text:
IRS proposes rules for truncated SSNs on W-2 forms
By Michael Cohn
The Internal Revenue Service has proposed regulations allowing truncated Taxpayer Identification Numbers on the Form W-2 to help protect people's Social Security Numbers from identity theft.
The proposed regulations enable employers to voluntarily truncate their employees' SSNs on copies of the Form W-2, Wage and Tax Statement, given to employees so the truncated SSNs appear in the form of IRS truncated taxpayer identification numbers, or TTINs.
The proposed rules would also amend the regulations under section 6109 of the tax code to clarify the application of the truncation rules to Forms W-2, adding an example illustrating how the rules could be applied.
The proposed amendments also would delete some obsolete provisions and update cross-references in the existing regulations.
The IRS is asking for comments on the proposed regulations by Dec. 18, 2017.
Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.
How tax reform could squeeze the middle class, in 5 scenarios
By Ben Steverman and Suzanne Woolley
Here's what we know about the details of the tax reform plan: almost nothing.
Powerful lawmakers are promising at least a framework for the overhaul by the end of the month. The broad goals are lower rates for corporations and individuals, a simpler tax code with fewer brackets, and the elimination of the estate tax and the alternative-minimum tax.
Sound good? Beware.
If you save for retirement or itemize your tax deductions, you could end up paying thousands of dollars more after tax reform than you do now. To help pay for promised cuts, President Donald Trump and Republicans in Congress are trying to raise revenue elsewhere.
And the best place to get this money may be the millions of Americans who use deductions and other such strategies to lower their tax bills.
Upper-middle-class taxpayers in particular could face a triple whammy. On the table are limits on—or even the elimination of—three of their favorite tax perks: deductions for mortgage interest and for state and local taxes and the ability to make pre-tax 401(k) retirement contributions.
These perks are popular with other taxpayers, too. Except for the very poor, Americans of all income levels can use 401(k)-style plans to lower their tax bills and save for retirement. The mortgage and local tax deductions are useful to the 30 percent of filers who itemize their tax returns. That includes 39 percent of filers earning $50,000 to $75,000 a year, 56 percent of those making $75,000 to $100,000, 77 percent earning $100,000 to $200,000, and 90 percent or more of those making $200,000-plus, Internal Revenue Service data show.
To figure out how much is at stake, we asked the Tax Institute at H&R Block to run some numbers. We looked at several hypothetical taxpayers with six-figure salaries, examining how much each one gains, and stands to lose, from tax provisions now under scrutiny.
Our five imaginary taxpayers are single homeowners under age 50 with salaries of $100,000, $200,000, $300,000, $400,000, and $500,000, with typical financial profiles for those income levels. They report some investment income in addition to their salaries, donate 5 percent of their salary to charity, and live in California, a state with a relatively high income tax.
Here's what we found:
401(k) retirement tax break
Right now, workers can put up to $18,000 a year in a 401(k) retirement account, and another $6,000 if they're 50 or older, bringing the total to $24,000. Those savings are made pre-tax, so they instantly drop a retirement saver's income, and thus tax bill, in the eyes of the IRS. Money in a 401(k) is taxed only when it's withdrawn from the account, possibly decades later.
Congress is exploring changes to the rules that would push workers to make more of their contributions to post-tax accounts, also known as Roth 401(k)s, from which money isn't taxed when it's withdrawn. For Congress, moving from traditional to Roth would bring in more money in the short term, even if it robs the Treasury of tax revenue later.
Workers would almost certainly notice the change.
For someone earning $200,000 or more and making the maximum possible contribution—as they should if they hope to keep up their standard of living in retirement—a traditional 401(k) cuts taxes owed by more than $8,000 a year. Even someone making $100,000 and saving half the maximum amount in a traditional 401(k) is lowering his or her tax bill by almost $3,000 a year. (To keep things simple, our taxpayers are single and childless, but these tax breaks can be just as valuable to couples and families.)
The possible "Rothification" of 401(k)s is worrying many retirement experts, along with the financial firms that manage that money.
"Comprehensive tax reform has the potential to be one of the biggest threats to our retirement system, in a way that ruins our incentives to save," said Bradford Campbell, a partner at the law firm Drinker Biddle & Reath LLP who served in the U.S. Department of Labor overseeing employee benefits under former President George W. Bush.
Overall, tax breaks for 401(k)s and other workplace defined-contribution plans cost the U.S. government $102 billion this year, according to the Joint Committee on Taxation, a nonpartisan congressional research group. The number is expected to rise to $146 billion by 2020.
State and local taxes
Tax expert Robert Willens, of New York-based Robert Willens LLC, said an area of "huge concern" for his clients is the possibility that the deduction for state and local taxes, or SALT, will go away. In a high-tax locality like New York, a client making $1 million may end up paying $120,000 in state and local taxes, he said. By deducting those taxes on a 1040 return, the client might avoid $48,000 in federal taxes. If Congress kills the SALT, as the Trump administration has proposed, "that's a massive tax increase," Willens said.
The SALT will cost the government $69 billion this year, the Joint Committee on Taxation estimates. It saves lots of money for our hypothetical taxpayers, who we assume live in highly taxed California.
While the SALT is most valuable in states with higher income taxes, it is used across the country to cushion the blow of local tax burdens, including sales and property taxes. For example, in Texas, which doesn't have a state income tax, 23 percent of itemizers still claim a SALT deduction. In Maryland, 45 percent of itemizers claim it. In three wealthy New Jersey districts represented by Republicans, SALT deductions make up a hefty 10 percent of adjusted gross incomes.
Mortgage interest deduction
House Speaker Paul Ryan has promised to "maintain" the mortgage interest deduction, but he and other Republicans haven't ruled out limiting the use of the tax break in some way.
Homeowners can currently deduct interest on their tax returns on $1 million in mortgage debt and another $100,000 in home equity loans, for both their first and their second homes. Our scenarios assume taxpayers took out a 30-year mortgage with a 4 percent rate to buy homes worth $375,000 to $750,000. The mortgage interest deductions end up lowering federal tax bills by $2,000 to $6,000 for these taxpayers, covering a significant share of the interest they pay each year.
Still, the deduction is a tempting target for tax reformers. In all, it will cost the U.S. Treasury $64 billion this year, the Joint Committee on Taxation estimates.
Whammy, whammy, whammy
The Tax Institute at H&R Block re-ran the numbers as if all three tax breaks—401(k) contributions, mortgage interest, and SALT—were no longer available.
Combined, they're worth from $6,500 to $31,000 annually to our upper-middle-class taxpayers.
Alternative minimum tax
It's unlikely Congress would completely repeal all three of these tax breaks. If lawmakers end or tweak any of them, they could cushion the blow with other tax changes. One that could help affluent taxpayers is the elimination of the alternative minimum tax, or AMT. The AMT is a complicated parallel tax system designed to limit the amount by which wealthy taxpayers can lower their bills with lots of deductions.
In our scenarios, the wealthiest three taxpayers, making $300,000 or more, are affected by the AMT because they take big deductions for SALT, mortgage interest and charitable contributions. The AMT costs them each several thousand dollars a year. Eliminating it would help these taxpayers offset the loss of perks like the SALT.
Keep in mind, though, that Congress could kill the AMT but replace it with other provisions, probably simpler, that also limit deductions.
Lower rates
Another way Congress could help out wealthy taxpayers is by lowering their tax rates. Here again, the details matter.
For example, don't confuse your overall rate with your marginal rate. Your marginal rate rises along with your income, as you pay different tax rates on different bands of income. The tax bracket your final dollars of income fall into is called your marginal tax rate. In our progressive tax system, the overall tax rate you pay can be much lower than your marginal rate. Research shows taxpayers often get this wrong. What ultimately matters, after tax reform, is your overall rate.
One idea being floated is a doubling or tripling of the standard deduction, an amount by which every taxpayer can lower their tax bills without itemizing. That could be a boon to upper-middle-class taxpayers who have relatively few deductions to make because they don't have a mortgage, they live in a low-tax state, or they don't contribute much to charity.
For affluent homeowners in high-tax states with lots of deductions, however, tax reform could be painful.
Bloomberg News
A solution to the tax reform pass-through problem
Tax reform under any of the proposals thus far released contemplates a significant rate cut for C corporations, and a smaller rate cut for individuals. But pass-through entities like S corporations, which comprise 90 percent of all U.S. businesses, pay taxes through the individual returns of their owners. There is already a rate gap between the current corporate rate of 35 percent and the highest individual rate of 39.6 percent, but under any tax reform plan, that gap would increase.
"One of the reasons for tax reform is the competitive disadvantage faced by U.S. multinationals compared to their foreign counterparts, but it doesn't make a lot of sense to address one disparity caused by the Tax Code to create a new disparity caused by the Tax Code," said Mel Schwarz, tax-policy advisor in Grant Thornton's Washington National Tax Office. "That's what will happen if you significantly reduce the corporate tax rate and do not also provide an equivalent rate cut for pass-throughs."
"Pass-throughs do have a benefit in that they are only subject to a single level of tax, but there's a good argument that the current difference between the corporate rate and the highest individual rate – 4.6 percent – is a pretty accurate measurement of what that benefit is," Schwarz said.
One of the tax reform proposals would lower the corporate tax rate from 35 percent to 20 percent while lowering the top rate on individuals from 39.6 percent to 33 percent, Schwarz noted. "In addition, it would establish a new tax rate for a portion of pass-through profits, at 25 percent."
The upshot is that rather than facing a nearly five-percentage-point difference in tax rates, the gap would expand to as much as 13 percentage points, depending on how much pass-through business profits are eligible for the 25 percent rate, Schwarz indicated.
Moreover, individual owners, faced with the choice of paying taxes on their salary at an individual rate of 33 percent, will be tempted to reclassify at least a portion of their salary so as to use the lower 25 percent rate.
One solution that has been advanced is the "70/30" test, which would arbitrarily tax 70 percent of pass-through income as if it were wages, while taxing the remaining 30 percent at the lower rate. "But this method is extremely arbitrary and in many cases would be extremely unfair," said Schwarz. "For example, some pass-through entities are capital-intensive. Why should 70 percent of profit at a manufacturing company be treated as wage income if machines are doing most of the work?"
A better solution would be to have third-party certification that a pass-through entity is paying appropriate wages, which would then be taxed at the new wage rates before distributing business profits to owners. "This would avoid a rough-justice rule, close the potential wage-profit loophole and deliver a tax rate on business income close to that paid by corporations," said Schwarz.
Although some businesses might prefer to use a simple ratio so they can easily process their tax returns, more complex pass-throughs could use the third-party certification process to ensure that business profits are not misclassified as more wage income, he suggested.
The beauty of this proposal is that the mechanism is already out there, Schwarz observed. "Many businesses have studies done to make sure that the compensation they offer is competitive. There's a whole group of people who are specialists in this area."
"The hard details will be to make sure that tax law appropriately captures what is and isn't business income from all pass-through entities and taxes it at a low and uniform rate, and to establish standards and enforcement rules to reduce the ability of business owners to recategorize their wages as business income," Schwarz said.
Roger Russell is senior editor for tax with Accounting Today, and a tax attorney and a legal and accounting journalist.
Trump plan seen increasing taxes on some middle-income people
By Sahil Kapur and Lynnley Browning
By 2027, almost 30 percent of individuals with incomes between $50,000 and $150,000 would see their taxes rise under the elements of a Republican framework for tax legislation released this week, according to an analysis released Friday by the Urban-Brookings Tax Policy Center.
The analysis came one day after White House economic adviser Gary Cohn said he couldn't guarantee that every middle-class family would get a tax cut under the framework.
"You could find me someone in the country that their taxes may not go down," Cohn told reporters Thursday at a White House press briefing.
