Election-year politics continue to drive 2016 tax legislative action as both parties lay down policy agendas for 2017 and beyond. As expected, Congressional party leaders are offering competing plans on how to reform the tax system and to promote other policies intended to increase economic growth and make American companies more competitive. At the same time, candidates seeking to secure the Presidential nomination are advancing tax reform plans. Although there is a lot of talk about tax reform, according to recent surveys of Washington tax experts, it is unlikely anything significant will happen prior to the November election.
Regardless, prior to leaving Capitol Hill in mid-July for the Democratic and Republican nominating conventions, lawmakers moved forward on tax legislation for individuals and businesses. Before recessing, the House voted to undo part of the Affordable Care Act (ACA) and approved a reduced budget for the IRS. Leading tax writers in the Senate addressed tax-related identity theft and home buying incentives. Bills targeted to tax reform, small business tax relief, and more have been introduced and are working their way to votes in the House and Senate.
Here are the highlights:
Just before recessing for the Independence Day holiday, House Republicans unveiled a tax reform blueprint. Since January, the House Ways and Means Committee has been exploring different approaches to tax reform. House Ways and Means Chair Kevin Brady, R-Texas, outlined six principles for tax reform:
- The tax code must be simpler, fairer, and flatter;
- Loopholes must be closed and special interest provisions eliminated for lower rates for everyone;
- Businesses of all size must have a fair and competitive tax rate;
- The current world-wide tax system must be replaced with a permanent, modern, territorial-type system;
- Reform should be bold, ambitious and pro-growth;
- A 21st century tax system should not raise taxes to bail out Washington’s spending problem.
The GOP blueprint would consolidate the individual tax rates into three brackets (12, 25 and 33 percent). Additionally, the blueprint would repeal the alternative minimum tax (AMT). The blueprint also calls for a simplified return for individuals.
For businesses, the blueprint would lower the top corporate tax rate to 20 percent. The blueprint also would create a new 25 percent business tax rate for small businesses organized as sole proprietorships or pass-through entities. Tax rates on capital gains and dividends also would be reduced.
House Republicans said they will spend the remainder of 2016 developing the blueprint into legislative proposals. While Republicans likely have enough votes to pass the proposals in the House, they lack the 60 votes needed to pass tax legislation in the Senate. Democratic lawmakers in both the House and Senate have been cool to the GOP’s tax reform proposals.
Affordable Care Act (ACA)
Before passage of the ACA, taxpayers could use health flexible spending arrangement (health FSA) dollars to pay for over-the-counter medications. The ACA abolished this treatment, leaving health FSA funds for the purchase of prescribed medications with some exceptions. Regularly, bills have been introduced in Congress to go back to the pre-ACA rules for health FSAs but the bills have failed to pass.
This year was different. The House approved in July the Restoring Access to Medication and Improving Health Savings Bill of 2016 (HR 1270). The bill would repeal the prohibition on using health FSA dollars to pay for over-the-counter medication. Repeal would apply to qualified expenditures incurred after December 31, 2016. The Senate did not take up the bill before recessing.
Many small businesses have traditionally provided a health benefit to their employees through a health reimbursement arrangement (HRA). Following passage of the Affordable Care Act (ACA), the IRS determined that these should be treated as employer payment plans subject to market reforms under the Affordable Care Act (ACA). Failure to comply with the ACA’s market reforms triggers excise taxes. The IRS provided transition relief (Notice 2015-17) from the penalties but the relief has expired.
In June, the House approved the Small Business Health Care Relief Act, (HR 5447), intended to provide permanent relief for small employers. Under the legislation, small employers (employers with less than 50-full-time and full-time equivalent employees) would be able to have stand-alone HRAs and reimburse expenses without violating the ACA’s market reforms. A similar bill has been introduced in the Senate.
The ACA made a significant change to the individual deduction for medical expenses. After December 31, 2012, the threshold to claim an itemized deduction for unreimbursed medical expenses increased from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI for regular income tax purposes. The ACA did carve out a temporary exception for senior citizens. In June, the House Ways and Means Committee approved legislation to resurrect the pre-ACA rules. The Halt Tax Increases on the Middle Class and Seniors Act (HR 3590) would replace the current 10 percent threshold with the old 7.5 percent threshold for all taxpayers.
Tax-related identity theft
Tax-related identity theft continues to plague the IRS. The agency has spent significant sums on identifying false returns before fraudulent refunds are paid. In July, Sen. Orrin Hatch, R-Utah, chair of the Senate Finance Committee (SFC), introduced the Stolen Identity Refund Fraud Prevention Bill (Sen 3157). The bill would provide guidelines for the IRS in handling stolen identity refund fraud cases and would increase the criminal penalty for tax-related identity theft. “Protecting taxpayers from bad actors looking to use their identities for fraudulent purposes and enhancing overall taxpayer protections is a priority of the committee,” Hatch said.
Hatch’s colleague on the SFC, Sen. Ron Wyden, D-Oregon, has introduced a bill to create a first-time homebuyer tax credit bill. Several years ago, Congress passed a similar bill to encourage home sales. Wyden’s bill would reward qualified first-time homebuyers with a refundable credit. “The credit would equal 2.5 percent of the home purchase with the maximum credit reached at homes selling for $400,000, Wyden said. The credit would phase-out for higher income taxpayers.
The IRS’s operating budget continues to be a source of friction in Congress. President Obama and Congressional Democrats have called for increased funding for the agency for FY 2017. Congressional Republicans have proposed budget cuts, to bring about, they argue, greater efficiency at the agency. The House approved in July a $10.9 billion IRS budget for FY 2017, more than $1 billion below President Obama’s proposal. The Senate, however, did not take up the IRS’s budget before recessing, although members of the Senate Appropriations Committee proposed keeping the agency’s FY 2017 budget at current levels. In recent years, lawmakers have waited till year-end to approve a budget for the IRS and they may do the same this year, possibly in a year-end tax bill.
Energy tax policy
Both leaders of the Senate Finance Committee (Orrin Hatch, R-Utah and Ron Wyden, D-Oregon) have taken an interest in simplifying energy tax incentives. The Senate Finance Committee held a hearing in June to examine the role taxation plays in energy policy. Wyden reiterated his proposal to consolidate the more than 40 separate energy tax credits and deductions into as few as three. The incentives, Wyden explained, would be built around three goals: energy, cleaner transportation, and energy efficiency. Wyden also noted that many of the energy incentives extended by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) were only extended temporarily.
In related energy news, the House approved in June a resolution signaling opposition to President Obama’s proposal to impose a $10 fee on every barrel of oil produced. The House also passed a resolution opposing the White House’s proposed carbon tax, to reduce greenhouse gas emissions.
Even though the presidential and congressional elections are generating substantive discussions about comprehensive tax reform, we don’t anticipate any drastic changes this year. Depending on the election outcome, tax legislation and tax reform activity should pick-up again in 2017.
Please contact Warady & Davis LLP at (847) 267-9600 if you have any questions about these or other tax proposals. Visit https://waradydavis.com/service/tax-services/ for more information on ways that we can help.
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