threshold for trusts and estates under Act Sec. 1001(b)(3)(C) (i.e., $12,500) (Act Sec. 1001(d)) (b)(2)(D))

 

Illustration : As illustrated by the Joint Committee on Taxation: a child subject to these rules has $60,000 taxable income of which $50,000 is net unearned income which would otherwise be treated as ordinary income. The 25% bracket threshold amount for the tax year is $45,000 for an unmarried taxpayer, and the 35% and 39.6% brackets thresholds for a trust are $9,150 and $12,500. The 25% bracket threshold for the child would be $10,000 [i.e., $60,000 less $50,000], the 35% threshold would be $19,150, and the 39.6% threshold would be $22,500. So, the first $10,000 would be subject to a 10% tax, the following $9,150 to 25%, the following $3,350 to 35%, and the remaining $37,500 to 39.6%.

 

Capital gains. The Act generally retains the present-law maximum rates on net capital gain and qualified dividends, retaining the existing breakpoints between the 0%, 15%, and 20% breakpoints (except that the breakpoints would be indexed using chained CPI, as explained below). (Act Sec. 1001(b))

 

Inflation adjustment. The dollar amounts above, as well as other annually adjusted IRS figures, would be indexed for inflation based on chained CPI (Consumer Price Index), as opposed to CPI-U (CPI for all urban customers) under current law. (Act Sec. 1001(c)) This change was originally to go into effect beginning in 2023, but the Chairman's Mark accelerated the date to 2018.

 

Effective date. Except as otherwise provided, the above changes would be effective for tax years beginning after Dec. 31, 2017.

 

Increased Standard Deduction and Elimination of Personal Exemptions

 

Standard deduction increased. The Act would increase the standard deduction to $24,400 for joint returns and surviving spouses, three-quarters of the joint amount for unmarried individuals with at least one qualifying child (i.e., $18,300), and half of the joint amount in any other case (i.e., $12,200). (Act Sec. 1002(a).

 

According to the section-by-section summary, this increase would significantly reduce the number of taxpayers who choose to itemize their deductions.

 

For individuals who are claimed as dependents, the Act would limit the standard deduction to the greater of $500 or the sum of $250 and the individual's earned income. (Act Sec. 1002(a))

 

Personal exemptions repealed. The Act would repeal the deduction for personal exemptions (which under current law is scheduled to be $4,150 for 2018, subject to a phase out for higher earners), as well as the personal exemption phase out. (Act Sec. 1003)

 

Effective date. The new standard deductions and repeal of personal exemptions would go into effect for tax years beginning after Dec. 31, 2017.

 

New Maximum Rate on Business Income of Individuals

 

25% “business income” rate. The Act would provide a new maximum rate of 25% on the “business income” of individuals. (Act Sec. 1004(a)) The Act sets out a formula under which it reduces the tax that would otherwise apply to “qualified business income” in order to achieve this maximum rate.

 

“Qualified business income” is generally defined as the excess (if any) of (i) the sum of 100% of any net business income derived from any passive business activity plus the capital percentage of any net business income derived from any active business activity, over (ii) the sum of 100% of any net business loss derived from any passive business activity, 30% of any net business loss derived from any active business activity, plus any carryover business loss for the preceding tax year.

 

As explained in the section-by-section summary, owners or shareholders could elect to apply a “capital percentage” (defined as 30%) to the net business income derived from active business activities to determine their business income eligible for the 25% rate (with the remaining 70% subject to ordinary individual income tax rates), or they may elect to apply a formula based on the facts and circumstances of their business to determine an amount greater than the 30% capital percentage. The percentage may be increased for certain “capital-intensive business activities.” However, the percentage is zero for certain personal services business—e.g., law, accounting—and taxpayers actively participating in those business wouldn't be eligible for the 25% business income rate.

 

The section-by-section explained that special anti-abuse rule would apply to prevent the recharacterization of actual wages paid as business income.

 

New 25% rate for certain dividends of REITs and cooperatives. The Act would also provide that certain dividends of real estate investment trusts (REITs) and patronage dividends from cooperatives are subject to a 25% rate. (Act Sec. 1004(b) Dividends that meet certain requirements would increase net capital gain and unrecaptured section 1250 gain under Code Sec. 1(h)(11) and Code Sec. 1(h)(6), respectively (both of which set out a 25% rate).

 

Effective date. The above provisions would go into effect for tax years beginning after Dec. 31, 2017 (Act Sec. 1004(d), subject to a transition rule.

 

Enhanced Child Tax Credit and New Family Tax Credit

 

Increased child tax credit. The Act would increase the amount of the child tax credit under Code Sec. 24 from $1,000 to $1,600. (Act Sec. 1101(a) It would also replace the term “qualifying child” with “dependent” and eliminate the phrase “for which a the taxpayer is allowed a deduction under section 151.”

 

The Act would also provide a $300 credit for non-child dependents, as well as a $300 “family flexibility credit” for the taxpayer (or both spouses, for a joint return). (Act. Sec. 1101(a)) The non-child dependent credit and the family flexibility credit would be effective for tax years ending before Jan. 1, 2023.

 

Phase-out. The Act would also increase the income levels at which these credits phase out. Under current law, the credit is phased out beginning at income levels of $75,000 for single filers and $110,000 for joint filers. The Act would raise these amounts to $115,000 and $230,000, respectively. (Act Sec. 1103(b))

 

Refundable portion. Under current law, the child tax credit is partially refundable. The Act would limit the amount that is refundable to $1,000, and index this amount to inflation based on chained CPI (up to a maximum amount of the $1,600 base credit). (Act Sec. 1103(c)) A taxpayer would be required to provide a Social Security number (SSN) to claim the refundable portion of the credit. (Act Sec. 1103)

 

Effective date. These amendments would apply to tax years beginning after Dec. 31, 2017. (Act Sec. 1101(d))

 

Repeal of Certain Nonrefundable Credits

 

Repealed credits. The Act would repeal:

• the credit for individuals over age 65 or who have retired on disability under Code Sec. 22;

• the adoption credit under Code Sec. 23;

• the tax credit associated with mortgage credit certificates under Code Sec. 25; and

• the credit for plug-in electric drive motor vehicles under Code Sec. 30D.

 

Effective date. The provision repealing qualified plug-in electric drive motor vehicles would be effective for vehicles placed in service for tax years beginning after Dec. 31, 2017. The other provisions would be effective for tax years beginning after Dec. 31, 2017.

 

Changes to Education Incentives

 

Enhanced AOTC. The Act would reduce the three higher education credits under current law—the American Opportunity Tax Credit (AOTC), the Hope Scholarship Credit (HSC), and the Lifetime Learning Credit (LLC)—to one “enhanced” AOTC. The enhanced AOTC would, like the version under current law, provide a 100% tax credit for the first $2,000 of qualifying higher education expenses and a 25% credit for the next $2,000 of such expenses (for a $2,500 maximum). The HSC and LLC would be repealed.

 

The Act would limit the AOTC to five years of post-secondary education, with the credit for the fifth year available at half the rate as the first four years, with up to $500 being refundable.

No new Coverdell account contributions. The Act would generally prohibit new contributions to Coverdell education savings accounts after 2017. (Act Sec. 1202(a))

 

Section 529 Account distributions. The Act would treat up to $10,000 per year for elementary and high school expenses as “qualified expenses” under the Section 529 plan rules. (Act Sec. 1202(b))

 

Qualified Tuition Program (QTP) distributions for apprenticeships. The Act would add to the term “qualified education expenses” certain books and supplies required for registered apprenticeship programs. (Act Sec. 1202(d))

 

Treatment of discharged student loan indebtedness. Under the Act, any income resulting from the discharge of student debt on account of death or total disability of the student would be excluded from taxable income. The Act would also exclude from income repayment of a taxpayer's loans pursuant to the Indian Health Service Loan Repayment Program. (Act Sec. 1203)

 

Other education provisions repealed. The Act would repeal:

 

• The above-the line deduction for interest payments on qualified education loans for qualified higher education expenses under Code Sec. 221;

 

• The pre-2017 above-the-line deduction for qualified tuition and related expenses under Code Sec. 222;

 

• The exclusion from income of interest on U.S. savings bonds used to pay qualified higher education expenses under Code Sec. 135;

 

• The exclusion from gross income of qualified tuition reductions provided by educational institutions under Code Sec. 117(d); and

 

• Employer-provided education assistance under Code Sec. 127. (Act. Sec. 1204)

Effective date. The above provisions would generally be effective after Dec. 31, 2017.

 

Changes to Deductions

 

“Pease” limitation repealed. The Act would repeal the so-called “Pease” limitation on itemized deductions. (Act Sec. 1301)

 

Mortgage interest deduction retained, but with new limits. The Act would retain the home mortgage interest deduction in its current form—i.e., subject to a $1 million cap—for mortgages that already exist on Nov. 2, 2017, as well as for taxpayers who have entered into a binding written contract before that date to purchase a home. However, for newly purchased homes, the deduction will be limited to $500,000 ($250,000 for a married individual filing separately). (Act Sec. 1302)

 

The Act would also limit taxpayers to one qualified residence. (Act Sec. 1302(b))

 

State and local property tax deduction retained, but with new limits. The Act would eliminate the deduction for State and local income or sales tax (see below), but would retain the deduction for real property taxes, subject to a $10,000 maximum. (Act Sec. 1303)

 

Repealed deductions. The Act would repeal deductions for:

 

• Taxes not paid or accrued in a trade or business under Code Sec. 164(b)(5); (Act Sec. 1303)

 

• Personal casualty losses under Code Sec. 165 (subject to an exception for disaster losses under the recent Disaster Tax Relief and Airport and Airway Extension Act of 2017); (Act Sec. 1304)

 

• State and local income taxes and sales taxes; (Act. Sec. 1303)

 

• Tax preparation expenses under Code Sec. 212; (Act Sec. 1307)

 

• Alimony payments under Code Sec. 215

 

• Moving expenses under Code Sec. 217; (Act Sec. 1310)

 

• Contributions to Medical Savings Accounts (MSAs) under Code Sec. 220; existing balances could be rolled over on a tax-free basis into a Health Savings Account (HSA); (Act Sec. 1311)

 

• Medical expenses under Code Sec. 213; and

 

• Expenses attributable to the trade or business of being an employee under Code Sec. 262. (Act Sec. 1312)

 

The Act would also modify the limitation on wagering losses under Code Sec. 165(d) to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, would be limited to the extent of gambling winnings. (Act Sec. 1305)

Modified rules for charitable contributions. The Act would:

 

• increase the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations to 60%;

 

• repeal the special rule in Code Sec. 170(l) that provides a charitable deduction of 80% of the amount paid to a college or university for the right to purchase tickets for athletic events;

 

• adjust the charitable mileage rate under Code Sec. 170(i) for inflation; and

 

• repeal the exception under Code Sec. 170(f)(8) under which a taxpayer that failed to provide a contemporaneous written acknowledgement by the donee organization for contributions of $250 or more is relieved from doing so when the donee organization files a return with the required information. (Act Sec. 1306)

 

Effective date. Except as otherwise noted, the above provisions would be effective for tax years beginning after Dec. 31, 2017.