The tax center's analysis suggests it eventually could be many, many people.
That's in part because of the framework's call to end personal and dependent exemptions worth $1.6 trillion over a decade, according to the analysis. The exemption would be replaced with an expanded child credit that isn't inflation-indexed. That means the number of taxpayers with a tax increase would rise over time.
The framework is a starting point for tax-writing committees to begin crafting legislation. Much remains undecided, including the amount by which Republicans plan to increase the child tax credit, which would mitigate the financial hit to some middle class families.
Raising taxes on the middle class could be a political obstacle for Republicans. Democrats are already highlighting the potential for just such a tax hike. Some GOP lawmakers are also worried about the prospect.
"I've also had that same concern—if the personal exemptions are gone and you have a family of six kids, well that could be a problem," said Representative Chris Collins, a Trump ally from upstate New York.
Senator John Thune, the third-ranking Republican and member of the tax-writing Finance Committee, said it's "going to be really important" to ensure middle class families don't see their taxes go up. He pointed to the rate cuts, doubling of the standard deduction and an unspecified increase in the child tax credit as examples of middle-class tax relief in the framework.
In terms of middle-class benefits, the framework outlines a near doubling of the standard deduction -- to $12,000 for individuals and $24,000 for married couples—and calls for "significantly increasing" the child tax credit from the current $1,000 per child under 17. It would also expand eligibility to include more upper-middle class parents.
Bloomberg News
Ending the state, local tax deduction is up for negotiation, Cohn says
By Alexis Leondis and Sahil Kapur
President Donald Trump is open to negotiating on the deduction individuals take for state and local taxes, his top economic adviser Gary Cohn said Friday.
While the tax framework released Wednesday would eliminate that deduction, the provision isn't a red line, according to Cohn, the director of the National Economic Council. The deduction is used extensively in high-tax states like New York, New Jersey and California. It's frequently cited by White House advisers as an example of carve-outs they want to end for the wealthy. Eliminating the deduction would raise an estimated $1.3 trillion that could be used to offset the plan's proposed tax cuts.
"We are willing to work with the tax writers on the other dials that we have in the system," Cohn said during a Bloomberg TV interview.
Senate Finance Committee Chairman Orrin Hatch is keeping his options open on what to do about the state and local tax deduction, a spokeswoman said.
"Chairman Hatch recognizes that every major provision within the Tax Code has an important constituency and consequence. As the Senate Finance Committee begins its work on this once in a generation opportunity, he will work with members to examine these provisions and make appropriate decisions," Julia Lawless said in an e-mail.
Business rates
Cohn said the president isn't open to negotiating on the corporate tax rate, which the framework calls for cutting to 20 percent, down from 35 percent. Also, Trump isn't flexible on a provision cutting the rate for pass-through businesses like partnerships and limited liability companies to 25 percent, according to Cohn. The current rate on pass-through income can be as high as 39.6 percent.
The framework lacks extensive details about offsetting its rate cuts with additional revenue. It says most itemized deductions for individuals should be eliminated, without providing specifics -- while calling for mortgage-interest and charitable-giving deductions to be preserved.
But it does target the state and local tax deduction for elimination. That break tends to benefit high-income filers in Democratic states, but the move to abolish it would face resistance from some Republican House members in districts that use the deduction heavily.
Representative Dan Donovan, a Republican who represents Staten Island, said he's "very encouraged" by Cohn's comment that the White House is willing negotiate on the state and local deduction.
"The president and Gary Cohn and Treasury Secretary Steve Mnuchin are all New Yorkers," Donovan said Friday in an interview. "They understand the importance of this to New York."
Code simplification
House Speaker Paul Ryan said Wednesday night on Fox News that the state and local tax deduction amounts to the federal government subsidizing high-tax states, which he argued is bad policy. Conservative advocates believe ending that break would encourage states to reduce their taxes.
Despite the flexibility on state and local deductions, Cohn said Friday that the objectives of the tax plan are to lower rates for everyone and simplify the code by getting rid of loopholes. "By creating simplification we were trying to get rid of all of the loopholes and all of the deductions that mostly wealthy people use -- remember only 25 percent of families in America use the itemized deduction," said Cohn.
Trump and White House advisers have repeatedly said that the tax plan won't benefit the wealthy.
"Our framework includes our explicit commitment that tax reform will protect low-income and middle-income households, not the wealthy and well-connected," Trump said during a tax speech on Wednesday in Indianapolis. "They can call me all they want. It's not going to help. I'm doing the right thing, and it's not good for me. Believe me."
When asked whether the 10 percent of taxpayers who pay about 80 percent of taxes would change under the tax framework, Cohn said: "We think that the 10 percent will be paying about the same amount of the taxes."
Bloomberg News
Trump's tax cuts seen producing short job growth 'sugar high'
By Lynnley Browning
President Donald Trump's plan to slash the corporate tax rate may not provide the sustained job growth that he and Republican leaders want, some economists say— that's a point of longstanding and unsettled debate.
But in the short term, a lesser-noticed item in the nine-page framework that Trump and Congress produced Wednesday might provide a quick burst of growth that then dwindles, said economist Alan Viard of the nonpartisan American Enterprise Institute. He compared it to a "sugar high."
Republicans propose to temporarily turbocharge the tax savings corporations can get when they spend heavily on major items like new equipment. Letting companies immediately deduct the full cost of such purchases from their taxable income would help spur more purchasing, more growth and more hiring, Viard said—at least for a while.
The result would be "a short spike in hiring and growth that would soon peter out," he said.
Trump and the GOP have promised growth that's far more robust—a sustained 3 percent growth rate. Their sales pitch for what Trump called "a revolutionary change" in business taxes boils down to one word: jobs. "We are going to bring back the jobs and wealth that have left our country—and most people thought left our country for good," Trump told an eager crowd in Indianapolis Wednesday.
The tax framework's prescription for growth involves a hefty dose of rate reduction: Corporations would pay 20 percent, down from the current 35 percent. And businesses organized as partnerships, limited liability companies and sole proprietorships would pay 25 percent, down from rates as high as 39.6 percent.
The argument that tax cuts fuel hiring and growth has its intellectual roots in the supply-side tax cuts of former President Ronald Reagan's era—an allusion Trump eagerly made during his Indianapolis speech. But among economists, the jury is out on whether cuts lead to jobs.
Mixed Results
The tax overhaul that Reagan presided over in 1986 was followed by a major expansion, but former President George W. Bush's tax cuts in 2001 and 2003 preceded years of comparatively anemic growth. Meanwhile, former President Bill Clinton's 1993 tax increases were followed by a boom.
So the tax-cuts-produce-growth argument "is not yet settled," said William Gale, a former senior economist to former President George H.W. Bush. A widely cited 2012 survey by the University of Chicago's Booth School of Business found an even split among economists on the question.
Enter the tax break for equipment purchases and other so-called "capital spending." Current law already allows companies to recover the costs of such purchases—but only over years through depreciation. The Republican plan would allow them to do it in one fell swoop—in the same year that they made the purchase.
The framework suggests that the accelerated tax break would only be available for a limited time—perhaps as little as five years. That would give companies an incentive to buy now and "may provide a little bit of an extra boost in the short run," said economist Donald Marron, the director of economic policy initiatives at the Urban Institute.
"But then it goes away," he said.
Pull Forward
There is good news for Trump and the Republican Congress: A short-term economic jolt might help make congressional elections next year smoother for them.
In effect, making the deduction temporary would "pull forward" companies' future purchases and "juice economic activity in the front, during this term leading into re-election," said Michael Drury, the chief economist of McVean Trading & Investments in Memphis.
Grover Norquist, the president and founder of the conservative group Americans for Tax Reform, says he thinks the tax plan would produce sustained growth. But he acknowledged the issue's political importance.
"This tax bill, and its growth, is going to be the central piece of legislation that voters will vote on in October and November of 2018," Norquist said earlier this week.
Perhaps with quick results in mind, the tax framework that Republicans released Wednesday—which largely stuck to broad themes and general terms—got very specific regarding the equipment-purchase deduction.
It'll apply to purchases "made after September 27, 2017," the framework said. That was Wednesday.
Bloomberg News
Trump gets to replace his auditor as IRS head prepares to leave
By Saleha Mohsin
Donald Trump soon will get to choose a new leader for the IRS, a person who may have two high-profile and sensitive jobs: helping implement the president's proposed tax cuts and overseeing an audit of his tax returns.
IRS Commissioner John Koskinen's term expires on Nov. 12 and he is unlikely to be reappointed. He was hired by President Barack Obama and is loathed by congressional Republicans, who tried to impeach him in 2016.
Trump hasn't nominated anyone to replace Koskinen. Treasury Secretary Steven Mnuchin, whose department includes the Internal Revenue Service, is said to be in the early stages of the selection process, according to two people familiar with the matter.
It's a potentially explosive decision for the president, unless he and Mnuchin recuse themselves. The slightest perception that Trump is trying to influence the agency overseeing his audit or any tax-related probes of his campaign's ties to the Russian government would ignite a furor in Congress.
The nomination will be even more important if Trump can persuade lawmakers to pass the "historic" tax overhaul he promised in an Indiana speech on Wednesday, legislation that would cut rates for corporations and individuals and simplify returns. The new IRS commissioner will be responsible for making sure computer systems and documents at the IRS are updated, staff are trained in the nuances of the law and filing season proceeds without a hitch.
While a permanent replacement for Koskinen must be confirmed by the Senate, by law the job can't remain vacant. The Internal Revenue Code requires the president to appoint an acting head of the agency.
"We are actively focused on nominating a new IRS commissioner. We will put someone in on a temporary basis if needed," White House spokeswoman Natalie Strom said.
The IRS also lacks a general counsel, the only other political appointee in an agency that employs about 80,000 people across the U.S.
Trump's Audit
The agency's enormous workforce of career civil servants insulates it from political meddling. A commissioner who tried to interfere in either the Russia investigation or Trump's audit would likely be foiled, former leaders of the agency said.
"The career folks at the IRS are not going to let anybody come into the organization, appointee or not, and tell them who and what they have to do in the way of examining someone," said Lawrence Gibbs, who worked at the IRS for 17 years, including as the commissioner in the 1980s.
That didn't stop former President Richard Nixon, whose attempts to manipulate tax investigations were cited by Congress in one of his articles of impeachment in 1974.
"The IRS pushed back when Nixon tried to exert political influence; that reinforced the probity of the IRS," said Mark Iwry, who served as a senior adviser and deputy assistant secretary for tax policy at the Treasury during the Obama administration. "IRS personnel know very well that improperly favoring or disfavoring a particular taxpayer would be absolutely wrong and contrary to IRS's mission and decades of IRS practice and adherence to principle."
Trump has said nothing about trying to influence either the Russia investigation or his audit through a new IRS commissioner. Yet Trump's critics say Congress should nonetheless safeguard against it. CNN reported on Tuesday that the IRS has begun sharing information about key Trump campaign officials with Special Counsel Robert Mueller.
A coalition of 10 liberal advocacy groups including MoveOn.Org said that the president should "not be allowed to unilaterally install an ally as acting commissioner of the IRS" in a letter sent last week to Mnuchin and members of Congress. The Senate should ask the president to retain Koskinen as acting commissioner until a permanent replacement is named to ensure that the agency's temporary leader is "qualified and impartial," the groups said.
Koskinen and Trump
As it turns out, Koskinen and the president have a long relationship. The pair first met in the 1970s when Koskinen worked at a company that managed some assets of Penn Central. One of them was a hotel that Trump had purchased. Koskinen said in a December interview that he got to know Trump through several months of negotiations over that deal.
