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Thursday, November 30, 2017

Tax Reform Links and Examples

UPDATED 12/7/17: Tax reform is moving along.  The House Ways and Means Committee introduced its bill - H.R. 1, on November 2 and the House passed it on November 16. The Senate Finance Committee released its proposal on November 9 and passed it on November 16. Late on 12/1/17, the Senate passed a bill that made numerous amendments to the bill passed by the Senate (see the list of amendments in this JCT document). Now the House and Senate need to create a conference committee to work out the differences among the bills and that version will go back to House and Senate for votes.  Or, perhaps the House will just pass the Senate version, but I don't think so. I think there are some items the House doesn't like such as the corporate rate reduction not starting until 2019.

Following are links to the key documents on the bills and Joint Committee on Taxation analysis. I also show examples of how two different families fare under the House and Senate Finance Committee bills.  Please note that there are many variations possible depending on how many children a family has and their ages, the types of itemized deductions they have, and their income level and its nature. I have kept the examples simple with the individuals only have wage and interest income.

Links:
H.R. 1 - Two examples of individuals:

Family of 4, wages $100K, state taxes $8K, mtg int $10.5K, charitable $500
Family of 4, wages $250K, mtg int $40K, State tax $35K, charitable $5K, misc $3K
2018 current law
H.R. 1
2018 current law
H.R. 1
Taxable income
$64,400
$75,600
$150,400
$205,000
Tax
$8,708
$9,072
$28,908
$39,550
Child credit
$2,000
$3,200
$0
$3,200
Non-child dependent credit
--
$600
--
$600
AMT
$0
--
$3,372
--
Net tax
$6,708
$5,272
$32,280
$35,750
























Note: The family above with $40,000 of mortgage interest has a debt greater than the new $500,000 limit allowed by H.R. 1, but falls under the transition rule. If this taxpayer instead had a new mortgage, the tax would be higher because H.R. 1 limits mortgage interest to a debt of $500,000..

SFC (not the Senate version which increased the child credit to $2,000) - Same examples as above:

Family of 4, wages $100K, state taxes $8K, mtg int (AI) $10.5K, charitable $500
Family of 4, wages $250K, mtg int (AI) , $40K, State tax $35K, charitable $5K, misc $3K
2018 current law
SFC
2018 current law
SFC
Taxable income
$64,400
$75,600
$150,400
$205,000
Tax
$8,708
$8,739
$28,908
$39,742
Child credit
$2,000
$3,300
$0
$3,300
Non-child dependent credit
--
--
--
AMT
$0
--
$3,372
--
Net tax
$6,708
$5,439
$32,280
$36,442
Tax HR 1
$5,272
$35,750

There are numerous changes for individuals, businesses, estates, and exempt entities in the proposals. The above examples aim to illustrate that not everyone gets a tax cut; it depends on the mix of their income and current deductions.

What do you think?

Friday, November 24, 2017

Today's Tax Reform Cost - How Much is $1.5 Trillion?


A budget agreement that preceded current tax reform efforts included that tax reform can "cost" up to $1.5 trillion over ten years (H.Con. Res. 71).

Key actions and votes on this resolution:
  • 10/5/17 – passed in House by 219-206 
  • 10/19/17 – passed in Senate by 51-49
  • 10/26/17 – Senate amendment passed in House by 216-212
Also see:
·       House Budget Committee summary and explanation of 11/7/17
·       House Budget Committee news on Senate-Passed Budget Resolution (10/24/17)
Observations
  • The passage of the budget with the $1.5 trillion for tax reform was slim in both House and Senate. What does this mean for tax reform? H.R. 1, Tax Cuts and Jobs Act passed on 11/16/17 in the House by 227-205 (13 Republicans voted against it). What might happen in the Senate?
  • A $1.5 trillion deficit over ten years divided among the 325,365,000 people in the U.S. comes out to $4,610 per person or $461 per year per person.  I'm reminded of an article in The Atlantic in May 2016, "The Secret Shame of Middle-Class Americans," that almost half of Americans could not put their hands on $400 for an emergency. So, seems that not only does this sound like a lot of money, it is even when it comes down to every person (of all ages) in the U.S. 
  • What about $1.5 trillion spread out over the 148,840,642 individual income tax filers we have (for 2015)? That comes out to $10,078 per individual filer over 10 years or $1,008 per year per individual filer.
What do you think?

