A mid-year tax legislation update
By Mark A. Luscombe
It has not been a big year for enactment of tax legislation so far. While a number of tax bills have been working their way through Congress, including IRS reform legislation, technical corrections to the Tax Cuts and Jobs Act, extension of tax provisions that expired at the end of 2017, retirement reform, and disaster relief, none have made it through Congress at this point. The delays may prove fatal to some of this legislation. The following is a wrap-up of current status and the prospects going forward.
The House passed IRS reform legislation by voice vote and sent it on to the Senate. Subsequently, however, some Senate Democrats raised objections to a provision that would codify the present IRS Free File program. The House then passed a revised bill that omitted the provision, which was passed by the Senate and sent to the White House for President Trump to sign last week. Details of some of the IRS reform provisions were highlighted in this column in the May 2019 issue. Prospects for the revised bill look good, but it is always an issue whether a tax bill might get loaded up with additional provisions that could cause problems.
Expired tax breaks
Approximately 30 tax breaks that had been given short-term extensions over a number of years expired at the end of 2017. There had been some debate as to whether those tax breaks would continue after the Tax Cuts and Jobs Act, but Congress extended them through 2017 in early 2018, resulting in some need to revise software systems and tax forms for the 2017 tax return filing season. Congress is again considering what to do with those expired provisions well after their expiration. The initial proposal had been to extend them retroactively for 2018 and preserve them for 2019. As time passes without enactment, however, the chances increase that many of those expired provisions will not be extended. Another issue that may push some of the tax breaks to the sidelines is that Democrats would prefer that any extension be paid for, but offsetting revenue-raisers appear to be in short supply. Besides a few individual tax breaks, most of the expired provisions relate to energy or to specific industries. Democrats have been working on a more simplified structure for energy tax breaks, focused on renewable energy, and that initiative might replace many of the energy-related expired tax breaks.
Lobbying activity continues in an effort to restore a number of these tax breaks, including credits for biodiesel and railroad track maintenance, but, as time passes without action, the number of expired provisions likely to receive retroactive extension, or any extension at all, continues to diminish.
While a number of errors have been identified in the TCJA, Democrats have been reluctant to help the Republicans correct errors in legislation that passed without Democratic input without getting something in return. That issue continues to be the impediment to passage of technical corrections. A “grain glitch” in the TCJA was corrected in budget legislation early in 2018 by giving something to the Democrats on low-income housing. A so-called “retail glitch” involving the depreciation of leasehold improvements, retail improvements and restaurant property (referred to as qualified improvement property under the TCJA) and an error in the dates applicable to changes to net operating losses are the two most substantive errors for which corrections are being sought. The repeal of the Kiddie Tax changes made by the TCJA, as proposed in the current retirement legislation in Congress, could also be viewed as a TCJA correction. Ways and Means Committee Chair Richard Neal, D.-Mass., may seek an expansion of the Earned Income Tax Credit and the Child Tax Credit as part of any bargain.
Some Republicans and Democrats from high-tax states are also pushing for repeal of the TCJA limit on the state and local tax deduction. However, this is viewed as a fix that would largely benefit higher-income taxpayers, and Democrats may not want to focus on that with the theme of the 2020 election campaigns being help for the middle class. There is also a bipartisan bill to restore a deduction for performing artists that was removed by TCJA.
In spite of the clear unintended consequences in the TCJA for qualified improvement property and net operating losses, movement on technical corrections does not seem to be a top priority in the House and might not get enacted in 2019.
The House passed the Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, nearly unanimously on May 21, 2019. The bill includes a number of enhancements to the tax breaks for retirement that are largely noncontroversial. Some of the details on the provisions were included in this column in the May 2019 issue, based on the Republican version of the bill from the prior Congress. The holdup in the Senate relates to objections by some Senate Republicans to the removal of a provision by the House that would have provided tax breaks for home-schooled children.
A last-minute House addition to the legislation would also eliminate the change in the treatment of the Kiddie Tax enacted as part of the Tax Cuts and Jobs Act. The TCJA taxed that income at the estate and trust tax rates, rather than the parents’ tax rate, resulting often in much higher taxes. There was a concern that this had an adverse impact on military families collecting survivor benefits, as well as other groups. Initial efforts to carve out some specific exclusions were abandoned, and the provision was proposed to be repealed.
At this point it is not yet clear how the dispute over the removal of the tax break for home-schooled children will be resolved, leaving a cloud over passage.
A disaster funding bill has passed Congress, but it did not include any tax provisions. It remains possible that some of the tax breaks Congress has in the recent past enacted in follow-up to disasters will still be taken up this year, but the specific vehicle to which they might be attached has not yet been identified.
In response to the college admissions cheating scandal, Congress is considering legislation that could restrict charitable contribution deductions to a school during a period around which a child of the taxpayer is attending that school. It is a little too early in the process at this point to assess the bill’s prospects of becoming law.
As is the case with any Congress, there are many tax-related issues before Congress. Beyond those bills discussed above, issues are being considered related to student loan debt and President Trump’s tax returns. However, Congress does not seem to have a clear route to passage for many of these bills. The revised IRS reform legislation might be the first to make it through. Democrats in the House are hinting that they might prioritize expired tax provisions over technical corrections, but it might be a while before we see either one emerge from the process, if at all.
Traditionally, the House tends to pass many tax bills while the Senate tends to lump them into one larger tax bill to send back to the House. The prospects for that larger Senate bill might not look too good this year; so, unless the Senate passes a few of the smaller bills sent by the House, there may end up being little tax legislation enacted this year. With the House and the Senate controlled by different political parties this year and the focus already on the 2020 election, compromise might be in short supply.