Unless Koskinen is reappointed or a new director confirmed by the Senate, Trump will have fewer political staff to manage changes to the tax code. He has an incomplete team at the Treasury Department, with half of the agency's highest-ranking political jobs empty. In addition to the general counsel, who would help interpret new legislation, the White House hasn't named anyone to the eight seats on the IRS's oversight board. The panel has suspended its operations due to a lack of Senate-confirmed members.
The IRS is also slimmer than it once was due to budget cuts initiated by House Republicans who targeted the agency after gaining power in 2010. IRS staffing levels have dropped 31 percent in the last 20 years, according to the National Treasury Employees Union, which represents IRS employees.
It's not unusual for temporary officials to lead the IRS. But combined with the lack of resources, the changes that would be required by a tax overhaul "could make for a particularly difficult and delicate time," said Gibbs, who was commissioner in 1986 when the Reagan administration's historic tax overhaul was implemented.
Bloomberg News
Trump meets with Democrats over GOP's 'detailed' tax plan
By Sahil Kapur
President Donald Trump met Tuesday with a bipartisan group of House Ways and Means Committee members, the day before he heads to Indiana to help unveil what he called a "very comprehensive, very detailed" framework for tax legislation.
Before the meeting, Trump said the plan, which has been kept under tight wraps by congressional leaders and White House officials, will simplify taxes, increase the child tax credit and cut taxes for the middle class "tremendously." Democrats have questioned whether the plan's details—based on leaks that surfaced over the past week—will ultimately benefit top earners the most.
Trump said Tuesday it was "time for both parties to come together" on taxes—though a House Democratic aide said Tuesday's meeting doesn't signal any new agreements. Because the framework is probably already written and scheduled for release Wednesday, the aide described Tuesday's meeting as pointless.
Lobbyists citing multiple leaks of the framework's elements say they include cutting the corporate tax rate to 20 percent or so, down from 35 percent, and taking the top individual tax rate down to 35 percent from 39.6 percent. Administration officials have said they'd offset the rate cuts by eliminating deductions and other tax breaks.
Trump has been making a push to engage with Democrats on taxes, even as GOP congressional leaders have said they don't expect to have any Democratic support for the planned tax overhaul. Earlier this month, the president dined with three Democratic senators who are up for re-election next year in states Trump won—including Senator Joe Donnelly of Indiana—to try to win their backing, and has met with a bipartisan group of moderate House members.
Tuesday's meeting with more than a dozen members of the tax-writing committee included Representative Kevin Brady, the panel's chairman, Representative Richard Neal, the panel's top Democrat, and Representative Lloyd Doggett, a Democrat who's on the tax policy subcommittee.
'Partisan Rancor'
"We want to underscore here that this is highly unlikely to result in a major bipartisan breakthrough on tax reform," Henrietta Treyz, a tax analyst with Veda Partners and former Senate tax staffer, said in a Sept. 25 research note. "Partisan rancor is alive and well on Capitol Hill at this point and the stage is not currently set for a bipartisan breakthrough in our estimation."
Doggett, of Texas, has called for the president to release his tax returns. Trump has departed from roughly 40 years of tradition for major-party presidential nominees by not making his returns public, saying his lawyers advised him not to release them while he's under audit.
The president is said to have an ambitious timeline for congressional action on taxes. Trump told dinner guests Monday night that he expects the House will approve a tax bill in October and the Senate by year's end—an extremely rapid timeline that would give him a much-desired signature legislative victory.
Brady told reporters Monday the goal was still to get a bill done by year's end. House Freedom Caucus Chairman Mark Meadows said Tuesday that Treasury Secretary Steven Mnuchin and National Economic Council Directory Gary Cohn are still aiming for a tax bill to be signed by Thanksgiving—a goal the House needs to work speedily to meet, Meadows said.
So far the lack of tax plan details has frustrated some conservative Republicans, who have indicated they won't approve a budget—a necessary step to pass a tax plan without Democratic support—until they get some specifics from their leaders. Meadows also said Tuesday he'd only vote for a tax overhaul if it cuts the rate for corporations to at least 20 percent and omits an international minimum tax, reduces the rate for pass-through entities to at least 25 percent, and doubles the standard deduction for individuals.
House Speaker Paul Ryan told reporters Tuesday he'll discuss taxes with the Republican conference on Wednesday.
"This framework is going to be focused on helping American families. It's going to be focused on helping the people in the middle. It's going to be focused on helping people get to the middle who are struggling to do that," Ryan said. "At the same time, our businesses in America can't compete with the low tax rates of foreign nations."
—With assistance from Erik Wasson
Bloomberg News
N.Y. tax squeeze in Trump's overhaul risks crippling GOP support
By Sahil Kapur
President Donald Trump's promised tax overhaul may force dozens of Republican congressmen in states including New York and New Jersey into a politically damaging vote to repeal a $1.3 trillion tax break their districts use heavily.
But not if Representative Peter King of New York can help it. King, a Republican who represents Long Island, said he'll oppose any attempt to repeal the state and local tax deduction, calling it "absolutely essential to my district."
King is one of 52 Republicans—more than enough to scuttle any bill that lacks Democratic support—who hail from districts that use the state tax deduction disproportionately. He thinks enough of those Republican colleagues will band together to keep its repeal out of any comprehensive tax legislation this fall, complicating GOP plans.
"I can't vote for a bill that would eliminate the state and local tax deduction," King said in an interview. In New Jersey, where lawmakers say losing the break would increase taxes on the average taxpayer by $3,500 per year, Representative Leonard Lance says he'll also work to save the so-called SALT deduction. But would Lance vote against a tax-overhaul bill that repeals it?
"Let's just say I would have the gravest of reservations," said Lance, whose constituents reported paying $4.9 billion in state and local taxes in 2015, the highest amount of any Republican congressional district.
If they and like-minded Republicans prevail, any tax-overhaul bill—which Trump and Republican congressional leaders plan to preview on Wednesday—may have to be sharply curtailed. The White House and lawmakers have avoided confirming details of their tax-bill framework, but lobbyists citing multiple leaks have said it will target a corporate tax rate of 20 percent or so, down from the current 35 percent. It would also provide middle-class tax relief and substantial rate cuts for many of the highest earners.
Year's End
The framework's contents appear to be subject to change. While Trump told reporters Sunday that it was "totally finalized," White House Press Secretary Sarah Huckabee Sanders said Monday that only certain details were final, and she didn't specify which. Trump is scheduled to meet Tuesday with a bipartisan group of lawmakers from the House Ways and Means Committee, which would begin hearings once legislation is introduced.
After that, Trump anticipates rapid legislative progress. During a dinner meeting Monday night at the White House, the president told leaders of several conservative groups that he expects the House will approve a bill in October and the Senate by year's end, according to two people who attended.
That timeline is aggressive. Under the procedure that Senate leaders plan to use to pass the tax bill, both chambers will have to first adopt identical budget resolutions before the House can act on tax legislation.
Amid the uncertainty, independent analysts say the revenue costs of some provisions that have surfaced may total $5 trillion or more over 10 years. Without hefty "pay-for" provisions—like repealing the SALT deduction—the rate cuts might have to be shallower, or shorter-lived.
Democrats' Defense
Many Republicans oppose the deduction because they say it creates an incentive for state and local governments to raise taxes, knowing that the federal government will cushion the burden. Democrats such as Senate Minority Leader Chuck Schumer are staunch defenders of the SALT deduction, and argue that eliminating it would hurt middle class families. One-third of the value of the tax break is used by tax filers in New York, New Jersey and California collectively, according to a study by the nonpartisan Center For a Responsible Federal Budget
Already, a coalition of groups that includes the U.S. Conference of Mayors, the National Governors Association and public-employee unions including the Service Employees International Union has formed to lobby against repeal. The coalition will target all lawmakers in districts that use the deduction heavily.
The mayors' group is sending a bipartisan delegation to speak to members of Congress Tuesday, according to Sara Durr, a spokeswoman.
House Ways and Means Chairman Kevin Brady, who'll play a key role in writing the tax bill, wouldn't confirm that the SALT deduction is on the chopping block. But he said Monday that his committee still plans to simplify tax rules so returns can be submitted on a "postcard" —a goal that has called for eliminating the deduction in prior iterations.
"That allows us to significantly lower rates on Americans," Brady said. "And so that's the approach we're taking."
High-Tax States
Trump's top economic aides also proposed ending the state and local tax break earlier this year, as they released a one-page outline of the president's tax goals. Conservatives view the proposal as a way to tame high-tax states, which tend to vote Democratic.
But nationwide, 52 congressional districts held by Republicans registered above-average use of the SALT deduction in 2015, according to Internal Revenue Service data. They included several districts in New York, New Jersey and California, along with the Illinois district of Representative Peter Roskam, the chairman of a key panel on tax policy.
Roskam has avoided taking a position on the issue. "I've got to look carefully at state and local taxes because of my home," he said in an interview last month. His constituents reported paying $3.4 billion in state and local taxes in 2015. "What I'm working for is to make sure that—net, net—the bottom line is that they're going to be better off from a tax point of view."
In New York, lawmakers aren't convinced that their districts would be.
"Without the SALT deduction, taxpayers in all 50 states and in the District of Columbia would be doubly taxed—they would pay federal income taxes on the money they pay to their state and local governments," said a June letter from King and six other New York Republican lawmakers to Treasury Secretary Steven Mnuchin. "Such a policy is eminently unfair, as the federal tax code has recognized for the past 103 years."
Still, not every Republican lawmaker whose district uses the deduction heavily would oppose ending it.
"Everyone in my district will be way better off, on net, when all of this is said and done, by far," said Representative Dave Brat of Virginia. In his district, taxpayers claimed an average SALT deduction of $5,069 in 2015, IRS data show. The national average was $3,598.
—With assistance from Ben Brody, Anna Edgerton, Erik Wasson, John McCormick and Jennifer Jacobs
Bloomberg News
IRS updates per diem rates for lodging, meals and incidental expenses
By Michael Cohn
The Internal Revenue Service has issued its annual update describing the 2017-2018 special per diem rates that taxpayers can use to substantiate the amount of ordinary and necessary business expenses they incur while traveling away from home.
Notice 2017-54 outlines the special per diem rates, which take effect Oct. 1, 2017. The notice includes the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.
The special meals and incidental expenses rates for taxpayers in the transportation industry are $63 for travel within the continental United States and $68 for anywhere outside the continental U.S.
The rate for the incidental expenses only deduction is $5 per day for any locality within or outside the continental U.S.
For the high-low substantiation method, the per diem rates are $284 for travel to any high-cost locale and $191 for travel to anywhere else within the continental U.S. The amount of the $284 high rate and $191 low rate that is treated as paid for meals is $68 for travel to any high-cost locality and $57 for travel to any other locality within the continental U.S.
The per diem rates in lieu of the rates for the meal and incidental expenses only substantiation method are $68 for travel to any high-cost locality and $57 for travel to any other locale within the continental U.S.
The notice also provides a list of high-cost localities, which have a federal per diem rate of $238 or more.
Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.
Trump tax overhaul bid poses a big risk to U.S. Treasury bulls
By Sid Verma
Investors in the world's largest bond market may need to pay a lot more attention to Washington once more.
The White House has worked out a tax framework with congressional Republican leaders that includes cuts, President Donald Trump said over the weekend, with a speech on the fiscal plan expected on Wednesday.
But markets don't appear to be pricing in a prospective uptick in the fiscal deficit and associated bond supply—and that's giving fuel to Treasury bears, emboldened last week by the more-hawkish-than-expected Federal Reserve meeting.
"Any tax reform is likely to increase Treasury supply near term—as they are looking at plans that will rely on increased revenue in the future, after the growth kicks in, to reduce the costs of the plan," Peter Tchir, head of macro strategy at Brean Capital LLC wrote in a client note.