 

Changes to Exclusions and Taxable Compensation

 

Employer-provided housing. The Act would limit the exclusion for housing provided for the convenience of the employer and for employees of educational institutions under Code Sec. 119 to $50,000 ($25,000 for a married individual filing a joint return). The exclusion would also phase out for higher-income individuals. (Act Sec. 1401)

 

Additional holding period required for carried interest. The Act, as amended, would impose a 3-year holding period requirement for certain partnership interests received in connection with the performance of services to be taxed as long term capital gain rather than ordinary income. An anti-abuse rule would tax as ordinary income transfers of applicable partnership interests to certain related persons within the 3-year holding period. (Act Sec. 3314)

 

Gain from sale of principal residence. The Act would require that, in order to exclude gain from the sale of a principal residence under Code Sec. 121 (up to $500,000 for joint filers; $250,000 for others), a taxpayer would have to own and use as a home the residence for five out of the previous eight years (as opposed to two out of five years under current law), effective for sales and exchanges after Dec. 31, 2017. In addition, the exclusion could only be used once every five years, and it would be phased out at higher income levels. (Act Sec. 1402)

 

Five-year deferral of private company compensatory option and restricted stock gain. The Act, as amended, would give certain employees of nonpublic companies who receive stock options or restricted stock under widely applicable, written equity compensation plans, and later exercise those options or units, an election to defer income recognition for up to five years. The deferral election would not be available to 1% owners (within the meaning of Code Sec. 416(i)(1)(B)(ii)), CEOs, or CFOs (and their relatives), or to certain highly-compensated officers). Employers would have new withholding and reporting rules related to the deferral stock. Coordinating rules would apply to incentive stock options, employee stock purchase plans, and nonqualified deferred compensation. The deferral election would be available for stock from options exercised, or restricted stock units settled. Until regulations are issued on certain aspects of the deferral election, employers would be expected to operate under a reasonable good-faith standard. (Act Sec. 3804)

 

Repealed exclusions. The Act would repeal current-law exclusions for:

 

• Employee achievement awards under Code Sec. 74; (Act Sec. 1403)

 

• Dependent care assistance programs under Code Sec. 129, beginning in 2023; (Act Sec. 1404)

 

• Qualified moving expense reimbursements under Code Sec. 132; (Act Sec. 1405) and

 

• Adoption assistance programs under Code Sec. 137. (Act Sec. 1406)

 

Effective date. Except as otherwise noted, the above provisions would be effective for tax years beginning after Dec. 31, 2017.

 

Changes to Savings, Pensions and Retirement

 

Roth IRA recharacterization rule repealed. The Act would repeal the current-law provisions, in Code Sec. 408A, under which an individual may re-characterize a contribution to a traditional IRA as a contribution to a Roth IRA (and vice versa) and may also recharacterize a conversion of a traditional IRA to a Roth IRA. (Act Sec. 1501)

 

Reduction in minimum age for allowable in-service distributions. The Act would permit all defined benefit plans (Code Sec. 401(a)(36), as well as State and local government defined contribution plans (Code Sec. 457(d)(1)), to make in-service distributions beginning at age 59-1/2. (Act Sec. 1502)

 

Modified rules on hardship distributions. The Act would require IRS to, within one year from the date of enactment, change its regs under Code Sec. 401(k) to allow employees taking hardship distributions to continue making contributions to the plan. (Act Sec. 1503)

 

The Act would also let employers choose to allow hardship distributions to include account earnings and employer contributions. (Act Sec. 1504)

 

Extended rollover period for the rollover of plan loan offset amounts in certain cases. The Act would modify Code Sec. 402(c) to provide that employees whose plan terminates or who separate from employment while they have plan loans outstanding would have until the due date for filing their tax return for that year to contribute the loan balance to an IRA in order to avoid the loan being taxed as a distribution. (Act Sec. 1505)

 

Modification of nondiscrimination rules. The Act would amend Code Sec. 401 to allow expanded cross-testing between an employer's defined benefit and defined contributions for purposes of the nondiscrimination rules, effective as of the date of enactment. (Act Sec. 1506)

Effective date. Except as otherwise provided, the above provisions would be effective for tax years beginning after Dec. 31, 2017.

 

Estate and Generation-Skipping Transfer Taxes

 

Basic exclusion doubled. The Act would double the base exclusion amount—i.e., the amount of transferred property that is exempt from estate and gift tax—of $5 million (as indexed for inflation; $5.6 million for 2018) to $10 million (which will also be indexed for inflation), effective for tax years beginning after Dec. 31, 2017. (Act Sec. 1601)

 

Estate and GST taxes repealed after 2023. The Act would repeal the estate and GST taxes such that they do not apply to the estates of decedents dying after Dec. 31, 2023. The rule under which a beneficiary receives a stepped-up basis in inherited property would not be repealed., while still maintaining a beneficiary's stepped-up basis in estate property. (Act Sec. 1601)

 

Gift tax provisions. The Act would lower the gift tax to a top rate of 35% for gifts made after Dec. 31, 2023, and would provide for a basic exclusion amount of $10 million and an annual exclusion amount of $15,000 (for 2018), as indexed for inflation. (Act Sec. 1602)

 

AMT repeal. The Act would repeal the AMT—specifically, Code Sec. 55 through Code Sec. 59—generally effective for tax years beginning after Dec. 31, 2017. (Act Sec. 2001(a))

Treatment of carryforwards. If a taxpayer has AMT credit carryforwards, the Act would allow the taxpayer to claim a refund of 50% of the remaining credits (to the extent the credits exceed regular tax for the year) in tax years beginning in 2019, 2020, and/or 2021, with the remainder (up to 100%) claimed in the tax year beginning in 2022. (Act Sec. 2001(b))

 

 

 

Senate matches House’s 1.4% tax proposal for college endowments

By Janet Lorin

 

The Senate version of the Republican tax bill would tax wealthy private college endowments at 1.4 percent of net investment income, the same levy as the House proposal introduced last week.

Colleges are lobbying against the House plan, calling it a cash grab that’s detrimental to their educational missions. The latest version of the House bill affects roughly 70 U.S. schools whose endowments hold more than $250,000 per student. The Senate proposal uses the same threshold.

Congress has been eyeing the pot of assets held by colleges, more than $500 billion for some 800 schools. Many endowments are the richest they’ve ever been, boosted by robust performance of global equities for the year ended in June. Much of the focus over the last two years from Congress has been on how schools spend their money and how endowments could help lower the cost of college for many Americans.

 

Warga/Bloomberg

 

Two congressional committees sent the richest 56 private schools an inquiry in early 2016 about their endowments, stepping up scrutiny of tax-free earnings for the funds and deductions for donors.

 

“Tax reform has been a collaborative process and we’re trying to make some tough decisions,” Veronica Vera, a spokeswoman for Congressman Peter Roskam, the Illinois Republican who is tax policy chairman for the House Ways & Means Committee, said in an email earlier this week. “One aspect of this has always been trying to find a way to appropriately deal with college endowments.”

 

The Senate proposal is effective for taxable years beginning after Dec. 31, 2017.

 

It would affect schools with at least 500 tuition-paying students during the preceding taxable year. The number of students is based on the daily average number of full-time students attending the institution, with part-time students being taken into account on a full-time student equivalent basis.

 

 

 

Ryan says tax bill’s temporary breaks to continue, ignoring cost

By Anna Edgerton

 

House Speaker Paul Ryan said temporary provisions in the GOP tax bill won’t really go away in a few years—he predicted that future Congresses will preserve them, and he didn’t mention the impact that would have on the federal deficit.

 

The House legislation calls for eliminating its $300 family tax credit starting in 2023, but the measure would be such a popular benefit that a future Congress would extend it, Ryan said Tuesday. That family credit, combined with an increased child tax credit, is estimated to cost $431 billion over a decade—part of an overall bill that would increase the federal deficit by more than $1.4 trillion, according to the Joint Committee on Taxation.

 

Extending the family credit would only add to that cost. The expanded child tax credit is not set to expire in the bill.

 

Harrer/Bloomberg

 

Ryan said the only reason for making the family credit and other provisions temporary was to comply with Senate budget rules. The bill can’t add more than $1.5 trillion to the deficit over the next decade, according to the budget adopted by both chambers.

 

“The point is to get this policy in place, and we do not intend to have these sunsets occur, but we have to do this to make it compliant,” Ryan told reporters Tuesday.

 

Although the decision would be up to a future Congress, Ryan has been touting the extension of the family tax credit, along with other benefits, in response to analyses that show some middle-class families would see their taxes increase over the next decade under the House bill’s changes.

On the corporate side, Ryan has said a provision that would allow companies to fully and immediately write off their capital expenditures for five years would also probably be extended. That measure is estimated to cost $25 billion before expiring in 2023, according to the JCT. The Tax Foundation, an independent Washington policy group, has said that permanently allowing full and immediate expensing could cost as much as $2.2 trillion over a decade.

 

“We’re going to go for the greatest amount of permanence we can get in those funny Senate rules which we have to comply with,” House Ways and Means Chairman Kevin Brady said during a Bloomberg TV interview on Tuesday.

 

Brady didn’t specify any other provisions House lawmakers support changing to help meet budget constraints, but he did say the full repeal of state and local tax deductions—which the initial Senate plan has proposed—was a red line.

 

“I’ve made the commitment to our members in the House that we will restore the state and local property tax deduction up to $10,000,” Brady said.

 

—With assistance from David Westin

 

 

 

Senate’s offshore tax ideas have potential ‘gold mine’ for some

By Lynnley Browning

 

U.S. companies that make billions of dollars from patents and other intellectual property held offshore would be eligible for a special 12.5 percent tax rate on those earnings under the Senate tax plan.

 

That’s a potential “gold mine” for some multinationals, said Michael Mundaca, co-director of Ernst & Young’s National Tax Practice—especially compared to international tax provisions in the House bill that generally would apply a top rate of 20 percent.

 

But it’s unclear which chamber’s vision will prevail—and some companies that now pay even lower rates on such income may oppose the measure regardless.

 

Republican lawmakers in the House and Senate are rushing to rewrite complicated laws of international taxation on a tight, self-imposed deadline, part of their effort to overhaul the U.S. tax code by year’s end. The bills contain prizes for corporate America—including a corporate tax cut to 20 percent from 35 percent—but also potential surprises.

 

“That the two proposals contain dueling provisions covering fundamental tax issues—and the legislative process has been rushed and chaotic—creates uncertainty for the markets and for deal makers,” said Gary Friedman, an international tax partner at Debevoise & Plimpton.

 

Bill writers in both chambers want to end America’s quirky, globalist approach to taxation, while preventing companies from sending their earnings offshore to tax havens. How they reconcile their proposals—both of which are still subject to change—carries multibillion-dollar implications for IP-reliant companies, including Apple Inc.

