Congress recently reconvened after its August recess with several tax related items on its upcoming agenda. Both the House and Senate are slated to consider the following end-of-year proposed tax legislation:
Congress often enacts temporary tax provisions, most of which are tax cuts. They are temporary in that Congress is forced to review them periodically for their effectiveness and impact on the economy and taxpayers. There are over 30 of these types of bills that expired or will expire this year and need to be reviewed. These provisions are collectively known as the “tax extenders” because of the expectation that lawmakers will consider extending most or all of them.
Some of these include extending disaster tax relief, the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC), the Child and Dependent Care Tax Credit (CDCTC) and possibly reversing the 2017 estate tax exemption so that it increases three years earlier than scheduled.
Tax Extenders primarily fall in these four categories:
- Tax Relief for Individuals
- Green Energy Incentives
- Employment and Economic Incentives
- General Business Incentives
After “green energy” provisions, individual provisions represent the second largest component of the tax extenders, totaling nearly a third of the cost.
These provisions include relief for homeowners who obtain debt forgiveness on a home mortgage, a deduction for mortgage-insurance premiums and a provision that allows college students to deduct tuition and related expenses. They also include incentives for individual consumers to purchase energy efficient products for their home, as well as certain types of alternative vehicles.
General Business Incentives mostly determine when a business may utilize certain deductions and whether the costs are deductible in the first place. Most reward business and consumer investments in energy efficiency and production, as well as the use of alternative fuels.
Also on the agenda for 2019 tax legislation is the Disaster Tax Relief Act of 2019.
The Disaster Tax Relief Act of 2019 addresses relief for both individuals and businesses in certain designated federal disaster areas. The following provisions are included in the act:
Retirement Account Withdrawals – Qualified individuals may make early withdrawals from retirement accounts to help with expenses as they seek to rebuild their lives without incurring a 10-percent early withdrawal penalty.
Charitable Deduction Increases- This provision temporarily increases limits on qualified charitable contributions. Current tax law provides limitations on the ability of taxpayers to claim itemized deductions for the full value of their charitable contributions. Generally, qualified contributions are those that are paid in cash in 2019 to charitable organizations for relief efforts in qualified disaster areas.
Deducting Losses from Damages – Subject to certain limitations, a taxpayer may generally claim an itemized deduction for losses sustained during the year, not compensated by insurance or otherwise, attributable to a federally declared disaster.
In addition to helping disaster victims, the 2019 tax legislation proposals also want to help Americans save more for retirement.
To incentivize low- and moderate-income Americans to save more, the tax credit known as the Saver’s Credit provides a tax credit in the amount of money contributed to your IRA or ABLE accounts. There are income restrictions for this credit to apply. Keep in mind tax credits are not the same as deductions. A deduction lowers your tax bill by reducing your taxable income while a credit directly reduces your tax bill. The Saver’s Credit is worth up to $2,000 ($4,000 if filing jointly).
While encouraging saving for retirement, other 2019 tax legislation is looking at changing how the kiddie tax is calculated because some lawmakers think it may be too generous for taxpayers.
The kiddie tax is a tax on a child’s unearned income, such as interest, dividends, and capital gains, not on the wages earned by minors. A child’s net earned income is taxed as normal. A child’s net unearned income that exceeds the unearned income threshold ($2,200 for 2019) is subject to the kiddie tax and is taxed at the rates that apply to trusts and estates. Policymakers designed the kiddie tax to prevent parents from passing their unearned income to their children to avoid paying higher tax rates.
Under the Tax Cuts and Jobs Act (TCJA), the method of calculating the kiddie tax may have reduced the amount owed more than lawmakers wanted so the House of Representatives is considering a bill that would revert the calculation of the kiddie tax to the method used before the TCJA.
There are several different legislative proposals to alter the treatment of a child’s unearned income, each with its own impact to consider. Finally, Congress must also address health care issues as part of the final quarter 2019 tax legislation.
Recently-passed House bills include provisions repealing the “Cadillac tax” on high-cost employer-sponsored health coverage, which is one of the most controversial parts of the Affordable Care Act. It is not yet known whether the Senate will support the repeal of the Cadillac tax.
The Cadillac tax is a 40% tax on many employer-provided health insurance plans — specifically, those that cost more than $11,200 per year for an individual policy or $30,150 for family coverage . The Cadillac tax was supposed to take effect in 2018, but Congress has delayed implementation twice primarily because of the expectation that employers would cut benefits to avoid the tax.
While both the House and Senate are motivated to finalize all of these, there are simply not enough days left in the legislative year for final resolutions to all proposed 2019 tax legislation. The Joint Committee on Taxation has also identified over 100 potential technical corrections that will need to be addressed and this is likely to cut into a significant portion of the time spent on overall tax legislation.
For many taxpayers these late in the year changes lead to unpredictable tax bills. If you face tax debt and need legal assistance to determine your options for tax relief, contact Wilson Ratledge. Our experienced tax controversy attorneys in Raleigh can discuss options such as Offers in Compromise and Installment Agreements. There are many strategies involved in tax resolution. Let’s find a time to discuss your situation and determine which strategy will provide the best results for you.