After the post-election selloff on fiscal-stimulus fears, the market isn't currently projecting any increase in the deficit, according to Citigroup Inc. research, underscoring how tax legislation is a big risk to Treasury longs.
"The GOP's plan to do away with state and local tax deductibility makes it politically unattainable—so the market seems reluctant to take it seriously," says Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
Still, Jabaz Mathai, Citigroup's chief U.S. rate strategist and former bond bull, warns against complacency. He brought forward his call on Friday that the 10-year note will hit 2.4 percent by the end of the year, from a previous projection of the first quarter of 2018.
Tchir recommends investors underweight or short 10-year obligations, citing the likely resurgence of the Trump trade that should firm up U.S. price pressures. Inflation-linked bonds and trades betting on a steeper Treasury yield curve between two-year and five-year maturities look cheap, according to Bank of America Corp.
Strategists at Bank of America say tax cuts would come at a monetary inflexion point: a probable rate hike in December would take the federal-funds rate closer to the economy's full potential, while leadership changes are on the horizon, with possibly a new Fed chair, vice chair and vice chair for supervision over the next six months.
"This raises the tail risk that easier fiscal policy could be met with slower to adjust monetary policy resulting in central bank 'behind the curve' trade in the markets," analysts Shyam Rajan and Carol Zhang wrote last week.
Bloomberg News
Senate tax chairman splashes cold water on unified GOP plan
By Erik Wasson and Sahil Kapur
Senate Finance Chairman Orrin Hatch is downplaying the prospect that the White House and congressional Republican leaders will be able to deliver a unified framework for tax legislation next week, as other officials have promised.
"I can't say that they are" going to be able to produce a plan, Hatch told reporters Wednesday. "All I can say is that they are trying."
Hatch expressed similar uncertainty on Sept. 13, hours after House Ways and Means Chairman Kevin Brady told Republicans that party leaders would unveil a consensus document on a tax overhaul framework during the week of Sept. 25. White House budget director Mick Mulvaney and Treasury Secretary Steven Mnuchin have also said a plan is coming that week, although no details have emerged yet.
Twice since then, Hatch made clear that his panel will make its own decisions on what a tax bill looks like. "The group—some have deemed us the Big Six—will not dictate the direction we take in this committee," he said in opening remarks at a tax hearing on Sept. 14. "Any forthcoming documents may be viewed as guidance or potential signposts for drafting legislation. But, at the end of the day, my goal is to produce a bill that can get through this committee."
Supply-side economics is a fake. Trickle-down economic theory demonstrates its untruth when it meets practical reality. Tax cuts for the wealthy do little, if anything, for those who are not wealthy. I have explained my disbelief in this nonsense in posts such as Job Creation and Tax Reductions and Do Tax Cuts for the Wealthy Create Jobs?. By now, with the evidence from states such as Kansas, where tax cuts for the wealthy generated fiscal disaster, and Minnesota, where tax increases on high incomes ignited the state's economy, reasonable people might expect that the supply-side, trickle-down advocates would call it a day. But, no, that hasn't happened.
Recently, in a Philadelphia Inquirer viewpoint, Adam N. Michel proclaims, "Want to boost wages for workers? Cut corporate taxes." His arguments deserve analysis.
Michel begins by asserting that "wages rise when the demand for workers increases." This is true. The challenge is to identify what causes increases in demand for workers. Michel denies that corporate tax cuts don't simply increase profits for owners, shareholders, and top hat employees. Instead, he attempts to prove that if corporations receive tax cuts, they will increase worker salaries, hire more workers, or both.
Michel begins by claiming that this nation's corporate income tax rate is one of the highest in the world. What Michel ignores is that statutory tax rate are relevant only when a profitable corporation has positive taxable income. The statutory tax rate is meaningless to corporations that offset economic profits with tax shelter and other losses. Michel also ignores the effect of tax credits, which can reduce and eliminate tax liability based on statutory tax rates. If a corporation has sufficient artificial and other losses, or credits, or both, a 100 percent statutory rate has no practical adverse effect.
Michel also claims that high tax rates discourage investment in workers. He claims that business investment in machinery and technology make employees more productive. A good chunk of business investment in machinery and technology causes job loss, as machines and robots replace human workers. That's job dissolution, not job creation.
Michel then asserts that because businesses invest in machinery and technology, employees become more productive, causing profits to increase, and thus permitting businesses to hire more workers. That's utter nonsense. When installation of machinery and robots cause higher productivity, it can, but does not necessarily, increase profits, but it leads to more purchases of machinery and robots, not the hiring of more workers. Worse, no matter how productive a business is, profits will not increase, and will decrease, if demand fails to increase or, as often happens, decreases. Demand decreases when people lose jobs and when people's real income declines.
Michel then proclaims that increasing business investment would increase wages by at least 13 percent, and perhaps as high as 20 percent or more. Anyone who believes that sales pitch might be in the market for any version of the "give me more money and you'll get richer" ploys that can be found whichever way one turns.
When taxes are cut for businesses and high-income individuals, they do not give existing employees pay raises. How do we know that? Because despite a parade of tax cuts for the wealthy and businesses since 1981, real incomes for Americans, other than the sheltered top tier, have remained stagnant. Nor do they run out and hire people. They don't do that because they have no need for employees. What will the new employee do if the existing employees are handling existing demand? If demand increases, businesses will hire new employees, despite tax rates, because increased demand will increase profits. Granted, businesses prefer the highest possible after-tax return, but a positive after-tax return of any amount is better than the zero profit increase that takes place if a business facing increased demand decides to ignore it and not hire workers to help meet it.
Michel misses another point. Compensation is deductible, and some forms of compensation generate tax credits. The mere act of hiring a worker reduces the taxable income and the tax liability of a business. It's that simple.
Michel is correct that anemic economic growth is afflicting the nation. What he ignores is the link between income and wealth inequality on the one hand, and stagnation in demand on the other. Smart business owners understand, as did Henry Ford, that if their workers cannot afford to sell the products offered by the business, the business won't be around for very long.
I repeat, with a few tweaks, what I wrote seven years ago in Job Creation and Tax Reductions:
What will create jobs is an increase in demand, 90 percent of which comes from the 99 percent who are not in the economic top one percent, and the best way to stimulate demand among the 99 percent is to [give them] tax cuts. Ironically, where work needs to be done, such as highway and bridge repair and maintenance, refurbishment of public infrastructure such as storm sewer systems, firehouses, schools, sanitary sewage systems and plants, dams, national cybersecurity, and similar public improvements, the advocates of tax cuts for the wealthy hold a position that guarantees the lack of funding for most, if not all, of what needs to be done to keep the nation vibrant in a changing world economy.
It should be obvious what this debate is all about. It's about greed. Hiding the role of greed as the motivating factor for misrepresentations and half-truths becomes difficult when people can see the true agenda. If the wealthy[, corporations, and businesses] wanted to create jobs, they could be creating jobs as I write while getting tax benefits in the form of deductions and even, in some instances, credits. Instead, they hold the nation hostage while claiming, falsely, that jobs will be created only if [there are tax cuts for corporations, businesses, and the wealthy].
Time and again, we've been down the road Michel suggests, and time and again the economy gets lost, becomes stuck, and crashes. That road doesn't get us there. It's time to take another road.
# posted by James Edward Maule
Side Hustlers Earning Billions In Extra Cash But Not Reporting It To IRS
Kelly Phillips Erb , FORBES STAFF
Do you have a side hustle? From driving a Lyft to dog-walking, Americans are increasingly looking to pick up some extra cash with a side gig. According to a survey conducted by finder.com, more than 1 in 4 of Americans are earning cash on the side but not declaring it on their tax returns. In terms of dollars, about 69.8 million Americans are failing to report an estimated $214.6 billion to the Internal Revenue Service (IRS) each year.
The biggest offenders? Millennials, according to the survey. When it comes to not declaring the money made on the side, about a third of millennials with a side gig aren't declaring that income.
You'd think that the reason for not declaring income would be some Les Misinspired response - something along the lines of "I only did it to feed my family." But the dollars don't bear that argument out. More than a third (36.3%) of high-income earners - those making between $150,000 and $300,000 - don't declare their side hustle. That's more any other income bracket.
On average, those with side gigs made $3,075 of undeclared income per year, according to the survey. Those making the most in their undeclared side gigs? Keystone residents. My own state of Pennsylvania leads the pack with a whopping $5,759, followed by New York, and Florida. By the numbers, however, those in Alabama are more likely not to declare their income, followed by Washington and Illinois.
(It's worth noting that these are results from a survey where samples are small. You can read more here.)
Side hustles can be a great way to pursue your dream job, save for a fun purchase, or pay off your credit card.
But skipping out on paying taxes? That's not a great idea. Undeclared income doesn't count for purposes of earning Social Security later - or making an impact on your credit score. And if you get caught skipping out on your taxes, not only do you have to pay it back, you can get socked with interest and penalties.
Want more taxgirl goodness? Pick your poison: follow me on twitter, hang out on Facebook and Google, play on Pinterest or check out my YouTubechannel.
Tim Murphy
How many times have you found yourself dreading some task you needed to do, only to find out "there's an app for that?" Or wishing that there was one? Well, the latest chore that has now been taken care of by a smartphone application is logging your business miles. From now on you don't need to keep track of your driving because an app will do it for you.
You're probably aware that whether you're a business owner, an employee, or a person who is self-employed, when you drive someplace for business there's a good chance that you can deduct it from your income taxes. The key to getting that write-off is that you have to log every mile you drive to get the biggest benefit, and that can be a real challenge. It's not that it's hard to do, but it can be tough to remember to write miles down when you're thinking about the business purpose of your drive. Plus, it's not just the miles that are required. You also need to write down the who, what, why and where of it, and keep it in the format that the IRS or the company reimbursing you requires.
Well, now you no longer need to worry about finding paper or pencil, putting things into the right structure or any of the rest of it. Your phone has it covered! All of today's smartphones have GPS technology built in. There are apps that use GPS monitoring capability to pick up on every time you go for a drive. It will ask you where you went and for what purpose, and then at the end of the year, it will quickly and easily generate the information you need in exactly the way that the IRS wants it so that you can get your full tax write-off for the mileage you've logged.
It doesn't get much easier than that. All you have to worry about is how much you want to pay for the app, and how much you're going to allow it to drain your battery.
Though you may find some that are free, most of the mileage trackers that have the features that you'll value most charge a fee – either yearly, monthly, or a single up-front payment. Though it may pain you to pay a price initially, you'll find that the technology pays for itself in catching trips that you would have forgotten to log and saving you time you would otherwise have spent on paperwork.
The one thing you need to understand about these applications is that in order to make sure they catch all your trips, they operate in the background at all times, and this can have an impact on how frequently you need to recharge your battery. So keep a car-charging cord handy.
Though there are plenty of these mileage-tracking apps available, I've chosen four that run the gamut in terms of features, look, and price. They all have the same basic function at their heart – and there are certainly other options available besides these – but reviewing what they offer will give you a good sense of what to look for and what these types of technologies should cost.
Mileage Expense Log (iOS): Free or $3.99 for the Pro version
This app is only available for iOS, and it is pretty straightforward in terms of bells and whistles, but it's also one of the most affordable of all the tracking apps. For the extra $3.99 you'd spend one time for the Pro version, you'll find a lot more flexibility and freedom, plus you get the advantage of eliminating pop-up ads that frequently interrupt the interface in the free version. The Pro version also allows you to set the application so that it automatically tracks all your trips. Doing this is not as intuitive as in other apps: you start off seeing a blank dashboard, and there are no instructions to direct next steps. That being said, once you press the "+" sign, the fields for recording the specific data about your journey appear, including what vehicle you're driving, where you're going and why, and more. It is on this screen that you can opt into either an automatic tracking setting or a manual setting in which you enter your mileage after each trip. Even so, when choosing the automatic setting you still need to initiate and halt tracking each time you use the app.