 

The bills “upend decades of U.S. tax policy,” Friedman said. “They so radically change the landscape that almost every multinational corporation will have to rethink its tax strategy.”

 

With regard to the 12.5 percent Senate proposal for IP, experts say it appears to be designed to compete with countries like Ireland, which has a 12.5 percent corporate tax rate. But—as may be fitting for a rewrite of the byzantine rules of international taxation—the rate is impossible to find in the actual Senate plan.

 

To unearth it, tax lawyers have had to assess two provisions. First, the Senate plan would require that any “global intangible low taxed income” received by a company’s offshore unit would be immediately taxable in the U.S. at the new 20 percent corporate rate. But then a second provision would allow companies to deduct 37.5 percent of their “foreign derived” income from such intangibles that comes from trade or business in the U.S.

 

That deduction would leave them paying 20 percent on 62.5 percent of that income—the functional equivalent of a 12.5 percent tax.

 

“There is nothing that explicitly says the rate is 12.5 percent, but the math gets you there,” said Debevoise’s Friedman.

 

The combination of the immediate taxation of that income—and the generous deduction—led Congress’s official tax scorekeeper to estimate the provisions would raise about $29.1 billion over 10 years, said Bret Wells, an international tax professor at the University of Houston. Setting the rate at 12.5 percent is no accident, Wells said.

 

“It’s clearly aimed at Apple and Ireland,” he said.

 

Irish Scrutiny

 

A spokesman for Apple didn’t immediately respond to a request for comment. The company’s tax arrangements with Ireland have drawn scrutiny on both sides of the Atlantic. Last year, the European Commission ordered Ireland to collect 13 billion euros ($15.2 billion) in back taxes from Apple.

 

Apple Chief Financial Officer Luca Maestri said in an interview earlier this month that the company is waiting to see what legislation gets enacted. “We’ve always been a very strong advocate for comprehensive corporate tax reform,” he said.

 

The tax overhaul that Republicans hope to deliver would change international taxation in profound ways. Currently, the U.S. applies its 35 percent corporate income tax to its companies’ global earnings—unlike other developed countries, which focus only on their companies’ domestic activities.

 

But the U.S. system also allows companies to defer paying tax on foreign income until they decide to return that income to the U.S. parent. As a result of that quirk, companies have left large stockpiles of unreturned earnings sitting offshore for years. Those accumulated earnings may total $3.1 trillion, according to a Goldman Sachs research estimate.

 

Now, congressional tax writers propose to cut the corporate tax rate, end the global system, impose a one-time tax rate on the stockpiled earnings and keep companies from shifting their future profit offshore in search of still-lower rates.

 

Tax Havens

 

One widely used technique involves transferring intellectual property, like patents, to offshore subsidiaries in tax havens, including Ireland, Bermuda and the Cayman Islands, and then paying royalties to those units. The Senate bill would aim to stem the practice with its 12.5 percent rate on income from IP—which would apply whether the property in question is held offshore or not.

“They’re basically saying, ‘Please don’t move your science from the west coast to a foreign country, because we’ll give you the 12.5 percent rate,”’ Wells said.

 

The House’s approach would levy a 20 percent excise tax on certain payments that U.S. companies make to their foreign affiliates—including royalties, but also for other costs, including imported inventory. Ray Beeman, co-leader of Ernst and Young’s Washington Council advisory services group, labeled that provision “the atomic bomb” in the original House bill; it’s since been softened.

 

The House Ways and Means Committee amended the provision last week, to “significantly water it down,” Wells said. By week’s end, the measure included an escape hatch that would let companies choose to pay tax on their foreign affiliates’ profits—not on the gross payments made to them—under certain conditions. Another change boosted the amount of credits companies could take for foreign taxes paid by such units to 80 percent from 50 percent.

 

Lower Revenue

 

As a result, the provision went from raising an estimated $154.5 billion over 10 years in its original drafting to raising just $87.6 billion, according to Congress’s Joint Committee on Taxation.

 

The House and Senate will have to iron out the differences between their bills. House leaders hope to have a floor vote on their bill as soon as Thursday. In the Senate, where actual legislative text has yet to be revealed, leaders say they want to vote during the week of Nov. 27.

 

After that—assuming the approved versions still differ—a conference committee from the two chambers would have to reach agreement.

 

The Senate bill includes a few other proposals aimed at keeping U.S. companies’ earnings in the U.S. for tax purposes—or combating the corporate profit shifting that tax experts call “base erosion.”

 

One of them is a 10 percent “base erosion and anti-abuse tax,” or BEAT, on companies that make deductible payments to foreign affiliates—including for payments on loans between units in different countries. The 10 percent rate would function as a kind of “alternative minimum tax,” Mundaca said.

 

That’s because under the Senate plan, companies would generally pay either the 12.5 percent rate on their intangible property income or the 10 percent rate on a larger income base that includes “excess income” and other items.

 

Whichever tax results in the larger bill would be the one that applied, according to Mundaca. But Itai Grinberg, a tax law professor at Georgetown University and a former top Treasury tax official, said the Senate language on this was “unclear.”

 

The 10 percent BEAT tax would raise $123.5 billion over a decade, according to the official congressional estimate.

 

The Senate plan also contains a harsh new rule for new corporate inversions—transactions in which U.S. companies merge with offshore firms to shift their tax addresses offshore. It would hold that any company engaging in an inversion within 10 years after enactment would be taxed at 35 percent—not any lower rates.

Multinational tax events

 

 

 

Startups say the Senate tax reform would be catastrophic for their industry

By Lizette Chapman

 

Startups and venture capitalists rarely get worked up over laws before they pass, but the tax plan currently winding its way through Congress is causing an uproar in Silicon Valley.

 

The Senate version of the bill requires employees pay tax on stock options at the time they vest, rather than when they are exercised. Stock options are a big part of compensation at startups, giving staff a shot at earning serious wealth should the startup succeed. With companies staying private longer, the proposed bill would force an increasing number of employees to pay tax before they even take ownership of shares.

 

“This would be a catastrophic blow to early stage companies,” said Michael Boswell, co-founder of health startup Cue. “This is like paying taxes on the winning of the lottery without knowing whether you're going to win.”

 

The wording is likely to change as policymakers continue revising the tax plan this week, and members of the House of Representatives are working on a version that startups like. Still, Boswell and others in the startup world, including PayPal co-founder and venture investor Keith Rabois, are worried. BitTorrent creator Bram Cohen, former Facebook Inc. Chief Technology Officer Bret Taylor, and venture investor Fred Wilson also criticized the bill.

 

Wilson urged startup employees to contact their senators to tell them to remove the provision before it becomes law. If it remains, “it would be the end of equity compensation in startups as we know it,” he wrote on his blog.

 

Engine, a research and advocacy group supporting tech startups, collected more than 500 signatures for a letter it sent to Senator Orrin Hatch opposing the changes to the tax code.


Representatives from the National Venture Capital Association, an industry group, said they are also talking with lawmakers to try to persuade them to drop the provision. An NVCA spokesman said Senator Rob Portman has an amendment to strip out the language and the NVCA is "hopeful" it will get adopted during the next version of the bill.

 

 

 

A race against time in Congress

By Roger Russell

 

With few days left in the legislative calendar this year, both the House and Senate are moving to get their bills passed and into Conference Committee to allow enough time to work out a compromise bill before the end of the year – a goal that may be endangered by their cost, and the significant differences between them.

 

The Senate began its markup process on November 13, with an updated chairman’s mark expected November 14. While the Senate markup may take until the Thanksgiving recess, the House is expected to vote on its bill by the end of the week.

 

“I was surprised by how different the two bills were, considering they were working off of the same framework,” said Dustin Stamper, director at Grant Thornton’s Washington National Tax Office. “There are major differences in key areas.”

 

“The way they approach pass-through income is totally different,” he noted. “The House bill generally gives a pass-through a 25 percent rate, but puts limits on how broadly it applies. The Senate provides a deduction against pass-through income. It is allowed against a broader range of pass-through income, but it provides a much shallower effective rate.”

 

Part of the differences can be attributed to the politics of getting the bill through the Senate, Stamper indicated. “There are a lot of different policy approaches, especially in the international area,” he said. “If you’re looking for politics, you can see that the Senate is not as worried about the state and local tax deduction in the House, which has a lot more members from high-tax states.”

 

“The big story so far is that neither bill is compliant with reconciliation,” he warned. “Both appear for now to be under the $1.5 million budgetary threshold, but that’s the easiest issue. The harder part is making sure that the bill doesn’t lose any money outside of the 10-year budget window. Both of these bills cost a significant amount of revenue, and would lose money beyond 10 years. They haven’t made any attempt to address it yet. We assume that big beneficial pieces will be forced to expire, but it’s hard to assess the bill without knowing which pieces are permanent and which are not.”

 

Stamper noted the special election scheduled for December 12 for the vacant Senate seat from Alabama. “The Republican margin is narrow enough as it is,” he said. “Any additional votes they lose makes it that much harder. It will be challenging to craft a final compromise to appease conservatives in the House and moderates in the Senate. But it can be done – the obstacles are not insurmountable.”

 

Although both bills cut the corporate tax rate to 20 percent, only the Senate bill would include professionals and consultants. “Under the House bill they would be taxed at 25 percent. Both bills try to achieve a carve-out from the highest rates for business income, but they do it in a different manner,” Stamper said.

 

Whatever reform passes will likely benefit lower- to middle- income and high income individuals, according to David De Jong, CPA, Esq., a principal at Rockville, Md.-based Stein Sperling Bennett De Jong Driscoll PC. “But those making in the upper $100,000 range, to those in the upper $700,000 range, in states with high income and property taxes, will likely be losers with this legislation.”

 

The odds

The chances of tax reform passing this year are slightly better than 50-50, according to Linda O’Brien, legal analyst and editorial lead for tax and emerging practice areas for Wolters Kluwer Legal & Regulatory.

 

“This week will give us a better picture,” she said. “With the House expected to pass its bill this week, all eyes are on the Senate. The biggest hurdle moving forward is dealing with the deficit. There are fiscal hawks in the Senate who would be opposed to anything that added to the deficit, so this is where you’ll see the focus -- whether they will attempt to pay for tax cuts, or will be willing to live with the deficit because it would add to economic growth.”

 

“The other challenge they face is time – it’s not on their side,” she said. “There are very few days left on the legislative calendar, which is why they’re attempting to move forward so quickly.”

 

“If tax reform actually passes and is signed, practitioners should encourage clients to accelerate deductions,” she said. “Businesses would want to defer income until 2018 in anticipation of the lower corporate rate. And if it doesn’t pass this year, taxpayers should balance taxable income and watch for reform later in 2018.”

 

 

 

Senate Republicans toss potential Obamacare bomb into tax bill

By Sahil Kapur

 

Senate Republicans have tossed a potential bomb in the middle of their tax overhaul bill.

