Monday, July 30, 2018

Outline of Tax Proposals Released

Overview

Last week, House Ways and Means Committee Chairman Kevin Brady released the committee’s working outline for a tax legislative proposal that they are presently working on with hopes of passage later this summer or fall.  It appears to be a framework at this time, with not much substantive Code structure attached to it.  But, the framework is something to go on in anticipating what might be a forthcoming legislative proposal.  In any event, it’s worth noting what has been released so that feedback from tax professionals can be provided to tax staffers as the drafting process proceeds. 

A tax proposal following-up on the Tax Cuts and Jobs Act – that’s the topic of today’s post.

Basic Categories

The framework puts the tax proposals into three separate categories:  1) individual and small business tax cuts; 2) promotion of individual savings; and 3) promotion of business innovation. 

Individual and small business.  The effort seems to be with respect to the first category to make most of the TCJA provisions that apply to individuals and small business permanent.  Under the TCJA, many provisions are set to expire at the end of 2025.  Remember, however, tax provisions are only “permanent” if they don’t contain a statutory sunset date and the Congress doesn’t otherwise change the law. 

Savings.  The second area of focus, promoting individual savings, contains several proposals designed not only to spur individual savings, but also incentivize the use of workplace retirement plans.  One proposal that is outlined would establish a “Universal Savings Account.”  The description of the account is that it would be a “fully flexible savings tool for families.”  At this time, however, there are no details as to how the account would be established or function. 

While the TCJA did expand the potential use and application of funds contained in a “529” education account, the proposal would attempt to expand further the use of such funds by allowing them (on a tax-favored basis) to be used to pay for apprenticeship fees to learn a trade, cover home schooling expenses and be applied to pay-off student debt. 

This prong of the proposal would also allow money to be withdrawn without penalty from existing retirement accounts to pay for childbirth or adoption costs.  In addition, amounts withdrawn for such purposes could be paid back at a later time. 

Innovation.  The third prong of the proposal focuses on spurring small business entrepreneurship and innovation.  To accomplish this objective, the proposal would allow qualified small businesses to write off a greater amount of initial start-up costs than is permitted under present law.  There is no specification as to the additional amount, nor is there any “meat” to the comment in the proposal that new tax provisions would be used to “remove barriers to growth.”

Process

In recent years, tax legislation (or most legislation, for that matter) passes the House and then goes to the Senate to either die or not get acted upon – largely because of the 60-vote requirement to pass tax legislation in the Senate without the reconciliation process.  That same process could also be true for this proposal.  A likely scenario is that the House passes a tax bill, but the Senate fails to take action before the end of the year (or takes action at the last minute in December).  For this reason, it looks as if (at least right now) the House will introduce its tax proposals in three separate bills – one for each of the prongs mentioned above.  It is believed that such a strategy will assist in the process of getting the necessary 60 votes by tailoring each proposal to specific provisions.  But, then there is always the politics of the situation.  The Senate majority leader could call for a vote before the fall congressional election.  Or, on the other hand, the vote could be put off until after the election on anticipation that the Republican majority in the Senate will widen.

Other Issues

While some in the Congress could balk at what is likely to be budget scoring that will say that additional tax cuts will widen the deficit, that may be counterbalanced by those wanting deeper cuts and pointing to the strength of the overall economy.  In addition, I am already hearing talk from some tax staffers that there could be an attempt to tweak the TCJA by repealing the tax on private college endowments, modifying the new qualified business income deduction of I.R.C. §199A and indexing capital gains.  The I.R.C. §199A issue is an interesting one.  There are many unanswered question concerning it and the first set of regulations involving the new deduction have yet to be released.  Also, politicians from high tax states may push for a full reinstatement of the state and local tax deduction. 

Another possibility is that any new tax legislation will contain technical corrections to TCJA provisions.  That is probably a slim possibility, however, until after the midterm election.  That means that technical corrections, if any, won’t be until later in November or December.  Of course, those are needed now (actually they were needed months ago) as are regulations and forms so that tax pros can give advice to clients and take appropriate planning steps. 

As for health care, on July 25, the U.S. House passed two health care reform bills which would do numerous things but, in particular, expand access to tax-preferred health savings accounts (HSAs).   As usual, it remains to be seen whether the Senate will even take up either or both of the bills.

The first of the two bills, H.R. 6311, would allow individuals to bypass the Obamacare restriction on using premium tax credits to buy catastrophic health care plans and would broaden eligibility for contributions to an HSA.  Specifically, the bill would raise the contribution limit to $6,650 for individuals and $13,000 for families.  That’s the combination of the annual limit for out-of-pocket and deductible expenses for 2018.  The bill would also permit HSA funds to pay for qualified medical expenses at the start of coverage of the high deductible health policy (HDHP) if the HSA has been opened within 60 days of the HDHP start date.  The bill would also suspend until 2022 Obamacare’s annual fee on health insurers. 

The other bill concerning health care that was passed on July 25 is H.R. 6199.  This legislation repeals the portions of Obamacare that limit payments for medications from HSAs, medical savings accounts, health FSAs, and health reimbursement arrangements to only prescription drugs or insulin.  As a result, distributions from such accounts can be made without penalty for over-the-counter medications and products.  The bill would also allow persons with health insurance that qualifies as HSA family coverage to contribute to an HSA if their spouse is enrolled in a medical FSA.  It would also allow an HDHP to annually cover up to $250 (self) and $500 (family) of non-preventative services (e.g., chronic care) that may not be covered until after the deductible is reached. 

Conclusion

Tax policy will remain a key topic over the weeks leading up to the midterm election.  Whether any legislation is enacted remains to be seen.  Certainly, technical corrections are needed to deal with certain aspects of the TCJA.  From there, additional legislation is an add-on.  In any event, certainty in tax policy will not likely be part of the future for some time.  All of this makes providing tax advice to clients difficult.

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