MileIQ (Android, iOS): $5.99 per month or $59.99 annually
For those who are willing to pay more for an app that looks a lot better and asks a lot less in terms of figuring out how to use it, MileIQ is a good option. With the highest price of the three mileage tracks discussed here, this one is also the easiest to use and has the most professional, slickest interface.
There are so many things to like about MileIQ. This app goes out of its way to be easy to use. It automatically records trips – all you have to do is swipe right to let it know that you're driving for business. Once the business function has been engaged, it lets you quickly categorize trips in terms of purpose, and even tracks your business driving totals and their values based on the IRS deduction rate.
If you want to minimize the amount of swiping you need to do between business and personal driving, you can even tell MileIQ what hours you work and what hours you don't so that it won't even ask about trips outside of your business drive times. Though it does still track those drives (which means it is still operating in the background and draining your battery), it makes up for that shortcoming by providing lots of choices for how to export its information, including being able to sync with some of the most popular accounting tools.
The other advantage that MileIQ offers is a much more comprehensive functionality from the automated mileage tracking: this app can be set to initiate based on a variety of choices, including based on time of day, movement above 4 miles per hour, when it's connected to a power source (such as a car charger), or when it connects to Bluetooth.
The app is definitely pricey, but when you pay the fee you get unlimited tracking, no matter how much driving you do. If you don't have a robust travel schedule you may find that the free version is enough for you: it gives you the same functions, but only for 40 drives per month including the trips that are for not for business.
Read the latest reviews before your purchase.
TripLog (Android, iOS): Free, $1.50/month or $15/year for the Personal plan, or $2.50/month or $25/year for the Business plan
This app offers users both a lower price than MileIQ and a lot of different pricing options based on their needs. There's a free version that can be set for either manual or GPS-based mileage tracking for up to 5 vehicles. It even offers a map-based route review and the option of tracking fuel and other expenses. But as useful as those basic features are, TripLog really shines once you sign up for its upgrades. That's where you'll find support both for its use and for backing up the information you've logged to the cloud, the ability to record photos of receipts for gas and other expenditures, and as many IRS-ready reports as you need.
There's no doubt that for elegant appearance and ease of use, MileIQ is miles ahead of TripLog, but if you're looking at the features and flexibility that you need at a much lower price, TripLog provides more than enough.
QuickBooks Self-Employed Edition Mileage Tracking
You can automatically track your mileage with the QuickBooks self-employed edition. According to the Intuit help desk, the self-employed version is currently only available online and includes mileage and receipt tracking. Other QuickBooks users can access various third-party plugins, including Triplog, from the Intuit Appcenter.
The app will automatically calculate your driving time and mileage. Intuit claims that it does not drain your mobile phone battery. The app will sync with QuickBooks making the accounting side seamlessly. So maybe worth taking a look.
We'd be happy to hear your thoughts on other mileage trackers that you may be using. Feel free to leave your thoughts and recommendations in the Disqus comment field below.
Tim Murphy, CPA writes for TaxBuzz, a tax news and advice website. Reach his office at firstname.lastname@example.com.
Fake Insurance Tax Form Scam Aims at Stealing Data from Tax Pros, Clients
WASHINGTON – The Internal Revenue Service today alerted tax professionals and their clients to a fake insurance tax form scam that is being used to access annuity and life insurance accounts.
Cybercriminals currently are combining several tactics to create a complex scheme through which both tax professionals and taxpayers have been victimized.
There may be variations but here's how one scam works: The cybercriminal, impersonating a legitimate cloud-based storage provider, entices a tax professional with a phishing email. The tax professional, thinking they are interacting with the legitimate cloud-based storage provider, provides their email credentials including username and password.
With access to the tax professional's account, the cybercriminal steals client email addresses. The cybercriminal then impersonates the tax professional and sends emails to their clients, attaching a fake IRS insurance form and requesting that the form be completed and returned. The cybercriminal receives replies by fax and/or by an email very similar to the tax professional's email – using a different email service provider or a slight variation to the tax pro's address.
The subject line varies but may be "urgent information" or a similar request. The awkwardly worded text of the email states:
Dear Life Insurance Policy Owner,
Kindly fill the form attached for your Life insurance or Annuity contract details and fax back to us for processing in order to avoid multiple (sic) tax bill (sic).
The cybercriminal, using data from the completed form, impersonates the client and contacts the individual's insurance company. The cybercriminal then attempts to obtain a loan or make a withdrawal from those accounts.
Excel is about to get smarter
Microsoft Office 2019, set for release by the end of the year, will feature a more powerful Excel that will use artificial intelligence to perform more complex data analysis.
The souped up Excel will be able to understand more about a user's inputs, and pull information from the internet as needed, TechCrunch reported. For example, users can tag a list as a certain category — such as "company names" — and Excel can get more information about the companies named in that list from Microsoft's Bing search engine, which will be connected with the spreadsheet. Excel will also be able to discern what category a list might fall under by reading the content of the list.
Also new will be a built-in tool that can create visual representations of the data within an Excel spreadsheet. Dubbed Insights, it is modeled after a similar tool in Microsoft's Power BI suite. The charts and graphs are manipulable by the user as well.
"Office 2019 will add new user and IT capabilities for customers who aren't yet ready for the cloud," said Jared Spataro, Microsoft's general manager for Office, in a blog post. "For example, new and improved inking features—like pressure sensitivity, tilt effects, and ink replay—will allow you to work more naturally. New formulas and charts will make data analysis for Excel more powerful ... Cloud-powered innovation is a major theme at Ignite this week. But we recognize that moving to the cloud is a journey with many considerations along the way. Office 2019 will be a valuable upgrade for customers who feel that they need to keep some or all of their apps and servers on-premises, and we look forward to sharing more details about the release in the coming months."
Ranica Arrowsmith is technology editor for Accounting Today.
IRS may have targeted the left, too
By Daniel Hood
At the same time it was subjecting conservative groups to inappropriate scrutiny and delays, the Internal Revenue Service may have been doing the same to liberal groups, according to a new report.
The report from the Treasury Inspector General for Tax Administration looked at the same period as an audit in 2013 that found that using inappropriate criteria led the IRS to target conservative groups applying for tax-exempt status (see "TIGTA: Ineffective management led to targeting Tea Party groups"), but used a broader range of criteria to examine case selection.
The new report says that, from 2004 to 2013, the IRS had as many as 259 criteria for identifying tax-exempt applications for further review, most of which were not related to politics, such as potential fraud, abuse, or links to terrorism. The current audit focused on 17 specific criteria selected by congressional committee staff, the IRS itself, and from IRS training documents that weren't available to TIGTA during its 2013 audit.
The 17 criteria, which were included in IRS "be on the lookout" listings and training documents in 2010-2012, included organizations that were successors to ACORN, a liberal group that had collapsed following a video scandal in 2009, as well as those interested in medical marijuana and green energy, and those with "Occupy" or "Progressive" in their names or policy positions.
The current audit identified over 900 cases from 2004 to 2013 that might have been chosen for review, and determined that 181 of those had evidence of political activities or potential political campaign intervention. Of those, 146 cases were processed either based on the 17 criteria (83 cases), or were processed while the criteria were in use (63 cases).
The 2013 revelation that the IRS had been targeting conservative group led to the resignation of Lois Lerner, who had been director of the Exempt Organizations unit, and sparked a number of congressional investigations, as well as years of animosity between congressional Republicans and the agency.
TIGTA noted that its new report did not include any recommendations; a separate report that it released in 2015 found that the IRS had implemented a number of improvements to its processes to protect against improperly targeting particular groups. (See "Inspector general finds IRS has improved process of tax-exempt applications.")
Daniel Hood is editor-in-chief of Accounting Today and Tax Pro Today, and has covered the tax and accounting field for over 20 years.
Trump, McConnell open door to tax revamp slipping into 2018
By Alexis Leondis
President Donald Trump and Senate Majority Leader Mitch McConnell appeared to give themselves some breathing room on their goal of completing a tax overhaul before year's end in remarks that emphasized the difficulty of passing major legislation.
Both men affirmed their aim of delivering a tax bill by December during an impromptu Rose Garden news conference Monday. But in response to a question, Trump said that the last major tax overhaul was adopted in 1986, midway through President Ronald Reagan's second term. "I've been here a little more than nine months," he said.
McConnell of Kentucky called completion of a tax bill in 2017 "the goal." But he pointed out that the Affordable Care Act and the Dodd-Frank Act were signed in the second year of former President Barack Obama's first term.
Senate Majority Leader Mitch McConnell, R-Ken., and President Donald TrumpBloomberg News
The Senate is expected to vote later this week on a budget resolution—the vehicle needed to unlock the fast-track mechanism that GOP leaders say they want to use to pass a tax bill in the Senate with only 50 votes.
Kevin Brady of Texas, chairman of the tax-writing House Ways and Means Committee, has said his panel will release tax legislation after Congress adopts the budget resolution.
Meanwhile, the days that remain on the legislative calendar are dwindling. The House is on recess this week, and when it returns, it will have just 28 days left on its calendar to tackle issues including taxes and funding the government.
'Minor Adjustments'
House Speaker Paul Ryan of Wisconsin said last week his chamber plans on getting a tax bill to the Senate in November, and he will keep the House in session until Christmas if needed to finish the legislation. Any bills produced by the House and Senate could diverge on some significant issues, such as the elimination of state and local tax deductions.
Trump's top economic adviser Gary Cohn said earlier Monday that the president has told him a tax revamp must happen in 2017, and Congress will have to stay through any recesses to ensure it's completed.
"You're going to start seeing rhetoric out of the president that this must get done this year," Cohn said at an American Bankers Association conference in Chicago.
Cohn also repeated that the president's two non-negotiable items in a tax bill are a 20 percent corporate rate—down from the current 35 percent—and tax cuts for the middle class.
Trump said Monday there would be "minor adjustments" to the framework that he and congressional leaders released last month to make sure middle-class taxpayers are the biggest beneficiaries of the legislation. He didn't specify what those changes would be.
Bloomberg News
Social Security to provide 2.0% benefit increase in 2018
By Michael Cohn
The Social Security Administration said it would provide a 2.0 percent cost of living adjustment in 2018, the biggest increase since 2012.
The COLA increase will affect more than 61 million Social Security recipients starting in January, the Social Security Administration said Friday. Increased payments to more than 8 million Supplemental Security Income beneficiaries will also begin on Dec. 29, 2017. Some people receive both Social Security and SSI benefits, the SSA noted. The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor's Bureau of Labor Statistics. However, there was only a 0.3 percent increase in 2017 and no increase in 2016.
Several other adjustments that take effect in January are also based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $128,700 from $127,200, according to the SSA. Of the estimated 175 million workers who will pay Social Security taxes in 2018, approximately 12 million of them will pay more thanks to the increase in the taxable maximum.
For more information, see this fact sheet.
Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.
House GOP's tax-cut hopes ride on defining the middle class
By Anna Edgerton
House Republicans agree with President Donald Trump that they want to cut taxes for the middle class, but who fits that definition is where the consensus stops.
For some GOP members of Congress, a middle income household tops out at $100,000 a year. For others, a family making $400,000 still deserves a break.
Whatever definition they settle on will be central to determining whether the party's tax plan delivers on Trump's most basic promise: a historic middle-class tax cut.
"Our framework ensures that the benefits of tax reform go to the middle class, not to the highest earners," Trump said Wednesday in Pennsylvania. "It's a middle-class bill."