 

The plan released Tuesday night mixes two red-hot debates by adding a repeal of the Obamacare law’s individual mandate to their tax legislation. While the move will help them meet their fiscal target, it complicates the vote calculations in both chambers and hands Democrats a bumper sticker-ready issue they can use to charge up their base.

 

The revised proposal "will effectively repeal Obamacare’s individual mandate tax so that we can provide even more tax relief to low- and middle-income families," Senate Majority Leader Mitch McConnell, a Kentucky Republican, said Wednesday.

 

Harrer/Bloomberg

 

Getting rid of the requirement that most people have insurance or pay a penalty would knock out a pillar of the Obamacare law. House leaders considered adding the repeal to their bill before ultimately keeping it out of the legislation, which is headed for a final vote on Thursday. It was included in the Senate bill after John Cornyn, the Republicans’ chief vote counter, expressed confidence to colleagues he can secure 50 votes to pass a tax bill with that provision.

 

But it’s a narrow margin of error. Republicans have a two-vote majority in the Senate, and they tried and failed twice to pass an Obamacare repeal earlier this year.

 

Now, the three senators who sank the Obamacare repeal, Maine’s Susan Collins, Alaska’s Lisa Murkowski and Arizona’s John McCain, will be back in the spotlight as the tax legislation moves through the Senate.

 

McCain’s objections to the Obamacare repeal were more about procedure than policy. For Collins and Murkowski, there were concerns that voters would be hurt by dismantling the health-care law.

 

Premium Impact

 

Collins said adding the repeal would complicate the tax bill “because of the effect on premiums” —if healthy people forgo insurance, insurers may be forced to raise their prices for policies.

 

Murkowski said it would help if Congress approved a proposed Obamacare fix sponsored by Republican Senator Lamar Alexander and Democratic Senator Patty Murray, but she made clear that she’s still troubled by the idea of repealing the mandate.

 

“Are you going to have a situation where your premiums are now going to increase?” she said. “Tell me how that’s making me a happier person in the middle class here. That’s a consideration I think is very real and needs to be weighed.”

 

McCain so far has signaled open-mindedness on repealing the mandate, saying he’d evaluate the full tax bill.

 

Senate Finance Committee Chairman Orrin Hatch defended the inclusion of the health-care provision in the tax legislation, arguing Wednesday that “the individual mandate is a tax.” He quipped that Democrats shouldn’t be shocked to learn Republicans oppose that provision.

 

“Apparently somewhere between the salad course and the entree, it was decided that permanent corporate tax cuts should be paid for, in part, by kicking 13 million Americans off their health care and raising premiums for millions more,” Senator Ron Wyden, the top Democrat on the Finance panel, said at a sometimes tense committee hearing.

 

Saving Revenue

 

Repealing the mandate is projected to save $318 billion over a decade, revenue Republicans can use to help trim the deficit their tax cuts would cause in the short term and make the tax bill comply with Senate budget rules for the long-term. But it’s also projected to lead to 13 million Americans losing their health-care coverage, according to the Congressional Budget Office.

 

That has some Republicans in the House as well as in the Senate leery of gutting a central provision of the Affordable Care Act without replacing the law.

 

Representative Carlos Curbelo, a Florida Republican on the tax-writing Ways and Means Committee, said he wants to keep the mandate out of tax legislation. “To mix the two isn’t smart,” he said in an interview. “I think our tax bill has a lot to offer to every American and American family, and to introduce what is a controversial component would muddy that picture and that message.”

 

Republican Representative Tom MacArthur of New Jersey said there’s “concern” that including a repeal of the Obamacare mandate could scuttle a tax bill the way it scuttled the GOP’s efforts to overhaul health care.

 

Dangerous Mix

 

“It brings the politics of health care into tax reform,” he said. “There’s some danger with that.”

House Ways and Means Chairman Kevin Brady said on Oct. 31 that “what I don’t want to do is to add things that could again kill tax reform like health care died over there.” Shortly after that, President Donald Trump endorsed eliminating the mandate in a tax bill, which he repeated on Monday.

 

Republican leaders have more room to lose votes in the House than the Senate. There were 20 House Republicans who voted against Obamacare repeal legislation earlier this year. That included moderates who have so far been open to the tax bill, such as Charlie Dent of Pennsylvania, Mike Coffman of Colorado, Jaime Herrera Beutler of Washington and Barbara Comstock of Virginia, who expressed concern about the impacts on the health-care system.

 

Herrera Beutler said Tuesday night she is “leaning yes” on the House tax legislation, and is not necessarily opposed to repealing the mandate. But she said she would have to evaluate its impacts on the health-care system. The issue represents “a layer of complexity in an already pretty complex code,” she said.

 

The Senate’s decision to scrap the mandate is part of a deal to hold a separate vote on a package of bipartisan Obamacare fixes negotiated by Alexander and Murray, Republican Senator John Thune of South Dakota said. That may ease some concerns of Republicans who worry about possibly destabilizing the health-care system.

 

Health-Care Deal

 

Murray said the Senate action was “the exact opposite of where we should going.” In an emailed statement, the Washington Democrat urged Republicans to “back away from their plan to pay for tax cuts for the rich by spiking families’ premiums, cutting millions of people off of coverage, and injecting even more uncertainty into people’s health care.”

 

As if on cue, some of America’s biggest health-care players sent a letter urging Congress to keep the insurance requirement in place unless or until lawmakers can enact a larger package of changes to “prevent extraordinary premium increases.”

 

Overhauling health care in a tax bill could awake a sleeping giant among the progressive voters and industry groups who mobilized to kill an Obamacare repeal but have been less active against tax legislation.

 

“The #GOPTaxScam is a backdoor attempt to get #Trumpcare passed,” Senate Democratic Leader Chuck Schumer tweeted on Tuesday.

 

“It makes the numbers look better, but it grossly complicates the politics,” said Stan Collender, a longtime congressional Democratic budget aide who is now executive vice president of Qorvis MSL Group in Washington. “While you can’t underestimate McConnell’s negotiating skills, this is one that has you scratching your head.”

 

—With assistance from Erik Wasson Steven T. Dennis Laura Litvan and Anna Edgerton

 

 

 

Koskinen warns IRS will need a bigger budget to implement tax reform

By Michael Cohn

 

Outgoing Internal Revenue Service Commissioner John Koskinen foresees problems with tax reform if major provisions apply to the current tax year, and predicted that the agency would need more funding from Congress to implement the legislation if it passes.

 

Koskinen is nearing the end of a four-year term next week, having survived attempts by some Republican lawmakers in Congress to have him impeached. He will be succeeded by David Kautter, the Assistant Secretary of the Treasury for Tax Policy, who will become acting commissioner on Nov. 13 (see Trump names Kautter as acting IRS commissioner).

 

During a press conference Monday, Koskinen reflected on the IRS’s accomplishments and challenges over the past four years, along with the prospects for tax reform. Although most of the provisions in the bill released last week by Republicans on the House Ways and Means Committee won't apply to current tax years, there are a few that would be retroactive. Nevertheless, Republicans are promising that taxpayers will be able to file their taxes on a postcard-size forms instead of the bulky tax returns they are used to printing.

 

“Tax reform will work a lot better for us if it’s made prospective, but we don’t obviously control that, and it will be up to the Congress as to how they want to proceed,” Koskinen said in answer to a question from Accounting Today. “We’ve been great proponents of simplifying the code. I keep telling people we don’t have a dog in the fight about the policy. We have a great interest in execution and implementation. But if you make major changes to what we call the core record layout, then that’s going to take resources, significantly more than we have. Our hope would be that if you’re going to make major changes and affect the system, which causes us to make major changes in information technology, that will come with a recognition that we can’t do it with the workforce we have now. We’ll need to get appropriate resources, particularly for our information technology systems.”

 

Tax Extenders Uncertainty

 

The IRS is still waiting to hear from Congress about the fate of dozens of so-called tax extenders, many of which would be eliminated under the House Republicans’ tax reform bill, even though Congress made many of them “permanent” only a few years ago. They include deductions for state and local income taxes and sales taxes, and for schoolteachers to write off the cost of school supplies they buy for their students.

 

Koskinen noted that he typically asks Congress each year for more assurances about the tax extenders. The IRS warned tax professionals last Friday that the tax extenders issue has not yet been resolved and therefore the start date for next year’s tax filing season has not yet been set (see IRS warns against false reports on filing season start date).

 

“First of all, every year for the last several years we’ve had a question about tax extenders, where you have a provision of a credit for one reason or another, and a number of them have been renewed annually at the end of the year,” he said. “Last year, a whole series of them were made permanent so we don’t have them this year, but there’s still -- depending on how you count them -- as many as 30 extenders where the Congress is going to be considering whether to extend them or not. And if you extend them, they’re extended for the tax year, which means they’re extended retroactively. So every year, I usually write to the tax writers reminding them of two principles. One is, the earlier we get legislation the easier it is obviously for us to absorb it. The second is, with regard to tax extenders, I’ve told them that even if they’re retroactive, if they’re not changed we can generally implement them without a significant delay. But if you change the way the extender operates, the calculation for the benefit gets adjusted. We then have to change the systems, and that’s where we run into trouble. So we’ve tried to alert the Hill this year again on the extenders, that if they’re going to extend and re-up the provisions, we can deal with that because basically what we do is we have an on/off switch. We’ve already programmed the system so that if you extend the extender, we’ve got the system set. If you decide not to, we’ve got the system set to run without it. But what the system can’t assume is some adjustment to that extender.”

 

Koskinen discussed how the IRS has managed to cope with major legislation during his term despite budget cuts and lack of funding for implementing new laws.

 

“One area in which we’ve been very successful is in implementing a whole series of legislative mandates, nearly all of which came without any additional funding from Congress,” he said. “It’s a long and complicated list that includes the Affordable Care Act, the Foreign Account Tax Compliance Act, better known as FATCA, the Private Debt Collection program, the ABLE Act, the PATH ACT, and the reauthorization of the Health Care Tax Credit. The ACA alone cost us over $1 billion in information technology expenses to establish the system without no appropriations. That was money that was desperately needed in other areas of our IT systems.”

Koskinen is worried that if the IRS budget is cut further at the hands of Congress, it could lead to a breakdown during tax season.

 

“My concern as I leave now is that if the IRS budget continues to be cut, tax administration will fail in one of two ways,” he said. “This is not a question of whether; it’s simply a question of when. The first significant risk involves the IRS information technology systems, which have long been operating with antiquated hardware and software. About 64 percent of our IT hardware systems are aged and out of warranty, and 22 percent of software products are two or more releases behind the industry standard. I’m concerned that the potential for a catastrophic systems failure is increasing as our infrastructure continues to age. If this failure were to occur during the filing season, we could be looking at a lengthy interruption in processing returns and issuing refunds. This could have a devastating effect on more than 100 million taxpayers waiting on their refunds, as well as the nation’s economy, which sees some $275 billion of refunds each winter and spring.”