Sunday, November 19, 2017

Guest Post - Simplification for Employers and Mobile Employees

I have a guest post blog here from Danielle Higley of TSheets.com. She explains H.R. 1393 that aims to simplify payroll registration and filings for employers and mobile employees by making the rules uniform among states as to when an employer needs to register and when the mobile employee is subject to tax.

The Tax Simplification Act That Benefits Employers and Mobile Employees

Danielle Higley,* TSheets.com

Have you heard of H.R. 1393? Most people haven’t. It’s been keeping a lower profile than the bills currently aimed at health care reform or corporate tax cuts. One might argue legislation regarding income taxes — like H.R. 1393 — aren’t often interesting enough to end up in the news, as most people tend to tune out the moment they hear the words “Senate Finance Committee.”

That said, H.R. 1393 should have your attention because if it passes — which it’s likely to do — it may have a major effect on employers and employees.

H.R. 1393, also known as the Mobile Workforce State Income Tax Simplification Act of 2017, basically says any person working over state lines for 30 days or fewer out of the year doesn’t have to pay income taxes in those states.

“The bill would create a uniform national standard, eliminating a compliance maze faced by many employers and employees who need to keep track of state income tax withholding laws and varying de minimis exemption periods,” explains a June 2017 article in Accounting Today.

Rather than filing income taxes in all states worked over the course of the year, employees will file only in their home state and/or in any state where they worked over 30 days. The bill passed the House without amendment and is now waiting to go before the Senate, where it is expected to pass with bipartisan support.

Despite the bill’s popularity, some Americans believe the Mobile Workforce State Income Tax Simplification Act of 2017 could go further. According to a recent independent survey of 811 US employees, 23 percent of people surveyed said states should never tax non-residents. Nine percent approved of a 60-day limit, 13 percent were in favor of a 90-day limit, and 11 percent thought a six-month limit would be more appropriate.

Interstate workers have something to gain

The same survey found 62 percent of workers surveyed have traveled for business. Among them, the majority of these travelers worked in other states for two weeks or fewer. Considering these interstate workers will have to file income taxes in multiple states (or at least every state they’ve worked in, depending on income earned and other factors), many people have something to gain by HR 1393 being signed into law.

Here are a few more stats regarding the Mobile Workforce State Income Tax Simplification Act of 2017:
In the past 12 months, most interstate workers (77 percent) visited more than one state in addition to their home state. Meanwhile:
     27 percent visited two states.
     21 percent visited three states.
     29 percent visited four states or more.

While H.R. 1393 will be helpful to many interstate workers, 38 percent will still be held responsible for paying state income taxes in other states, given they spend more than 30 days out of the year working in a state other than their own.

Currently, only 23 percent of interstate workers are paying income taxes in the other states they’re working in, meaning 77 percent could be committing tax fraud.

How interstate employees can protect themselves from tax fraud

All time worked in another state should be documented. Whether employees are there for two weeks or two months, these records are important for proving to the IRS they’ve been filing their taxes correctly.

According to the Mobile Workforce State Income Tax Simplification Act of 2017, it is the employee’s job to use time tracking tools to record their hours worked in other states. Otherwise, their employer must maintain “a time and attendance system that tracks where the employee performs duties on a daily basis” (check out the full bill for more information).

Even employees who only work in other states a few times a year will want to record their location and time worked in those states, should any questions come up regarding their interstate work history and taxes.

Why employers should pay attention to the outcome of H.R. 1393

1. It’s in an employer’s best interest to help protect employees from committing tax fraud.
Employers can rely on an employee to keep their own records, but be aware, should an employee misrepresent their location or time, their employers could be on the hook for abetting fraud or committing collusion.

Employers can protect themselves by “[maintaining their own] time and attendance system that tracks where the employee performs duties on a daily basis.” Should an employee inaccurately report their time working in another state, “data from the time and attendance system shall be used instead of the employee’s determination.” In plain English, the employer’s record will be held above the employee’s.