The debate is playing out now as House Republicans explore a compromise to cap the income level at which people would still be allowed to deduct state and local taxes, instead of eliminating the deduction altogether as proposed in their recently released tax blueprint. The definition of middle class will also be a key factor shaping where Republicans set the thresholds for individual income tax brackets.
The promised boon for the middle class is a key GOP counterpoint to charges that their plan will mostly benefit America's highest earners. Yet nobody in Congress or the Trump administration has defined yet who counts as middle class.
Regional differences
It's not surprising that lawmakers from rural Alabama may define middle class differently from those representing Manhattan.
But even Republicans from the same state can't agree on the definition. "The middle class is whatever you want it to be in many ways," said Jim Renacci, an Ohio Republican who sits on the Ways and Means Committee. "I think the middle class is anywhere from zero to $80,000 to $100,000. That's really the target zone."
For Warren Davidson, who represents the Ohio district on the outskirts of Cincinnati where the biggest company is AK Steel Corp., middle-class families could be those making up to $250,000 a year.
"I think for our district, people probably don't start feeling like they're middle class until they start earning $40,000 a year, and they probably still feel like they're middle class up until about a quarter million a year," Davidson said in an interview.
Davidson gave the example of a two-teacher household that might be able to pay the bills but struggles to put much away for future college tuition. He said those are the people who need to be keeping more of their paycheck every year. "If those folks aren't getting a tax cut, I don't think we've gotten the tax cut right," he said.
Trump has staked out similar ground. When the president found out that eliminating state and local tax deductions could hurt some middle-class families, he grew angry and demanded changes, according to two people familiar with his thinking. Nonetheless, Gary Cohn, Trump's top economic adviser, said Thursday that the White House isn't reconsidering its support for abolishing that break.
Republican Senator Tim Scott of South Carolina said Friday that he expects a group of House Republicans to help change the GOP plan to put an income cap for the state and local deduction "in the $200,000 to $250,000 range," he said at a policy meeting for conservative donors organized by the Koch political network at the St. Regis Hotel in New York.
A middle-class New York City income will be very different from a middle-class income elsewhere.
No single definition
There is no single definition among economists for what makes someone middle class, but the dividing lines usually depend on income, education, home ownership or some combination of them all.
The Pew Research Center, for example, classifies the middle class as households making between two-thirds and double the median household income -- or between $42,500 and $125,000 for a family of three in 2014. Other definitions consider whether people have a college degree or even their job type.
Americans themselves are more likely to place themselves into the middle class than any other group. In a Gallup poll released in June, 62 percent of respondents said they belong to the middle or upper-middle class.
Kevin Brady, the chairman of the House Ways and Means Committee and one of the main architects of the tax policy framework, said his panel has "not yet" identified how individual brackets will be defined. But, again, he promised that the group is "moving toward a very strong middle-class tax cut."
The policy framework published last month suggests three tax brackets for individuals -- 12 percent, 25 percent and 35 percent -- and gives congressional tax-writing committees the flexibility to add a fourth bracket for the highest earners. It also calls for a near-doubling in the standard deduction for households, a "significant," yet unspecified, increase in the Child Tax Credit and the elimination of personal exemptions for dependents.
A study by the nonpartisan Urban-Brookings Tax Policy Center found that most middle-income families would enjoy after-tax gains under the GOP framework, but that taxes would go up for almost 30 percent of people making $50,000 to $150,000. The study said it used brackets outlined in the House GOP tax blueprint released in 2016 -- a methodology that Brady and others criticized.
Seeking details
Some Republicans have demanded more details of the effects of the emerging GOP plan, arguing that to sell it to voters, they need to know how different demographics in their districts will be affected.
"I want to see specifics about the impact at various income levels," said John Faso, a New York Republican whose district covers the Catskills just north of New York City. "Everyone's definition of middle income is going to be a bit different."
This is an especially important distinction for those representatives from New York, New Jersey and California who are fighting to preserve the state and local tax deduction. An income level that would afford a middle-class lifestyle in most of the country doesn't go as far in wealthy districts where good public schools and proximity to urban centers drive up property values.
Rep. Peter King said families in his New York district can make as much as $400,000 and still feel like part of the middle class. While he suggested that he'd be open to considering a compromise on state and local tax deductions, he rejected the idea of a cap that kicks in at an annual income of $200,000.
'Insidious effort'
Democrats have also used the middle-class argument to attack the emerging GOP plan. House Minority Leader Nancy Pelosi said Thursday that the plan to end the state and local tax deduction is "an insidious effort to raise taxes on middle-class families," noting that half the people who would be hit make less than $100,000.
While people at various income levels claim the deduction, most of its benefits go to those with higher incomes -- who pay higher state and local taxes. People who make more than $100,000 a year claimed about two-thirds of the total amount of SALT deductions in 2014, according to the Tax Policy Center.
With the House scheduled to be in session for only 29 more days before the end of the year, House Republicans say they need to start making some decisions soon.
"I think that's really what needs to happen in the next week to 10 days as far as these numbers starting to slide into these bracket slots for the first time to give an idea of what that looks like," said Mark Walker, the North Carolina congressman who chairs the conservative Republican Study Committee.
Bloomberg News
IRS updates per diem rates for lodging, meals and incidental expenses
By Michael Cohn
The Internal Revenue Service has issued its annual update describing the 2017-2018 special per diem rates that taxpayers can use to substantiate the amount of ordinary and necessary business expenses they incur while traveling away from home.
Notice 2017-54 outlines the special per diem rates, which take effect Oct. 1, 2017. The notice includes the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.
The special meals and incidental expenses rates for taxpayers in the transportation industry are $63 for travel within the continental United States and $68 for anywhere outside the continental U.S.
The rate for the incidental expenses only deduction is $5 per day for any locality within or outside the continental U.S.
For the high-low substantiation method, the per diem rates are $284 for travel to any high-cost locale and $191 for travel to anywhere else within the continental U.S. The amount of the $284 high rate and $191 low rate that is treated as paid for meals is $68 for travel to any high-cost locality and $57 for travel to any other locality within the continental U.S.
The per diem rates in lieu of the rates for the meal and incidental expenses only substantiation method are $68 for travel to any high-cost locality and $57 for travel to any other locale within the continental U.S.
The notice also provides a list of high-cost localities, which have a federal per diem rate of $238 or more.
Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.
IRS Announces 2018 Pension Plan Limitations; 401(k) Contribution Limit Increases to $18,500 for 2018
WASHINGTON — The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2018. The IRS today issued technical guidance detailing these items in Notice 2017-64.
Highlights of Changes for 2018
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $18,000 to $18,500.
The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver's credit all increased for 2018.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2018:
The income phase-out range for taxpayers making contributions to a Roth IRA is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly, up from $62,000; $47,250 for heads of household, up from $46,500; and $31,500 for singles and married individuals filing separately, up from $31,000.
Highlights of Limitations that Remain Unchanged from 2017
Detailed Description of Adjusted and Unchanged Limitations
Section 415 of the Internal Revenue Code (Code) provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made following adjustment procedures similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
Effective Jan. 1, 2018, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $215,000 to $220,000. For a participant who separated from service before Jan. 1, 2018, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2017, by 1.0196.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2018 from $54,000 to $55,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2018 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $18,000 to $18,500.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $270,000 to $275,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $175,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a five year distribution period is increased from $1,080,000 to $1,105,000, while the dollar amount used to determine the lengthening of the five year distribution period is increased from $215,000 to $220,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $120,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $6,000. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $3,000.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $400,000 to $405,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $18,000 to $18,500.
The limitation under Section 664(g)(7) concerning the qualified gratuitous transfer of qualified employer securities to an employee stock ownership plan is increased from $45,000 to $50,000.
The compensation amount under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of "control employee" for fringe benefit valuation is increased from $105,000 to $110,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $215,000 to $220,000.
The dollar limitation on premiums paid with respect to a qualifying longevity annuity contract under Section 1.401(a)(9)-6, A-17(b)(2)(i) of the Income Tax Regulations is increased from $125,000 to $130,000.
The Code provides that the $1,000,000,000 threshold used to determine whether a multiemployer plan is a systemically important plan under Section 432(e)(9)(H)(v)(III)(aa) is adjusted using the cost-of-living adjustment provided under Section 432(e)(9)(H)(v)(III)(bb). After taking the applicable rounding rule into account, the threshold used to determine whether a multiemployer plan is a systemically important plan under Section 432(e)(9)(H)(v)(III)(aa) is increased for 2018 from $1,012,000,000 to $1,087,000,000.
The Code also provides that several retirement-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2018 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $37,000 to $38,000; the limitation under Section 25B(b)(1)(B) is increased from $40,000 to $41,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $62,000 to $63,000.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the Retirement Savings Contribution Credit for taxpayers filing as head of household is increased from $27,750 to $28,500; the limitation under Section 25B(b)(1)(B) is increased from $30,000 to $30,750; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $46,500 to $47,250.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the Retirement Savings Contribution Credit for all other taxpayers is increased from $18,500 to $19,000; the limitation under Section 25B(b)(1)(B) is increased from $20,000 to $20,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $31,000 to $31,500.
The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,500.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) increased from $99,000 to $101,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers who are active participants (other than married taxpayers filing separate returns) increased from $62,000 to $63,000. If an individual or the individual's spouse is an active participant, the applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $186,000 to $189,000.
The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $186,000 to $189,000. The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $118,000 to $120,000. The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.
In 2018, Some Tax Benefits Increase Slightly Due to Inflation Adjustments, Others Unchanged
WASHINGTON — The Internal Revenue Service today announced the tax year 2018 annual inflation adjustments for more than 50 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2017-58 provides details about these annual adjustments. The tax year 2018 adjustments generally are used on tax returns filed in 2019. The tax items for tax year 2018 of greatest interest to most taxpayers include the following dollar amounts:
IRS won't accept returns next year without health coverage
By Michael Cohn
The Internal Revenue Service said that for the upcoming 2018 filing season, it will not accept electronically filed tax returns where the taxpayer does not address the health coverage requirements of the Affordable Care Act, the first tax season it has refused to accept such returns.
In an update Friday to the web page of its ACA Information Center for Tax Professionals, the IRS said it 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. On top of that, the IRS said tax returns filed on paper that don't address the health coverage requirements may be suspended pending the receipt of additional information and any refunds may be delayed.
In previous tax seasons the IRS has held up processing of tax returns that didn't have the health care coverage box checked, but it didn't prevent the returns from being processed. During this year's tax season, President Trump signed an executive order directing agencies not to impose burdens from the Affordable Care Act pending repeal, so the IRS processed the returns, but still required taxpayers to pay a penalty known as an individual shared responsibility payment if they lacked coverage and didn't receive an exemption.
"To avoid refund and processing delays when filing 2017 tax returns in 2018, taxpayers should indicate whether they and everyone on their return had coverage, qualified for an exemption from the coverage requirement or are making an individual shared responsibility payment," the IRS advised. "This process reflects the requirements of the ACA and the IRS's obligation to administer the health care law."
The announcement comes after unsuccessful efforts this year by the Trump administration and Republicans in Congress to repeal the Affordable Care Act and replace it with a Republican health care plan as an alternative to Obamacare. Last week, President Trump announced he would end cost-sharing reduction payments, subsidies to health insurance companies to help provide coverage to low-income people. He also signed an executive order allowing consumers to buy coverage from so-called "association health plans," which could be sold across state lines and wouldn't need to meet the minimum coverage requirements or consumer protections of the Affordable Care Act.
However, with the Affordable Care Act largely still in place, the IRS said taxpayers remain obligated to follow the law and pay what they may owe when filing.