 

Tax Compliance Worries

 

Koskinen is also concerned about the impact on tax compliance as the IRS’s enforcement budget is starved. “The second way the tax system is at significant risk is our ability to adequately ensure tax compliance,” he said. “We’ve lost about 20,000 full-time employees since 2010. Of those job losses, about 7,300 were key enforcement personnel, representing about a third of our compliance workforce.”

 

He pointed out that in 1954 the IRS had more than twice as many revenue officers as it has today, and the current number of Criminal Investigation special agents is the smallest it’s been since 1971.

 

“What these numbers mean is that without adequate resources, we don’t have enough people to perform all the audits we think are necessary,” said Koskinen. “That continues to show up in our enforcement statistics. We audited just under 935,000 individual income tax returns in fiscal year 2017. That’s the lowest number in 14 years. The number of investigations initiated by our Criminal Investigation division is down 11 percent from last year and is 36 percent below 2010. And the number of prosecutions recommended has declined by more than a third in the last four years.”

 

Koskinen worries that that may have an impact on the tax compliance rate and the tax gap. “If people think that many others are not paying their fair share or that they’re not going to get caught if they cheat, or they’re just frustrated because they can’t get the help they need from us to file their taxes, our voluntary compliance system will be put at risk,” he said. “A 1 percent drop in the compliance rate translates into a revenue loss of over $30 billion every year.”

 

He pointed out these are long-term problems that could grow worse if they aren’t addressed.

 

“Neither of the two problems I just mentioned can be turned around overnight,” said Koskinen. “If the funding situation isn’t corrected soon, and a major technology failure does occur at some point in the future, I don’t want anyone to say they weren’t warned or that the problem occurred because the IRS employees weren’t doing their jobs. Our workforce is as dedicated and talented as any I’ve ever worked with, and our employees continue to do everything they can for taxpayers, even within our constrained resources. But there’s a limit to what you can expect them to do, and when the system begins to fail because of lack of resources, it’s important for everybody to understand that’s the driving force.”

 

Mnuchin and Kautter

 

On the other hand, Koskinen believes Treasury Secretary Steven Mnuchin will push to get more funding for the IRS’s aging IT systems.

 

“The good news for us is that Treasury Secretary Mnuchin has been very supportive of the IRS from the start of his tenure,” said Koskinen. “He testified at his confirmation hearing about how surprised he was that we were underfunded, and how concerned he was about making sure our IT systems would continue to function properly. I’m hopeful that in the future, the IRS and Congress can have a more rational and reasonable discussion about the resources the agency needs to meet its very critical responsibilities.”

 

He is also hopeful about his successor, David Kautter, but admitted to some uneasiness about him fulfilling two roles by keeping his post as Assistant Treasury Secretary for Tax Policy at the same time as he works as acting commissioner.

 

“It will be a challenge,” said Koskinen. “Mr. Kautter is a very knowledgeable tax guy. We were delighted when he was appointed to be the Assistant Treasury Secretary for Tax Policy. But as has been noted by everybody, he’s keeping that job, so obviously for the rest of this year he’s going to be very busy on tax reform. To do that job and be the acting commissioner full time would obviously be impossible for anybody. But he’s been a quick study. We’ve met with him several times. He’s made it clear he wants to be supportive of everything we’re doing. He wants to be appropriately engaged, and so we’ll move forward.”

 

However, he still believes tax reform is going to be a major lift. “As I keep reminding people, the implementation of tax reform, in terms of the technology, the forms, the instructions, is all done by career IRS employees,” said Koskinen. “The new IRS commissioner, permanent or acting, isn’t going to make adjustments to the 1040, isn’t going to rewrite the instructions. The bulk of the work will go forward, almost no matter who’s the commissioner. I think the challenge with tax reform is more focused on the fact that it could be a significant redo of our information technology system, which even with time would take more resources than we now have. But nonetheless, if we have the resources, we have a history of willingly, happily implementing whatever tax policy changes and tax reform the Congress passes.”

 

Despite his clashes with some members of Congress, Koskinen still considers his term to have been a rewarding one.

 

“As I leave the IRS I want to say what an honor and a privilege it’s been to be the commissioner,” he said. “When they first asked me to take this job, it took me about 15 seconds to say yes, because I realized how important the agency is to the functioning of our government. I can honestly say that if I knew then what I know now, it would still only take me about 15 seconds to say yes.”

 

Progress on Fighting Identity Theft

 

He also discussed some of the major accomplishments of his time at the IRS. “Looking back over the last four years, I’m delighted with what the agency has accomplished in many areas, even with all of the constraints and challenges we have faced,” said Koskinen. “That progress is a result of a lot of important and good work by the career employees of the IRS. My job has just been to try and provide appropriate structure and support for the work we do.”

 

He noted that this past tax filing season was the smoothest one of his four-year tenure, and the IRS has made major strides in combating identity theft.

 

“We’ve made amazing progress over the last few years, thanks to the efforts of the Security Summit initiative, launched in March 2015, and the continuing important work in this area by our IRS employees,” said Koskinen. “Probably the most compelling evidence of the progress we’ve made so far with this unique partnership with the private sector tax community and tax commissioners across all states is the decline in the number of people reporting to the IRS that they were victims of identity theft. In 2016, the number of victim reports was 376,000, reflecting a drop of 46 percent from the prior year. This year through August, about 189,000 taxpayers filed victim reports, which was an additional drop of about 40 percent from the same period last year. Taken together, the number of taxpayers filing victim reports has fallen by about two-thirds in a little less than two years. That means we’ve helped prevent hundreds of thousands of taxpayers from becoming victims of tax-related identity theft.”

 

However, he noted that cybersecurity continues to be a challenge. “The organized criminals and syndicates we’re dealing with are creative, well-funded and persistent,” said Koskinen.

 

Improving Taxpayer Service

 

Koskinen believes the IRS has also made strides in improving taxpayer service. “Another area where the IRS has made progress over the last four years is improving the taxpayer experience over the longer term,” he said. “That includes taking the first concrete steps toward a fully functional online account for taxpayers. We now have features that let taxpayers view their IRS account balance and see payments posted online. They can also perform online transactions, such as paying their taxes or setting up an installment plan.”

 

The IRS has also been trying to reduce some of the long wait times on the phone and in person at its Taxpayer Assistance Centers.

 

“The IRS also recognizes there will always be taxpayers who want or need to talk with us on the phone or to visit us in person,” said Koskinen. “Even as we move to having 90 percent of taxpayers file online, that still leaves over 15 million returns filed on paper, and we will continue to serve those taxpayers as well. It’s also important to recognize that increasing online services frees up resources for us to improve services we provide to taxpayers who still want to deal with us on the phone or in person. In fact, one of our best accomplishments has been to get rid of the long lines that formed in the early morning at Taxpayer Assistance Centers around the country during filing season. We did this by allowing taxpayers to make an appointment at a specific time to visit a center. The lines disappeared, in part because half of the people who called for an appointment didn’t actually need to visit us in person.”

 

 

 

So Guess Who Pays for the Senate’s Tax Cuts for Corporations and Wealthy Americans?

by James Edward Maule

 

 

For years I have been arguing that tax cuts for the wealthy are not as beneficial for the economy and the economic well-being of all Americans as are tax cuts for the non-wealthy. Those cuts would permit vast numbers of Americans to purchase goods and services, thus requiring the providers of goods and services to hire more workers.


But the Senate, frozen into the disproven theory that cutting taxes for the wealthy is the way to go, is taking the position that perhaps tax cuts for the wealthy and for corporations, many of which are drowning in cash stored overseas, is an even better way to revive the American economy. Of course, those members of Congress who remain devoted to this theory are far more devoted to the funds pouring in from the campaign donors, who are the beneficiaries of the legislation, then they are to educating themselves with respect to economic reality. They haven’t yet learned that when theory meets reality, reality wins.


But it’s worse. Not only are the wealthy and corporations looking at years of reduced taxes, the rest of America is facing two paths. One, an immediate tax increase that remains in effect for year after year. The other, a tiny tax cut followed a few years later by tax increases that not only wipe out the tax cuts but increase taxes compared to what they are under current law. This isn’t my conclusion. It’s the conclusion of the Joint Committee on Finance, found in its report, Distribution Effects Of The Chairman's Modification To The Chairman's Mark Of The "Tax Cuts And Jobs Act," Scheduled For Markup By The Committee On Finance On November 16, 2017. Yes, it’s a bunch of numbers. But look closely at the minus signs that represent tax cuts, and where and when they disappear and tax increases show up.


To top it off, the report doesn’t even take into account the automatic cuts in Medicare and other programs required to satisfy budget constraints that the Congress doesn’t appear to be ready to dismiss. It surely fits with the plan to eliminate or privatize Medicare, Social Security, national defense, and everything else so that eventually the oligarchy owns everything. 

By the time people realize what is happening, it will be too late. What a wonderful legacy the ignorant, enabling the evil, are constructing for the world.

 

 

 

 

 

Some Wealthy Persons Don’t Want Tax Cuts

by James Edward Maule

 

Occasionally readers contact me to ask why I dislike wealthy people. I explain that I don’t dislike them, I simply think they don’t need any more tax cuts. Readers ask me why I describe the wealthy as a monolithic group. I admit that in the interest of making sentences readable, I don’t qualify the term wealthy with long phrases each time I use it. The context of my language should make it clear that it’s the wealthy who oppose paying taxes whose opinions are the target of my criticism and whose legislative and political machinations are the object of my derision. In other words, there are wealthy individuals who have sufficient understanding of economics to have concluded that the supply-side, trickle-down bill of goods that has been foisted on the American people is a crock of nonsense.


Recently, this perspective was reinforced when, according to this report more than 400 wealthy Americans signed a letter recommending to the Congress that it raise, rather than lower, taxes on millionaires and billionaires. They decried actions that would increase inequality, surely because they understand that, in the long run, inequality growth means everyone will lose, and that includes the wealthy. Put another way, they understand that the key to national financial well-being is demand-side economics. In other words, give the so-called job creators a reason to create jobs, that is, to meet demand. 


Reading the names of those who signed the letter caused me to wonder whether the views of a wealthy person depend on whether that person created their own wealth or inherited it. Considering that more of the signers seemed to belong to the first group, it is possible, and logical, that those who started out poor or merely comfortable spent enough of their lives experiencing struggle, or at least economic limitation, and spent enough time surrounded by others in the same situation, to appreciate the intrinsic value of those who are not wealthy but whose demand for goods and services fuels the economy. They understand, therefore, the need for those folks to have sufficient economic wherewithal to make those purchases. On the other hand, those born into wealth, who spend their entire lives unaware of life without opulence, who circulate among others with wealth, and who isolate themselves from everyone else, are far more likely to lack the understanding of how valuable not-so-wealthy people are to the economic well-being of the wealthy. Of course, there are those among this latter group who, for one reason or another, realize this fact of economic life and become philanthropists, perhaps patterning after a parent or grandparent, or perhaps having had some sort of Damascus moment. But many do not, as they succumb to selfishness and greed, overcome by an addiction to money triggered by a deep insecurity that they will never have enough money to insure that they will not end up, as some did in 1929, on what they see as the wrong side of the tracks.



