Congress returns from its summer recess on Monday, September 9 and it may address several pieces of outstanding tax legislation over the next month. The federal government must pass budget appropriations soon and many are hoping that a few tax bills can hitch a ride. Otherwise, the tax bills may not be addressed until the end of the year or completely languish with little appetite to address them in the 2020 election year.
The possible tax bills that may be addressed cover diverse topics, including:
- Tax Extenders—Congress is struggling with what to do with certain tax extenders including certain provisions which expired at the end of the 2017 tax year.
- Disaster Relief— Proposed legislation would make permanent certain tax provisions providing relief to victims of federal disasters alleviating the need to pass a separate bill for each disaster.
- Retirement Savings—Legislators may try to come to an agreement on a bipartisan retirement savings bill that would change IRA rules on contributions and distributions, among other things.
- Kidde Tax—Several proposals have been made to exclude certain items from the definition of unearned income and thereby fix problems caused by the 2017 reform legislation.
- Technical Corrections—Taxpayers are hopeful that Congress will make other corrections to the 2017 reform legislation especially to address the retail glitch and the effective date for eliminating the two-year carryback of net operating losses (NOLs).
Addressing Uncertainly of Tax Extenders
The Code contains numerous temporary tax breaks that typically get extended by Congress annually or bi-annually, so-called “tax extenders.” Both Democrats and Republicans have criticized the uncertainty created by these temporary tax rules as not ideal policy for taxpayers.
During the year Congress has been examining over 40 tax breaks that have already expired or will expire between 2017 and 2019. They are examining whether to extend these provisions (even retroactively if necessary), make them permanent, let them simply expire, or some combination. Tax writers are hoping to put together bipartisan legislation once they return to work this month.
Most of the extenders are rather narrow but can affect many businesses and individuals. They cover various areas including:
- Cost-recovery of business expenses such as expensing energy efficient improvements and extended depreciation recovery periods for certain property,
- Business-related tax credits such as for renewable electricity production or energy-efficient residential homes,
- Energy-related tax credits such as for nonbusiness energy property or new qualified fuel cell motor vehicles,
- incentives for the production and use of alternative fuels including credits for biodiesel or alternative fuel vehicle refueling property,
- Individual tax breaks including the deductions for mortgage insurance premiums and qualified tuition and fees.
Permanent Disaster Relief Proposed
We are in the peak of the Atlantic hurricane season and with it may bring interest in Congress to make permanent several tax benefits for victims of major disasters. Tax benefits for disaster victims are currently provided on a case-by-case basis. This means that victims of one major disaster might be provided tax benefits, while victims of another major disaster may not unless Congress passes separate legislation.
There are several proposals that would make permanent tax benefits for victims in a disaster area whenever the president declares a federal disaster. These benefits include:
- Rules allowing access to retirement funds,
- A tax credit for employee retention during business interruption,
- Suspension of the limits on deduction for certain charitable contributions,
- Rules for the deduction of disaster-related personal casualty losses,
- Rules for measurement of earned income in qualification for certain tax credits.
Bipartisan Retirement Savings Bills
Bipartisan legislation has overwhelmingly passed the House and awaits Senate approval that is aimed to increase the use of retirement plans by individuals and businesses. As currently written, the bill would make the following reforms:
- Repeal of the maximum age for traditional IRA contributions,
- Increase the minimum age for taking required minimum distributions from 70-1/2 to 72,
- Allow certain part-time workers to participate in 401(k) plans,
- Allow up to a $5,000 penalty-free withdraw from retirement accounts within a year of birth or adoption for qualified expenses,
- Allow up to $10,000 withdraw from certain 529 plans to repay student loans, and
- Expand the availability of pooled multiple employer plans (MEPs).
To help pay for the changes, the legislation would shorten the distribution period for a non-spouse designated beneficiary of an IRA to 10 years rather than the beneficiary’s lifetime. Thus, the change would mostly eliminate “stretch IRAs.” The 10-year limit would not apply a designated beneficiary who is disabled or chronically ill.
Fixing Kiddie Tax Problems
The Tax Cuts and Jobs Act (TJCA) (P.L. 115-97) simplified the kiddie tax beginning in 2018 by taxing a child’s unearned income as the same rates used for trusts and estates. However, the effect of using trust and estate rates can result in a higher tax liability for a child. This is because the income thresholds in applying trust and estate tax rates are much lower than for an individual (i.e., the child or the child’s parents).
Many low- and middle-income families have seen higher kiddie tax liability as a result, most notably families of military members who received survivor benefits (Gold Star families). One legislative proposal would fix this issue by excluding certain items of unearned income for the kiddie tax to reduce tax liability. This includes:
- Military survivor benefits,
- Distributions from qualified disability trusts,
- Taxable scholarships,
- Indian tribal payments, and
- Alaska Permanent Fund dividends.
A broader proposal would simply repeal the TJCA changes to the kiddie tax. It would restore the kiddie tax calculation to the pre-2018 rules and depend on the tax rate of a child’s parents.
Technical Corrections to TJCA
The TJCA made other significant changes to the Code and like most large pieces of tax legislation require some technical corrections. However, there are a couple of substantive errors apart from the kiddie tax that taxpayers and practitioners are most eager for Congress to address.
Depreciation for qualified improvement property placed in service after 2017 is intended to replace the categories of 15-year qualified leasehold improvement property, 15-year qualified retail improvement property, and 15-year restaurant property. However, TJCA failed to provide a 15-year recovery period and instead a 39-year recovery period applies for qualified improvement property unless a technical correction is made. The “retail glitch” also means qualified improvement property placed in service after 2017 is not eligible for bonus depreciation.
The TJCA also generally eliminated the two-year carryback period for net operating losses (NOLs) and allows for an unlimited carryforward period. However, the legislative language only applies the change to NOLs arising in tax years ending after 2017. Congress’ intent was to have the change apply to NOLs arising in tax years beginning after 2017. Without a technical correction this means that an NOL arising in the 2017/2018 tax year of a fiscal-year taxpayer may not be carried back two years.
By John Buchanan, J.D. LL.M.