"The 2018 filing season will be the first time the IRS will not accept tax returns that omit this information," said the IRS. "After a review of our process and discussions with the National Taxpayer Advocate, the IRS has determined identifying omissions and requiring taxpayers to provide health coverage information at the point of filing makes it easier for the taxpayer to successfully file a tax return and minimizes related refund delays."
Voices Wage earners should not have to subsidize small-biz owners
By David Nelson
Although it comes as no surprise, President Trump and Republican leaders have proposed lowering tax rates for small-business income from pass-through entities like partnerships and sole proprietorships to 25 percent, significantly less than the highest proposed tax rate on wage income of 35 percent. Having a different tax rate for a special source of income is the opposite of two stated goals for tax reform, simplicity and fairness, and is contrary to the principles of Ronald Reagan's Tax Reform Act of 1986, none of which suggested that wage earners should subsidize small-business owners.
Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, recently expressed alarm about efforts to lower tax rates for pass-through business income: "The day the pass-through loophole becomes law would be Christmas morning for tax cheats. It would make a mockery of the Trump pledge that, quote, 'The rich will not be gaining at all with this plan.'"
On the surface, lower rates for pass-through business income may appear reasonable, but there are serious downsides. In Reagan's 1986 tax act, all items of income, including wages, pass-through business income, dividends, and capital gains were taxed at the same rates. Reagan and a bipartisan Congress wanted simplicity and fairness to accompany tax reform.
One suggestion by Republican leaders toward providing simplicity is to shrink the individual tax brackets from seven to three. Certainly fewer tax brackets do provide a minor amount of simplification. However, a great deal of complexity is provided by having different tax rates for different sources of income such as a separate tax rate for pass-through business income.
For example, recently I helped an accounting student manually fill out a Form 1040 for a person who had a modest amount of income that included a small amount of long-term capital gains. Have you ever tried manually to make the tax calculation when long-term capital gains are included in taxable income? The process is onerous and laborious, including completing special tax forms and IRS worksheets -- an enormous amount of complexity that certainly is not offset by having three tax brackets versus seven. The same complexity will occur if pass-through business income is taxed at separate rates.
In the General Explanation of the Tax Reform Act of 1986, the authors expressed a rationale for eliminating reduced taxes for long-term capital gains. That same rationale for simplicity should apply today and be one of several reasons to reject reduced taxes for pass-through business income: "This will result in a tremendous amount of simplification for many taxpayers, since their tax will no longer depend upon the characterization of income as ordinary or capital gain."
If lower tax rates are provided for business income of partnerships and other pass-through entities, tax avoidance schemes undoubtedly will be used in an attempt to characterize profits of the business as strictly business income versus higher-taxed compensation. Litigation will pit taxpayers against the IRS in arguments over how much of business profits constitutes "reasonable compensation" versus lower-taxed business income.
In addition to simplification, providing the same tax rates for all types of income increases the important element of fairness. The Senate Finance Committee observed in its final report on the Tax Reform Act of 1986:
"First, the committee desires a simpler tax system for individuals."
"Second, the committee desires a fairer tax system. It is difficult for the committee to find fairness in a tax system that allows some high-income individuals to pay far lower rates of tax than other, less affluent individuals."
"A primary goal of the committee is to provide a tax system that ensures that individuals with similar incomes pay similar amounts of tax."
Many of the pass-through "small businesses" operate as large and profitable S corporations, partnerships or sole proprietorships. As pass-through entities, they already receive preferential tax treatment compared to regular corporations since there is no "double taxation," as any profits are taxed only at the individual level, similar to wages.
Now is the time to reclaim Reagan's great compromise with Congress in 1986 that allowed ordinary wage earners to pay taxes at no higher rates than those individuals who received capital gains and pass-through business income. That guiding principle should not be lost today under the guise of 21st century economic needs being substantially different than 31 years ago. It was not fair in 1986 for wage earners to subsidize small-business owners, and it is not fair today.
Mnuchin sees stock market wiping out gains if tax plan fails
By Sarah McGregor
Treasury Secretary Steven Mnuchin said the stock market will probably see its gains wiped out if lawmakers fail to deliver planned tax cuts that will benefit corporate America.
"To the extent we get the tax deal done, the stock market will go up higher," Mnuchin said in an interview on the Politico Money podcast released Wednesday. "But there is no question in my mind if we don't get it done you are going to see a reversal of a significant amount of these gains."
U.S. stocks have been hitting record highs, buoyed by strong economic data and, according to Mnuchin, investor optimism that the Trump administration's planned tax cuts and regulatory relief will move forward. "I think it's priced in, in anticipation, so I don't think it's priced in 100 percent certainty," said Mnuchin. "So I think the market will go up."
Mnuchin also gave his "absolute guarantee" that the tax bill will be ready for the presidential signature by early December to be completed by the end of this year.
In the interview, Mnuchin also shed light on his reading habits: The Treasury secretary gets phone notifications when his boss, President Donald Trump, posts on Twitter, which is one of the first things he checks after waking up. These days briefing books are about the only texts on his nightstand, though Mnuchin said loves learning about people and their history and he devours biographies, including first U.S. Treasury Secretary Alexander Hamilton's.
Bloomberg News
IRS plans further steps to curb identity theft
By Michael Cohn
The Internal Revenue Service, working in partnership with state tax authorities and the tax preparation industry as part of their Security Summit initiative, reported significant progress Tuesday in the battle against tax-related identity theft, with new steps planned for next tax season.
"The underlying numbers show we are making progress on multiple fronts, with significant improvements taken in 2016 and we've continued the dramatic trend in 2017," said IRS Commissioner John Koskinen during a conference call with reporters Tuesday. "For example, in calendar year 2016 the IRS stopped 883,000 confirmed identity theft returns. That was a 37 percent drop from 2015. This year through August, the IRS has stopped 443,000 confirmed identity theft returns, a 30 percent decline from the same period last year. This reflects the fact that we've made it harder for criminals to file false returns in volume, so they have to work more on an individual return-by-return basis. Another important sign involves the number of people reporting to us that they were victims of identity theft. In 2016, the number of victim reports was 376,000, a drop of 46 percent from the prior year. This year through August, 189,000 taxpayers filed victim reports, an additional drop of about 40 percent from the same period last year. Taken together over the two years, the number of taxpayers who filed victim reports has dropped by about two-thirds. "
Financial institutions stopped 124,000 suspect refunds in 2016, a 50 percent plunge from 2015. So far this year, financial institutions have stopped 127,000 suspect refunds, in part reflecting a handful of cases involving several thousand accounts.
"The states and the IRS have improved their ability to stop fraudulent refunds by working with financial institutions to help identify refunds that are questionable," said Koskinen. "And since 2015 the IRS has been running a pilot program to test the idea of adding a verification code to W-2 forms. This helps the IRS confirm the accuracy and integrity of tens of millions of electronically filed tax returns. These and other initiatives made a significant difference for taxpayers. The underlying numbers show we are making progress on multiple fronts with significant improvements taken in 2016 and we are continuing the dramatic trends in 2017."
New Protections for 2018
The IRS and its Security Summit partners plan to add more protections for the 2018 filing season, as well as share more data points from tax returns than in the past.
In 2018, a new Verification Code box will appear on all official W-2 forms for the first time. Many taxpayers will see a 16-character code on approximately 66 million Forms W-2 to help authenticate the W-2. Taxpayers preparing their own returns and tax professionals will be urged to enter the code if the box contains the 16-digit number.
The Summit partners are putting greater emphasis on identity theft protections for business returns in the Form 1120 and 1041 series. The IRS will be asking tax professionals to get more information on their business clients to help the IRS authenticate that the tax return being submitted is actually a legitimate return filing and not an identity theft return. Some of the new questions people may be asked to provide when filing their business, trust or estate client returns include:
• The name and Social Security number of the company individual authorized to sign the business return. Is the person signing the return authorized to do so?
• Payment history – Were estimated tax payments made? If yes, when were they made, how were they made, and how much was paid?
• Parent company information – Is there a parent company? If yes, who?
• Additional information based on deductions claimed.
• Filing history – Has the business filed Form(s) 940, 941 or other business-related tax forms?
Intuit chairman and CEO Brad Smith hailed the progress that has been made, but said more needs to be done. "American taxpayers are still under siege from cybercriminals, so we remain steadfast in our commitment to fight tax cyberfraud. We're proud of the progress being made," he said. "This year also marked the launch of the Tax Information Sharing and Analysis Center (ISAC), which has dramatically improved real-time security information sharing to strengthen our collective ability to safeguard taxpayers. Efforts to educate taxpayers and tax professionals have also resulted in greater awareness and accountability to protect online identities and increase the safety and security of the nation's tax system. But there's still much work to do. We have the opportunity to build on existing trusted customer requirements to continuously improve taxpayer authentication. As technology advances, we must continue to innovate to protect taxpayer information. And for those taxpayers who become a victim of tax fraud, it is imperative that we collectively provide faster, better relief and assistance to those who depend on us."
H&R Block's new president and CEO Jeff Jones pointed to the progress made by the Security Summit, and like Smith he also praised Koskinen's leadership. "As recent events show—the ongoing tax reform discussion, a new IRS commissioner to be named, and three new CEOs to the Security Summit—this forum is at the cusp of change," he said. "But one thing that likely will never change is the adaptiveness of criminals. As someone who has experienced dealing with a data breach, I know we can never let up in our fight against cybercrimes and identity theft. We should expect criminals to continue employing a variety of approaches and tactics to find vulnerabilities in the system, and so I am fully committed to the Security Summit efforts to protect the tax ecosystem and to protect the legitimate taxpayer. Security of our clients' information remains a top priority in the battle against this persistent and evolving threat."
John Ams, executive director of the National Society of Accountants, noted that tax professionals are an important part of the solution. "The IRS and the various stakeholders have been heavily involved in the effort to safeguard the integrity of our tax administration process," said Ams. "The tax professional community needs to play an integral part in that safeguarding process as well because the information needed by criminals to file fraudulent returns—name, address, income, where they work, how long they have lived or worked in a particular place, if they have a mortgage or a car loan, the names of family members—that is all kept in a tax professional's file. Taxpayer data is the key to the kingdom in this digital age, and the files kept by tax professionals are increasingly a target for cybertheft. Tax professionals take seriously our obligations to safeguard the data, but we also recognize that we are tax professionals, not IT professionals. That is why we appreciate the work of the Security Summit, the ISAC and the IRS. We need to get the message out to taxpayers and tax professionals to make sure they are aware of the threat and how to secure their data and personal information."
Phishing Scams
Accounting Today asked Koskinen about the increasing number of phishing scams being reported by the IRS against tax professionals, and whether that was a way for them to get around some of the identity theft filters and protections the IRS and its partners have put in place.
"It's a challenge that we've been worried about with the Security Summit from the start," he responded. "That is, as the states and the IRS get more secure and more able to in fact stop direct filings, the criminals are going to get more sophisticated and try to figure out how to get more data and the place to get more data, as John [Ams] was saying, is through the preparers, or companies. So we began to see in effect the early warnings came from members of the Security Summit, both in terms of attacks on preparers as well as the phishing schemes on companies. What they're doing, and it's difficult for people to be careful when they're getting emails, is they send an email that looks real, and it says either you've got a problem with your account, and click here to access your account. They pretend to be a way to connect with your tax preparer, or for the tax preparer to connect with their client. Or the most insidious in some ways are the emails within a company to the CFO or the human capital departments, saying from the president, 'I need a list of the employees and their W-2's and other information.' And the information is sent, but it doesn't go to the CEO. It goes to an organized crime syndicate. So we have spent a significant amount of time through the Summit and all of our partners with campaigns to tax preparers urging them to put in security software and other firewalls in their systems. We've spent a lot of time and had great cooperation with the preparer community and the professional community trying to give them not only warnings, but increasingly advice on what steps to take."