I applaud these individuals for having the courage to speak out. I doubt, though, that their words will have any positive effect on the wealthy individuals whose mantra is “more, more, more,” nor on the members of Congress who are so subservient to their campaign donors that they cannot realize they are in dysfunctional relationships with those persons. I fear that fixing this mess will require some sort of intervention. That is not a pleasant thought.

 

 

 

 

When a Tax Plan Angers Almost Everyone

by James Edward Maule

 

Several days ago, Benjy Sarlin, in They’ve Got Issues. Here’s Who Is Mad About the GOP Tax Plan, demonstrated that just about everyone is unhappy with “the GOP Tax Plan.” Context and timing suggest that it’s the House plan that is being examined, though much the same can be said about the Senate tax plan.


Sarlin focuses on eight aspects of the House plan that have encountered significant opposition. That opposition, in many instances, is more than polite commentary and borders on deep anger and even rage. Here is a summary of the people who are annoyed, upset, angry, or enraged about one or more of the proposals in the legislation: liberals, Senator Susan Collins, anti-tax conservatives, liberal groups, Senator Marco Rubio, deficit hawks, unions, Republicans from blue states, the AARP, home builders, realtors, graduate students, Ivy League universities, and teachers unions. That’s a short list. One could add those who believe in separation of church and state, the pro choice movement, environmentalists, some small business owners, many middle-class families, and others.


It is said that the best compromise is one that makes everyone angry, or at least, one that everyone finds objectionable in one way or another. There is some truth to this perspective. If everyone finds the compromise perfect, then no one is completely pleased with it. The problem with the Republican tax plans, in both the House and Senate, is that there are some people who are jumping with joy at the prospect of the plan being enacted.


The primary challenge to crafting effective tax reform is that tax reform requires the elimination of tax breaks. Giving up a tax break is unpalatable to the taxpayers who benefit from it, unless something is received in return. In theory, giving up a tax break in exchange for lower tax rates should, if the numbers play out appropriately, seal the deal. The problem with the Republican tax plans is that not everyone is being asked to give up their tax breaks, even though they are getting the benefit of lower tax rates and other offsets.


So the more important question is this: Who is NOT angry about the Republican tax plans? The list begins with owners of carried interests, corporations, multinational investors, and individuals worth more than $5 million. There are others. This so-called “tax reform” is nothing more than a shifting of even more wealth and income from the peasants, artisans, small business owners, and middle class to the oligarchy. It’s the oligarchy that can afford to buy Congress and direct it to enact laws that increase the wealth and power of the puppet-masters. As one member of Congress explained, “My donors are basically saying, ‘Get it done or don’t ever call me again.’” I wonder if he salutes or bows when he is given orders from the oligarchy.


Of course almost everyone is annoyed, upset, angry, or enraged when they examine the Republican “tax reform” hoax. What should matter is the collective identities of these individuals. Almost all of them have something in common that should bridge the divides fracturing the nation. They’re not members of, apologists for, or puppets of, the oligarchy. This entire sordid episode tells America quite a bit about its sickness, and what needs to be done to cure it. Failure to administer and take the required medicine will be fatal.

 

 

 

 

GOP Tax Proposal Targets Professional Gamblers’ Losing Years

By Russ Fox EA

 

The Joint Committee on Taxation released its new tax proposal, H.R. 1, today. Buried within it is Section 1305:

 

SEC. 1305. LIMITATION ON WAGERING LOSSES.


(a) IN GENERAL.—Section 165(d) is amended by adding at the end the following: ‘‘For purposes of the preceding sentence, the term ‘losses from wagering transactions’ includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering trans action.’’.

 

So what does this mean? The Joint Committee on Taxation (JCT) sent out an analysis:

 

Sec. 1305. Limitation on wagering losses.

 

Current law: Under current law, a taxpayer may claim an itemized deduction for losses from gambling, but only to the extent of gambling winnings. However, taxpayers may claim other deductions connected to gambling that are deductible regardless of gambling winnings.

 

Provision: Under the provision, all deductions for expenses incurred in carrying out wagering transactions (not just gambling losses) would be limited to the extent of wagering winnings. The provision would be effective for tax years beginning after 2017.

 

JCT estimate: According to JCT, the provision would increase revenues by $0.1 billion over 2018-2027.

 

The JCT analysis is wrong about the current law. Only professional gamblers can take business expenses beyond their gambling winnings to create an overall loss. This is the result of Mayo v Commissioner; Section 1305 would overrule the Mayo decision.

 

 

 

 

Eight Important Changes in the Senate Tax Cuts and Jobs Act

Tax Foundation by Jared Walczak  & Amir El-Sibaie 

 

Thursday evening, the Senate Finance Committee unveiled a description of its version of the Tax Cuts and Jobs Act. Like its House counterpart, the Senate plan includes hundreds of structural changes to the tax code, a summary of which is available here. However, some changes are more significant than others. Here are the eight most important provisions in the Senate Tax Cuts and Jobs Act, in no particular order.

 

  1. Starting in 2019, the corporate income tax rate would be reduced to 20 percent. The bill would lower the current statutory corporate income tax rate from 35 to 20 percent. This would bring the U.S. in line with the rest of the other 34 industrialized countries in the OECD, which have an average statutory corporate income tax rate of 21.97 percent. For a comparison of corporate income tax rates around the world, click here.

 

  • Pass-through businesses would be subject to a slightly lower top rate and could qualify for a significant 17.4 percent business income deduction. In the U.S., small companies are generally organized as pass-through businesses. This means that their income is taxed on their owners’ tax returns instead of at the business level. While economists widely agree that C Corporations are less tax-advantaged than pass-through businesses under current law, the Senate plan addresses the rate disparity by offering a new deduction.

 

In addition to the reduction in marginal individual income tax rates to which pass-through businesses are exposed, qualifying pass-through businesses would be able to claim a deduction worth 17.4 percent of their business income up to a cap set at 50 percent of wage income. The deduction is disallowed for certain specified service industries, including health, legal, financial, and professional services. For more on the taxation of pass-through income, click here.

 

  • Some of the tax code’s disincentives to investment would be rolled back. The Senate plan modifies taxes on new investment in three ways. First, the bill would allow full expensing of short-lived capital investment currently subject to “bonus” depreciation, such as equipment and machinery, for five years, allowing businesses to write down these costs immediately rather than across a depreciation schedule. Second, the bill would increase Section 179 expensing from $500,000 to $1 million and increase the phaseout threshold from $2 million to $2.5 million. Finally, the bill also would reduce asset lives for residential and nonresidential real property to 20 years. For more on the economic and budgetary impacts of temporary expensing and other possible approaches to depreciation, click here.

 

  • The U.S. would move to a territorial tax system. In much of the industrialized world, domestic corporations are taxed on their domestic income alone (a so-called territorial tax system). In the U.S., by contrast, companies are taxed on their worldwide income, with credits for taxes paid to other countries (a so-called worldwide tax system). If tax liability is lower in another country in which a controlled foreign corporation operates, the residual amount is paid to the United States. This increases overall liability and makes the U.S. comparatively unattractive as a home for multinational corporations. The proposed tax plan would convert the U.S.’s worldwide tax regime into a territorial system, enhancing competitiveness and undercutting the traditional rationales that encouraged corporate inversion and the offshoring of corporate income. For more on territorial taxation, click here.

 

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  • Many itemized deductions would be eliminated. Individuals would retain the charitable contribution deduction as well as the mortgage interest deduction at current levels for purchases, though the latter deduction would be eliminated for equity debt. However, the state and local tax deduction, except for taxes paid or accrued in carrying on a trade or business, and most other itemized deductions would be repealed as well. Elimination of many itemized deductions would broaden the individual income tax base as a means to pay for lower overall rates. Their elimination would also be offset by an increase in the standard deduction and a higher child tax credit. For more on itemized deductions, click here. For more on the state and local tax deduction, click here.

 

  • The estate tax exemption would be doubled to $11.2 million. The federal estate tax, which raises very little revenue but encourages significant tax arbitrage and avoidance activity, would be scaled back significantly by doubling the exemption threshold. Economists tend to see the estate tax as one of the most economically harmful taxes per dollar of revenue raised. For more on the estate tax, click here and here.

 

  • The tax treatment of interest would change. The U.S. tax code is intended to include deductions on interest paid while taxing interest received, but in practice, a substantial portion of interest is untaxed. This results in a tax advantage for debt financing over equity financing, providing a subsidy for some investments while distorting business decision-making. The Senate version of the Tax Cuts and Jobs Act would limit business net interest deductibility to 30 percent of a business’s earnings before interest and taxes (EBIT). Businesses with less than $15 million in gross receipts would be exempt from the limitation. For more information on the tax treatment of interest, click here.

 

  • Business tax expenditures would be curtailed. The plan would eliminate multiple tax expenditures including the section 199 manufacturing deduction, the FDIC premium deduction, and the deduction for business meals, entertainment, and transport. Credits for orphan drugs would also be changed. With lower business income rates and better treatment of capital expenditures, there would be less need to rely on targeted incentives or industry-specific fixes embedded in the tax code.

 

The Senate Tax Cuts and Jobs Act, like its House counterpart, represents a move in the direction of greater neutrality and global competitiveness. As with the House plan, some important provisions are temporary, blunting their impact. Both versions are subject to change, and doubtless there will be many adjustments to the Senate plan. The features outlined here, however, are highly significant, and what happens to them could prove a good measure of the degree to which any final plan constitutes meaningful tax reform.

 

 

 

The Senate Tax Cuts and Jobs Act: The Impacts of Jobs and Incomes by State

Tax Foundation by Nicole Kaeding & Morgan Scarboro 

 

With tax reform in the news and Thursday’s release of the Senate version of the Tax Cuts and Jobs Act, Americans are trying to understand how changes to the tax code will affect their families. The Senate’s plan would grow the economy while simplifying the tax code and reducing marginal rates.

 

Using the Tax Foundation’s Taxes and Growth (TAG) macroeconomic model, our analysis found that “the plan would significantly lower marginal tax rates and the cost of capital, which would lead to a 3.7 percent increase in GDP over the long term [and] 2.9 percent higher wages.”

The TAG model estimates that the plan would result in the creation of roughly 925,000 new full-time equivalent (FTE) jobs, while increasing the after-tax incomes by 4.4 percent in the long run, meaning families would see an after-tax income boost of 4.4 percent by the end of the decade. The increase in family incomes is due in part from individual income tax reductions and the broader rise in productivity and wages due to economic growth. These estimates take into account all aspects of the Senate version of the Tax Cuts and Jobs Act, including changes to the individual and corporate tax codes.

 

The table below illustrates the state-by-state impact of the plan for both new jobs and the boost to after-tax incomes for middle-income families.

 

Source: The above income figures are increases in each state’s median income, using data from the U.S. Census Bureau and our Taxes and Growth Model.

