tax

Senate and House Compromise on Tax Reform

With a vote of 51 to 49, the Senate voted in favor of its version of HR 1, leading the way to the passage President Trump’s $1.5 trillion tax cut package. Since the approval of the Senate’s tax reform plan follows the approval of the House version, the path is now open for the two houses of Congress to work out their differences and agree on a piece of tax legislation that President Trump can then sign into law. If the process goes as the Republicans hope it will, they will be victorious in approving the most significant tax overhaul in over three decades.

Although the Senate and House tax reform plans target the same issues, they often differ on how these items should be treated. One of the major difference is that the House bill makes the new tax adjustments permanent for both businesses and individuals while the Senate bill provides for the expiration of most of the individual tax changes at the end of 2025. The following is a list of some of the important areas targeted by the Republican tax reform packages with an indication of how the House and Senate plans differ:

·        Both tax plans suggest a significant increase to the standard deduction but differ slightly on the amounts of the increase. The House bill raises the standard deduction to $12,200 ($18,300 for HOH and $24,400 for couples filing jointly) while the Senate bill increases it to $12,000 ($18,000 for HOH and $24,000 for couples filing jointly).

·        The House bill proposes four tax brackets with the top marginal tax rate held at 39.6% while the Senate bill keeps the current seven tax brackets but reduces the top marginal rate to 38.5%.

·        The House bill proposes eliminating the tax deduction for medical expenses while the Senate bill keeps it with a cut-off of 7.5 % for the next two tax years.

·        The House bill increases the child tax credit to $1600 for each child under the age of 17 while the Senate bill increases it to $2000 for each child under the age of 18. Both tax reform plans make the first $1000 refundable.        

While the House and Senate tax plans differ on the key points outlined above they are in agreement on the following items: 1) elimination of the additional personal exemption, 2) elimination of exemptions for spouse and dependents, 3) elimination of the additional deduction for the blind, disabled or elderly (over 65), 4) elimination of the sales tax deduction and/or the state and local income tax deduction, 5) retention of the charitable donation deduction, 6) retention of the property tax deduction with a cap at $10,000, 7) elimination of the tax deductions for home office expenses, unreimbursed employee expenses and tax preparation services 8) elimination of tax deductions for student loan interest and moving expenses and 9) exclusion of the first $250,000 of capital gains from the sale of a home that has been lived in for five out of eight of the previous years (allowed once every five years, House bill subject to income phase out). 

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IRS Reverses ACA Declaration Requirement

The IRS has recently announced that it will reverse its position on enforcing the ACA declaration requirement. Although the agency accepted tax returns that failed to indicate healthcare coverage during the 2017 filing season, they have recently stated that this information will be required in order for a return to be processed in 2018. An IRS spokesperson clarified the reason for the change, noting that the process “reflects the requirements of the ACA and the IRS’s obligation to administer the healthcare law.” They also maintain that declaring health coverage at the time a return is filed makes filing easier and reduces the possibility of a refund delay.

The requirements of the Affordable Care Act state that every taxpayer must demonstrate that they have “essential minimum” healthcare coverage. Forms of coverage that fulfill this requirement include Medicare, Medicaid, TRICARE, VA benefits, health insurance provided by an employer, privately purchased health insurance and health insurance obtained though the Health Insurance Marketplace. If one of these forms of coverage is not in place, the taxpayer must either obtain a waiver based on demonstrating a financial hardship or be subject to the assessment of a penalty. The penalty, which is referred to as the shared individual responsibility payment, is the greater of 2.5% of the taxpayer’s adjusted gross income or $695 per adult and $347.50 child up to a maximum of $2085.

Although President Trump signed an executive order earlier this year giving executive departments and agencies the authority to roll back certain aspects of Obamacare, the IRS has actually stepped up enforcement. While 2017 tax returns were processed even when line 61 indicating health care coverage was left blank, this will not be the case in for the upcoming tax season. In fact the IRS recently issued an official statement indicating that the 2108 filing season will be the first time the IRS will not accept tax returns that omit healthcare information. They have said that electronically filled and paper returns with this omission will be thrown out, thus delaying the receipt of any refund associated with the return. In addition to stepping up enforcement for the current tax year, the agency has recently sent out letters to over 130,000 taxpayers who did indicate healthcare coverage on their 2014 and/or 2015 tax returns.

Only time will tell how all of this will play out. Republican Congressmen have launched several attempts to repeal and replace the Affordable Healthcare Act but, to date, have been unsuccessful. This means that the IRS requirement that taxpayers indicate their healthcare coverage on their 2017 tax returns will stand as the 2018 tax season approaches. Although none of the more serious tax collection techniques such as tax liens or tax levies apply to meeting this requirement, the threat of a withheld tax refund may well be enough to force taxpayers into compliance on this issue.

The licensed accountants and bookkeepers at Las Vegas Bookkeeping have the knowledge and expertise to help your business run smoothly and efficiently. Contact us by phone at (702)514-4048 or by email at tina@lasvegasbookkeeping.com to receive a free, no obligation consultation. Don’t wait! Streamline your business operations by contacting the professionals at Las Vegas Bookkeeping today