Courtney Kay-Decker, director of Iowa's Department of Revenue, emphasized the importance of the partnership. "From my perspective as the state tax administrator, the work of the Security Summit is truly a paradigm shift," she said. "I would be remiss if I didn't thank Commissioner Koskinen for all of your efforts and the efforts of your team in spearheading this effort. As we look to the work that we do at the state level, collaboration and communication among industry, states and the IRS to identify fraudulent schemes and problematic returns earlier is the critical component of the Summit. We're better able to protect our taxpayers from tax refund fraud and from the effects of identity theft by working together."
"Now entering its third year, the Summit's work has already translated into tremendous success, which has decreased identity theft related tax refund fraud by two-thirds since 2015, " said Brian Tate, president and CEO of the Network Branded Prepaid Card Association, which participated in the Security Summit. "In today's ever-changing environment, collaboration among all stakeholders is vital to protect taxpayers from identity theft and tax refund fraud. For this reason, we remain committed to participating in the Summit in order to address—and combat—fraudulent activity plaguing taxpayers."
To help businesses and their tax preparers with these efforts, the IRS has created a new Identity Theft Guide for Business, Partnerships and Estate and Trusts.
IRS Commissioner Transition
Green Dot CEO Steve Streit congratulated Koskinen on his term as head of the IRS, where his term will expire next month, and his leadership of the Security Summit. "Because of you, Commissioner Koskinen, because of you personally supporting the initiative, it worked. Today we celebrate a great deal of success because of the efforts of so many, and because of the outstanding leadership of the entire IRS workforce and management team, led by Commissioner John Koskinen. As the commissioner's years of service come to a close at the IRS, I wish to thank and congratulate him on a great run, not just here at the IRS, but more importantly on behalf of all Americans, we thank you for your many years of public service for our country and making America a better place. You Commissioner are the definition of an outstanding and honorable public servant and we thank you, John Koskinen."
Koskinen survived despite efforts to oust him by Republicans in Congress. He was asked by a reporter on the call if he had any light he could shed on a successor, but couldn't provide any specifics.
"While there were some issues about how long I was going to survive I always maintained starting last December the real question was finding in enough time to get them through the review process and the confirmation process," said Koskinen. "I've talked on numerous occasions with [Treasury] Secretary [Steven] Mnuchin, who I know cares greatly about this and has been working on this, there is a real focus by the administration on finding a successor. It takes about six weeks of background checks and security checks for you to get a Top Secret security clearance and have your taxes audited, so it is very possible that someone is already in that process. You can't announce them until they've finished all of that."
"I have gotten no indication about any particular name or where they are, but it would not surprise me because I know they're focused on it that sometime in the very near future we will have a name provided," he added.
Secrecy, division, complaints: GOP tax rollout echoes Obamacare
By Sahil Kapur
Congress is trying to ram through a bill that would reshape the U.S. economy in just a few short weeks, but its leaders have kept the plan shrouded in secrecy and released not a word of legislative text.
Sound familiar? The GOP is handling its tax-overhaul rollout in almost the exact same way it did the Obamacare repeal effort and hoping for a different result. The Republicans' seven-year quest to repeal and replace the Affordable Care Act imploded as they tried to bypass Democrats but failed to rally their own forces amid unresolved policy disputes.
Already, many lawmakers are making similar complaints about the tax effort—saying they need more details before they can commit to the audacious timeline House Speaker Paul Ryan has vowed to meet: He wants a bill through the House by Thanksgiving. Rank-and-file members fear they'll have two choices: Swallow whatever bill their leaders devise or blow their self-imposed deadline of sending a bill to President Donald Trump before year's end.
"We don't know the brackets," Representative Chris Collins of New York, a Trump ally, told reporters after a Republican conference meeting Tuesday. "We don't know where we are on estate taxes. We don't know where we are on" the state and local tax deduction—a contentious issue for members like Collins from high-tax states.
"We don't know where we are on the size of the child tax credit," he continued. "We don't know, we don't know, we don't know, we don't know, we don't know."
In the Senate, meanwhile, bad blood between a pair of Republicans and Trump escalated on Tuesday—bringing tumult as the president sought to reach out to senators during a Capitol Hill visit. Trump and Senator Bob Corker of Tennessee reignited their feud, hurling insults over Twitter. Later, Senator Jeff Flake of Arizona, who has also sparred with Trump, shocked the political world by announcing he won't seek reelection in 2018—and then slammed his party for accommodating the president.
"I must say that we have fooled ourselves for long enough that a pivot to governing is right around the corner, a return to civility and stability right behind it," Flake said on the Senate floor. "By now, we all know better than that."
If the similarities to the Obamacare debacle seem haunting, GOP leaders are betting they won't be stymied this time—if only because of the party's sheer need for a legislative victory. There's another key difference: Republicans say they learned from the health-care fight that they had to come up with a unified tax plan, along with the White House, before either chamber began drafting legislation.
The Sept. 27 tax framework released by the White House and GOP leaders sought to lay out some clear goals—including setting a corporate tax rate of 20 percent and cutting tax rates on businesses and individuals—but it doesn't offer answers to some of the toughest questions, such as where to set income brackets or which corporate tax breaks to end.
The House and Senate may go their separate ways in filling in the blanks—and possibly changing key provisions included in the framework. For his part, Trump has already ruled out certain measures, such as changes to retirement savings vehicles, but the tax-writing committee heads have signaled that retirement changes could still be on the table.
'Amateur View'
House Ways and Means Chairman Kevin Brady said Tuesday his goal is to release tax legislation on Nov. 1 if Congress votes this week to adopt the budget vehicle, a critical step to passing tax changes without Democratic support.
One member of his committee, Representative Dave Schweikert of Arizona, responded succinctly when asked what issues are still outstanding: "All of them."
David Stockman, a former budget director for President Ronald Reagan, said the Trump plan "can't possibly get done by year-end," describing that as an unrealistic and "amateur" view. He said Reagan's 1986 tax overhaul, which Republicans cite as a guiding light for their current efforts, took two years because cobbling together the support for raising revenue to pay for tax cuts is "very hard politically."
The president's feuds with Corker and Flake won't make it any easier. Because neither senator is seeking re-election, they can vote on tax legislation free of the political pressure many Republican incumbents feel to show voters an achievement before primaries begin next spring. After failing to repeal the 2010 Affordable Care Act, build a wall, or pass an infrastructure bill, party leaders see a tax overhaul as their last chance for a legislative win in Trump's first year.
'Lot of Noise'
Senate Majority Leader Mitch McConnell deflected repeated questions Tuesday about Trump and his GOP members, insisting the disputes won't affect tax-overhaul efforts.
"If there's anything that unifies Republicans it's tax reform," McConnell said, dismissing the spats as "a lot of noise out there." He faces the same narrow margin that scuttled an Obamacare repeal in the Senate—any more than two defections would block a tax bill unless he can find Democratic support, which isn't likely.
The road ahead contains landmines—including must-pass bills such as averting a government shutdown on Dec. 8 and renewing the expired Children's Health Insurance Program. Another problem is how to get the GOP framework's $2.4 trillion in estimated red ink down to $1.5 trillion specified by the budget, especially if pay-fors like the proposed repeal of the state and local tax break are softened and the Child Tax Credit is raised.
Representative Dave Brat of Virginia said he's hearing "scary background noise" that the revenue offsets may go away and, as a result, the bill's tax rates could be higher than expected. The framework proposes slashing the corporate rate to 20 percent from 35 percent and condensing the individual income rates from seven to three, with a top rate of 35 percent, unless the tax committees decide to add a fourth rate above that.
"We can do this. There is a lot that needs to get done," said Representative Lee Zeldin, a New York Republican.
But the lack of details has some GOP members on edge.
Representative Matt Gaetz of Florida, a freshman Republican, said he's not ready to "vote for a budget that nobody believes in for a tax bill that no one has read."
—With assistance from Colleen Murphy, Erik Wasson, Anna Edgerton and Jack Fitzpatrick
Bloomberg News
Russ Fox, E.A. of Clayton Financial and Tax of Las Vegas, Nevada
As I write this from an undisclosed location on my vacation, it's now two days past the closing (for most of us) of the 2017 Tax Season (filing 2016 tax returns). Our clients told us some, shall we say, interesting things this year. Here are five lowlights:
5. "I sold things on the Internet, so I don't owe state tax on it."This client, call him Mr. Smith, sells products over the Internet. He's a resident of a state with an income tax. "But Russ," he said, "My customers use the Internet to purchase the products. This business isn't located in my home." Indeed, the products ship from Nevada, rather than his home state. Unfortunately, there are two arguments that outweigh his idea. First, he resides in a state with a state income tax; all of his worldwide income is subject to that tax. Second, he is conducting the business from his home: He directs it, manages it, and profits from it. His business may be conducted over the Internet, but it's conducted by him in his home (in his home state). He eventually came around to paying state income tax. I did offer him a solution: Move to Nevada or some other state that doesn't have a state income tax. His wife didn't like that idea.
4. "I don't want to file the New York tax return, even though I'm getting a full tax credit on my California return." Mrs. Jones didn't like it when her employer withheld New York income tax for a four week stint she did working in the Big Apple. "I'm a California resident; how dare New York tax me!" I asked her if she did spend that time in New York. She did. I explained she would get a full tax credit on her California tax return for the New York tax. She didn't care. I then explained that if she didn't pay the tax (after withholding, there was a small balance due to New York) she'd get a bill for penalties and interest in a couple of years, and she would pay a lot more than if she simply filed the return. She would also then have to amend her California return to get the tax credit; that would incur additional fees from me. That last point caused her to change her mind.
(The issue of nonresident taxation is a big one, though. Congress has been looking at making the rules for such taxation uniform, and that would be a godsend to both taxpayers and tax professionals.)
3. "I only had the foreign bank account for one week. I don't want to file the FBAR." A client inherited money in Spain; the money was moved into a Spanish bank account for exactly one week before being wired to her US account. Since the funds weren't taxable (gifts aren't taxable to the recipient) nor was it reportable (gifts from foreign individuals can be subject to reporting but this gift wasn't large enough to trigger that) she felt it was none of the government's business that she inherited funds. I explained that Congress felt otherwise. She didn't care. I then told her there's a minimum $100,000 penalty for willingly failing to file the FBAR. She then asked me how it was filed.
2. "The side income was only $30,000. Doesn't that qualify for the de minimis exception to reporting income?" My response was simple: There is no de minimis exception to reporting income. (And even if there were, $30,000 is likely not de minimis.)
1. Twice I heard, "The 1099 never showed up. I don't have to report the income, right?" Wrong: All income is taxable, no matter if you receive paperwork or not.
We have a bonus lowlight, too. An individual who I effectively turned down as a client apparently read up on Irwin Schiff. The late Mr. Schiff argued that the income tax was unconstitutional, and various other incorrect arguments about how one can legally stop paying the income tax. He was correct in that anyone can stop paying income tax; he was incorrect in saying that one can do that legally. Mr. Schiff died at ClubFed.
In any case, this unnamed individual called me and asked me if I believe in following the law on taxes. I do, of course. He then said that he was looking for a tax professional who believed in the law. So far, so good. He then said that since he had read that the income tax was voluntary he was only going to pay tax on a fraction of what he made; and he wanted me to prepare such a return. I told him that as long as the fraction was equal to 100% of his income, I'd be happy to do so. Strange, I never heard back from him.
I'll likely have some serious thoughts about the Tax Season that was next week when I get back from my all-too-brief vacation.
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.
15427 Vivian - Taylor, Michigan 48180 – voice (734) 946-7576 fax (734) 946-8166
website: www.rigotticpa.com email: email@example.com