 

Note: Our analysis includes corrections made to our model in November 2017, to address concerns raised by the Washington Center for Equitable Growth. Therefore, these results are not directly comparable to the House results issued on November 3, 2017.

 

 

 

Who Gets a Tax Cut Under the Senate Tax Cuts and Jobs Act?

Tax Foundation byAmir El-Sibaie  & Jared Walczak

 

Note: These scores are for the initially introduced version of the Senate’s Tax Cuts and Jobs Act and do not reflect changes made in the Chairman’s Mark, introduced 11/15/2017. For an updated analysis of the amended Senate Tax Cuts and Jobs Act, click here.

 

To help provide a sense of how the Senate’s version of the Tax Cuts and Jobs Act would impact real taxpayers, we’ve run the taxes of nine example households, each with realistic characteristics, to show how the individual income tax provisions of the bill would impact individuals and families across the income spectrum.

 

Our results indicate a reduction in tax liability for every scenario we modeled save one, with some of the largest cuts accruing to moderate-income families with children. Individuals with pass-through income also benefit from a deduction worth 17.4 percent of pass-through income (click the image below for a larger version).

 

https://files.taxfoundation.org/20171114133144/SEN-TCJA-Fed-Filers.png

 

Our first household (James) is a single individual earning $30,000 with no dependents. We assume that this filer takes the standard deduction and has tax-deferred retirement contributions of $2,600 (5 percent of income). Under current law, this taxpayer faces overall tax liability (including employee-side payroll taxes) of $4,331, and would see a tax cut of 9 percent, to $3,953. This household’s after-tax income would increase by 1.3 percent.

 

Our second household (Jason) is a single parent with two children, earning $52,000. This filer contributes $4,000 to tax-deferred retirement accounts. The taxpayer takes the standard deduction, and is eligible for child tax credits. This taxpayer sees a 23 percent reduction in tax liability, increasing after-tax income by 2.3 percent, chiefly due to the plan’s expanded child tax credit. This filer’s liability goes from $5,198 under current law to $4,006 under the proposed tax bill.

 

Our third household (Amber) is a single individual earning $75,000 with no dependents. We assume this filer takes the standard deduction and has tax-deferred retirement contributions of $5,500. This taxpayer’s liability is reduced by 10 percent, with after-tax income increasing by 2.2 percent. Taxes owed go from $16,104 under current law to $14,421 under the Senate proposal.

 

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Our fourth household (Kavya and Nick) is a single-earner married couple with two kids, earning $85,000. We assume tax-deferred retirement savings of $5,500, and that the couple takes the standard deduction. They also benefit from the expanded child tax credits, and see an overall tax savings of 10 percent, from $11,035 to $9,482. This family’s after-tax income increases by 1.8 percent.

 

Our fifth household (Sophie and Chad) is the first to take itemized deductions, which requires additional assumptions. We modeled a dual-income family with incomes of $95,000 and $70,000 respectively (for a total of $165,000), with two children. To derive the amount of deductible home mortgage interest, we assume a $340,000 home financed with a 30-year mortgage with 3.5 percent interest and 20 percent down. (In all cases, we assume that mortgage debt meets the definition of acquisition debt, and is not equity debt.) For deductible property tax, we assume an effective property tax rate of 1 percent. We also assume charitable contributions comprise 2.5 percent of income, and an effective state and local income tax rate of 5 percent. This couple has $20,000 in tax-deferred retirement contributions, and loses most of the value of the child tax credit under current law, but could claim it in full under the Senate bill. These taxpayers see a 4 percent reduction in tax liability, from $29,345 to $28,065. Their after-tax income increases by 0.8 percent.

 

Our sixth household (Soren and Linnea) also itemizes. A dual-income household with three children, this household sees incomes of $250,000 and $75,000 respectively, with an $800,000 home (same assumptions as above), charitable contributions of 2.5 percent of income, an effective state and local income tax rate of 5 percent, and a slightly higher effective property tax rate of 1.25 percent. The couple has $37,000 in retirement contributions (maxing out 401(k)s under current law in 2018), and is ineligible for child tax credits under current law, but eligible under the Senate proposal. Their tax liability would decrease by 6 percent under the plan, from $71,629 to $67,559. Their after-tax income increases by 1.3 percent.

Our seventh household (Laura and Seth) is a married, single-earner, two-child household with $2 million in income, a $2.5 million home, a maxed-out 401(k), and other assumptions identical to the previous household. In this case, tax liability actually increases by 1 percent, from $713,234 to $718,349, due to the loss of certain itemized deductions not fully offset by rate reductions. Their after-tax income declines by 0.3 percent.

 

Our eighth household (Olivia and Richard) is a married, single-earner, two-child household with $1 million in income, $200,000 of which is derived from a passive stake in a qualifying pass-through business and subject to the pass-through deduction. We assume a $1.5 million home, with other assumptions identical to the above households. In this case, tax liability declines 5 percent, from $318,315 to $300,816, with the benefit of the partial deduction for pass-through income more than offsetting the loss of certain itemized deductions. Their after-tax income increases by 1.7 percent.

 

Finally, our ninth household (Joe and Ethan) consists of married retirees with $48,000 in retirement income. We assume that they take the standard deduction, which is increased for filers over 65. They also fall within an income range that allows 15 percent of their Social Security income (which we set at $16,800) to be exempt from taxation. Under the plan, their after-tax income increases by 0.6 percent, with tax liability falling from $3,497 to $3,227, an 8 percent reduction in tax liability.

 

All but one of our sample filers receive a tax cut, but the size of that reduction varies. The significantly higher standard deduction, combined with lower marginal rates and a more generous (and more broadly available) child tax credit, drives the reductions in tax liability for low- and middle-income filers. A reduction in itemized deductions limits reductions in tax liability for upper-income earners, though these filers benefit from the repeal of the alternative minimum tax. A deduction worth 17.4 percent of pass-through income provides a benefit for some filers.

 

Individual income taxes are only one component of the proposed Tax Cuts and Jobs Act, and changes to business taxation could have a significant impact on wages and economic growth. Still, sometimes it’s helpful to drill down on one component of reform, and, as these sample taxpayers demonstrate, most taxpayers across the spectrum experience lower tax bills under the Senate proposal.

 

 

 

Who Gets a Tax Cut Under the Amended Senate Tax Cuts and Jobs Act?

Tax Foundation by Amir El-Sibaie  & Jared Walczak 

 

Last week, Senator Orrin Hatch (R-UT) released modifications to the “Chairman’s Mark” to the Senate’s version of the Tax Cuts and Jobs Act. The amendment slightly tweaked ordinary brackets and rates from the original proposal, substantially increased the child tax credit from the proposed $1,650 to $2,000 per qualifying child, and made many individual provisions temporary. For more details on the amended Senate bill, my colleague Nicole has a great summary.

 

To help provide a sense of how the Senate’s amended version of the Tax Cuts and Jobs Act would impact real taxpayers, we’ve run the taxes of nine example households. Each sample taxpayer has realistic characteristics to show how the individual income tax provisions of the bill would impact individuals and families across the income spectrum. Our results indicate a reduction in tax liability for every scenario we modeled, with some of the largest cuts accruing to moderate-income families with children.

 

Amended Senate Tax Cuts and Jobs Act Example Filers

 

Our first household (James) is a single individual earning $30,000 with no dependents. We assume that this filer takes the standard deduction and has tax-deferred retirement contributions of $2,600 (5 percent of income). Under current law, this taxpayer faces overall tax liability (including employee-side payroll taxes) of $4,331, and would see a tax cut of 9 percent, to $3,953. This household’s after-tax income would increase by 1.3 percent.

 

Our second household (Jason) is a single parent with two children, earning $52,000. This filer contributes $4,000 to tax-deferred retirement accounts. The taxpayer takes the standard deduction, and is eligible for child tax credits. This taxpayer sees a 36 percent reduction in tax liability, increasing after-tax income by 3.6 percent, chiefly due to the plan’s expanded child tax credit. This filer’s liability goes from $5,198 under current law to $3,306 under the proposed tax bill.

 

Our third household (Amber) is a single individual earning $75,000 with no dependents. We assume this filer takes the standard deduction and has tax-deferred retirement contributions of $5,500. This taxpayer’s liability is reduced by 11 percent, with after-tax income increasing by 2.4 percent. Taxes owed go from $16,104 under current law to $14,327 under the Senate proposal.

 

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Our fourth household (Kavya and Nick) is a single-earner married couple with two kids, earning $85,000. We assume tax-deferred retirement savings of $5,500, and that the couple takes the standard deduction. They also benefit from the expanded child tax credits, and see an overall tax savings of 20 percent, from $11,035 to $8,782. This family’s after-tax income increases by 2.7 percent.

 

Our fifth household (Sophie and Chad) is the first to take itemized deductions, which requires additional assumptions. We modeled a dual-income family with incomes of $95,000 and $70,000 respectively (for a total of $165,000), with two children. To derive the amount of deductible home mortgage interest, we assume a $340,000 home financed with a 30-year mortgage with 3.5 percent interest and 20 percent down. (In all cases, we assume that mortgage debt meets the definition of acquisition debt, and is not equity debt.) For deductible property tax, we assume an effective property tax rate of 1 percent. We also assume charitable contributions comprise 2.5 percent of income, and an effective state and local income tax rate of 5 percent. This couple has $20,000 in tax-deferred retirement contributions, and loses most of the value of the child tax credit under current law, but could claim it in full under the Senate bill. These taxpayers see a 8 percent reduction in tax liability, from $29,345 to $27,122. Their after-tax income increases by 1.3 percent.

 

Our sixth household (Soren and Linnea) also itemizes. A dual-income household with three children, this household sees incomes of $250,000 and $75,000 respectively, with an $800,000 home (same assumptions as above), charitable contributions of 2.5 percent of income, an effective state and local income tax rate of 5 percent, and a slightly higher effective property tax rate of 1.25 percent. The couple has $37,000 in retirement contributions (maxing out 401(k)s under current law in 2018), and is ineligible for child tax credits under current law, but eligible under the Senate proposal. Their tax liability would decrease by 10 percent under the plan, from $71,629 to $64,456. Their after-tax income increases by 2.2 percent.

 

Our seventh household (Laura and Seth) is a married, single-earner, two-child household with $2 million in income, a $2.5 million home, a maxed-out 401(k), and other assumptions identical to the previous household with the addition of about $6,000 in other miscellaneous itemized deductions. In this case, tax liability decreases by 1 percent, from $713,234 to $703,749. Their after-tax income increases by 0.5 percent.

 

Our eighth household (Olivia and Richard) is a married, single-earner, two-child household with $1 million in income, $200,000 of which is derived from a active stake in a qualifying pass-through business subject to the proposed 17.4 percent pass-through deduction. We assume a $1.5 million home, with other assumptions identical to the other households. In this case, tax liability declines 8 percent, from $318,315 to $292,478. Their after-tax income increases by 2.6 percent.

Finally, our ninth household (Joe and Ethan) consists of married retirees with $48,000 in retirement income. We assume that they take the standard deduction, which is increased for filers over 65. They also fall within an income range that allows a portion of their Social Security income (which we set at $16,800) to be exempt from taxation. Under the plan, their after-tax income increases by 0.6 percent, with tax liability falling from $3,497 to $3,227, an 8 percent reduction in tax liability.

 

All of our sample filers receive a tax cut, but the size of that reduction varies. The significantly higher standard deduction, combined with lower marginal rates and a more generous (and more broadly available) child tax credit, drives the reductions in tax liability for low- and middle-income filers. A reduction in itemized deductions limits reductions in tax liability for upper-income earners, though these filers benefit from the repeal of the alternative minimum tax.

 

Finally, these tax calculations are assumed to take place in 2018. Because of the temporary nature of the majority of the individual title in the Senate’s version of the Tax Cuts and Jobs Act, these results are not representative of the entire 10-year budget window. We also made no assumptions regarding individual’s health insurance status, meaning impacts of functionally eliminating the individual mandate penalty are not included.

 

Individual income taxes are only one component of the proposed Tax Cuts and Jobs Act, and changes to business taxation could have a significant impact on wages and economic growth. Still, sometimes it’s helpful to drill down on one component of reform, and, as these sample taxpayers demonstrate, most taxpayers across the spectrum experience lower tax bills under the Senate proposal.

 

 

 

The House Tax Bill Would Simplify Higher Ed Subsidies, But The Price Would Be Higher Costs For Many

Tax Policy Center

 

The House Ways & Means Committee version of the Tax Cuts and Jobs Act (TCJA) rightly aims to simplify a complex system of tax subsidies for higher education. However, by also reducing tax incentives for higher education by $64 billion over 10 years, it would reduce incentives for individuals to invest in human capital.  This is in contrast to the bill’s business tax cuts that are intended to increase investment in physical capital.

 

The bill would retain the American Opportunity Tax Credit (AOTC), the main tax benefit that provides educational assistance for low and moderate income families.  At the same time, it would eliminate other education tax credits, deductions, and other incentives.  Graduate students and workers attending school part-time could see the largest tax increases.

 

Currently, tax-based assistance for higher education is highly complex. Families with college students may choose between two overlapping tax benefits: the American Opportunity Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC is more generous and is partially refundable but eligible students must be enrolled at least half-time in degree programs and in their first four years of postsecondary schooling.

 

In contrast, the LLC is less generous but can be claimed by any student attending an eligible education institution. Until this year, students could also partially deduct tuition and fees from their federal income tax. However, that provision expired at the end of 2016.

 

These are just the beginning. There are more than ten other tax breaks for higher education including two separate savings vehicles for college tuition, a student loan interest deduction, and the exclusion of scholarships, tuition reductions, and employer provided educational assistance from taxable income.

 

This complexity may be one reason why many families fail to take full advantage of tax benefits for higher education.  This has been documented by the Government Accountability Office, among others.

 

The TCJA would change the tax breaks for higher education in these ways:

 

  • Retain the AOTC and extend eligibility to a fifth year albeit at half the regular amount.

 

  • Repeal the LLC.

 

  • Repeal the student interest deduction.

 

  • Repeal the tax exclusion for employer-provided education assistance.

 

  • Repeal the tax exclusion for tuition reductions for university employees and graduate student instructors and research assistants.

 

  • Disallow new contributions to Coverdell savings accounts and allow distributions for qualified education expenses from 529 plans at private elementary and secondary schools.

 

  • Not restore the tuition and fees deduction.  

 

The Joint Committee on Taxation (JCT) estimates that the education provisions would increase tax revenues by over $64 billion over the next 10 years. The education tax credit provisions (extending the AOTC and eliminating the LLC) would save $17 billion. Changes to education savings accounts would save less than $1 billion. The rest of the changes would increase revenues by $47 billion, about half the savings from ending the deduction for student loan interest, one-third from eliminating the exclusion for employer-provided education assistance, and one-fifth from eliminating the exclusion for tuition reduction programs for grad students and others.

 

Simplifying the system could potentially increase use of education benefits among those eligible.  Keeping the AOTC is important for low- and moderate-income students since it is the only refundable education tax benefit that benefits families without income tax liability.

 

But many students and former students would experience higher taxes under the proposal.   Most graduate students currently receiving the LLC would lose assistance and graduate student instructors and research assistants would be taxed on their waived tuition. Workers going back to school part-time or in non-degree programs wouldn’t be eligible for a tax credit and others would have to pay tax on the value of schooling paid for by their employers. And former students with loans would no longer be able to deduct interest paid on those loans under the proposal.

 

While simplifying the tax code and streamlining options is desirable, increasing the cost of higher education could make it unaffordable for some students. It also seems like a move in the wrong direction for a tax reform proposal that claims to be focused on increasing worker wages. Research shows that a more direct pathway to higher wages and salaries is through encouraging education and increases in human capital rather than physical capital.

 

 

 

The House Ways and Means Tax Bill Would Raise the National Debt to 123 percent of GDP by 2037

Tax Policy Center

 

The Tax Policy Center estimates that the House Ways and Means Committee’s version of the Tax Cut and Jobs Act (TCJA) would increase the ratio of national debt held by the public to Gross Domestic Product (GDP) by 6 percentage points by 2027 and by just over 10 percentage points in 2037 (Table 1) – to 123 percent of GDP

 

Over the first decade, the legislation increases the deficit by $1.7 trillion assuming it is not offset by spending cuts triggered by statutory PAYGO requirements. About $1.4 trillion would come from reduced receipts (net of outlay effects of tax law changes) and $250 billion from higher interest on the federal debt. Between 2028 and 2037, the TCJA would reduce net receipts by $1.6 trillion and add $920 billion in additional interest costs. Over the entire 20-year period, the combination of reduced revenues and higher interest payments would raise the federal debt held by the public by $4.2 trillion.

 

TPC based its projections on the Joint Committee on Taxation’s (JCT) revenue estimates for fiscal years 2018-27, TPC’s extrapolation of the JCT estimates for 2028-37, and the baseline economic and budget estimates in the Congressional Budget Office’s (CBO) March, 2017 long-term and June, 2017 updated 10-year budget projections.

 

CBO projects that, under current law, the federal debt held by the public will increase from 77 percent of GDP in fiscal year 2017 to 91 percent in 2027 and 113 percent in 2037. The House Ways and Means bill would increase the debt to 97 percent in 2027 and 123 percent of GDP in 2037.

 

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If You Care about Social Security and Medicare, You Should Care about these Tax Bills

Tax Policy Center

 

The Joint Committee on Taxation, Congressional Budget Office, and Tax Policy Center agree that, without significant changes, the House-passed tax bill (the Tax Cuts and Jobs Act, or TCJA) would add about $1.5 trillion to our nation’s debt over the 10-year budget window. Over the longer range, this proposal would increase the debt even more.  

 

Someone must eventually pay for these net tax cuts, which are expected to benefit higher-income households much more than those with lower- and middle-incomes. Unless the tax cuts spur immense economic growth, which many prominent economists doubt based on decades of evidence, these cuts will harm future workers and Social Security and Medicare beneficiaries.

 

Social Security and Medicare (net of offsetting Medicare contributions) currently comprise about 39 percent of federal spending, excluding interest on the debt. Under current law, this share will increase to 46 percent over the next decade as the large Baby Boom generation ages and collects promised benefits. Curbing immigration will reduce the number of workers available to support retirees and could make this already unfavorable demographic situation worse. Because Social Security and Medicare represent nearly half of non-interest government spending, those promised benefits could soon find themselves in budget-cutters’ cross-hairs.

 

Social Security and Medicare already face funding challenges. The Social Security Trustees project that the program’s shortfall over the next 75 years is $12.5 trillion in present value. To close that gap, Congress would need to permanently and immediately raise Social Security payroll taxes by 22 percent (2.76 percentage points), permanently and immediately reduce benefits by 17 percent, or some equivalent combination of the two, according to the Trustees. If Congress preserves promised benefits for current Social Security recipients, then benefits for future beneficiaries must be cut even further, by 20 percent.

 

Benefit reductions could devastate many Americans who rely on Social Security and Medicare. Social Security benefits are often modest. Retiree benefits average about $1,300 per month, or about $16,000 annually. Under current Medicare rules, older adults’ out-of-pocket cost shares for health care are already slated to rise in coming decades. The Census Bureau estimates that about 14 percent of adults ages 65 and older are impoverished, based on the Supplemental Poverty Measure, which accounts for health care costs.

 

Cosponsors of the House bill have made their intentions toward Social Security clear. House Speaker Paul Ryan (R-WI) would shrink Social Security’s long-range funding gap primarily by reducing scheduled benefits. His Roadmap for America's Future Act of 2010 would sharply curb the growth of Social Security benefits for future workers and increase the full retirement ages to track increases in life expectancy. It would also add carve-out personal accounts to the program. At a Virginia town hall last week, he again called for entitlement reductions.

 

Representative Sam Johnson (R-TX) has introduced the Social Security Reform Act of 2016 that would reduce Social Security replacement rates for all but the lowest-income workers, increase retirement ages, and reduce the cost-of-living adjustment (COLA), along with other changes. During debate over the Senate version of the TCJA, legislators voted down a Democratic amendment to exempt Social Security, Medicare, and Medicaid from cuts if revenues fall short of current law projections because of the tax cuts.

 

Adding to the nation’s debt while our population is aging rapidly is ill-advised and maybe dangerous. My Tax Policy Center colleagues have warned about the potential for catastrophic budget failure, a consequence of lawmakers’ avoiding necessary fiscal reforms. The longer Congress keeps avoiding difficult choices and adding to the debt, the greater the risk that investors’ confidence in US credit worthiness could rapidly decline and lead to a debt crisis.

 

There are compelling reasons to improve our personal income and corporate tax systems and to consider new mechanisms for increasing revenues. But when tax changes add to our already significant debt, they further constrain Congress’ ability to keep its promises to American workers who have been contributing to Social Security and Medicare throughout their careers and to respond to unanticipated events.

 

Policymakers have known about this looming demographic challenge for decades. Increasing the debt now for economically dubious—and undoubtedly regressive—gains could threaten Social Security and Medicare in the not-so-distant future—or, in the case of Medicare cuts, nearly immediately.

 

TCJA’s shift to indexing many tax parameters using the chained consumer price index for all urban consumers (C-CPI-U) could have important implications for Social Security were Congress to extend this change to Social Security benefits. Social Security actuaries estimate that shifting the COLA to the C-CPI-U in December 2018 could reduce Social Security’s long-range fiscal shortfall by about 20 percent, but COLA reductions would hit older, long-term beneficiaries particularly hard.

 

Citizens should ask themselves whether the business and personal income tax cuts in the House and Senate versions of the TCJA are worth increasing the risk of steep Social Security and Medicare reductions in the future.

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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