2. Efficiency and accuracy help employers keep track of changing interstate rules.
Providing employees with a time and attendance system that does all the tracking for them frees employees to be more productive and accurate with their time reporting.

Forty-nine percent of employees use a non-digital method of time tracking, including paper timesheets, punch clocks, or spreadsheets, but these methods leave room for error. Considering only 1 in 4 employees currently keeps a record of the hours they work, it’s possible that the time being reported may be inaccurate. This, in turn, affects billing and exacerbates inaccurate job costing.

If interstate workers are a key component of your business, or if you yourself work across state lines from time to time, keep an eye on H.R. 1393. It’s true, tax bills don’t always give us reason to celebrate. But if the time you spend working in another state is less than 30 days, the Mobile Workforce State Income Tax Simplification Act of 2017 may be just what you need to simplify your taxes at the start of the year.

What do you think?


*About the Author:  Danielle Higley is a copywriter for TSheets time tracking and scheduling. She has a BA in English Literature and has spent her career writing and editing marketing materials for small businesses. This year, she started an editorial consulting company. 

Saturday, November 18, 2017

California College Access Tax Credit Reminders

California's College Access Tax Credit Program started in 2014. For individuals, it allows a large credit for donations made to this fund. Before claiming any credit though, the donor must first apply for the credit with the State Treasurer. This is because a fixed amount of credits is available so people claim it on a first-come-first-serve basis.  In the first few years, little was claimed relative to the amount allocated.

IMPORTANT - If an individual or corporation wants to get the credit for 2017, the application is due to the State Treasurer by 5 pm on Thursday November 30, 2017 and payment must be made by December 31, 2017.

There was a legislative change this year that extends the credit through 2022.

AB 490 (Chapter 527; 10/6/17) College Access Tax Credit – Extends the credit for five years, through 2022. Also, starting in 2017, “the aggregate amount of credit that may be allocated and certified pursuant to this section, Section 12207, and Section 23687 shall be an amount equal to five hundred million dollars ($500,000,000)” (rather than $500 million per year). FTB analysis - AB 490.


The credit amount for 2017 (and beyond) is 50%. As of 4/3/17, there is $500 million available to be claimed for 2017. In the first three years, despite $500 million allocated for each year, only the following amounts were claimed:
            2014    $3,751,393
            2015    $8,231,253
            2016    $5,369,369
The application form and additional information is provided at the California Treasurer’s website at http://treasurer.ca.gov/cefa/catc/.

On the federal return, individuals claim the donation amount as an itemized deduction. For California, only a 50% credit is claimed (no deduction). The percentage amounts differ for corporations. See above website.

Per the Treasurer’s CEFA information, as described in the Assembly Floor Analysis to AB 490 (9/6/17):

“According to CEFA, nearly $3.8 million in tax credits for 355 taxpayers (from about $6.2 million in contributions) were allocated and certified for tax year 2014. As such, tax year 2015 began with approximately $996 million in available credits, with nearly $8.2 million in tax credits for 328 taxpayers (from about $13.8 million in contributions) allocated and certified over the tax year. Tax year 2016 began with approximately $1.4 billion in available tax credits, with nearly $5.4 million in tax credits for 213 taxpayers (from about $9.9 million in contributions) allocated and certified over the tax year.”

For 2014 that works out to a credit of about $10K per person who donated. I assume this really means a good number of smaller contributions and a few very large ones.

Observations on the credit:

  • It violates the neutrality principle in that it can affect a donor's decision-making to donate to this fund because the tax savings are much larger than for other donations.
  • It is underutilized relative to the dollars available. Why? Too complex due to the application requirement? Too few know about it? 
What do you think?

Saturday, November 11, 2017

Tax Reform - What's Up?

What an exciting month so far for tax reform!  We have an amended bill passed by the House Ways and Means Committee (on 11/9 by vote of 24-16). That's the bill, H.R. 1, Tax Cuts and Jobs Act, introduced just one week earlier.  On 11/9, the Senate Finance Committee released a 253-page summary by the Joint Committee on Taxation (most of the pages describe current law).

A few observations:
  • The House calls for individual rates of 12%, 25%, 35%, 39.6% and a surtax on the top rate because the benefit of the 12% bracket will phase-out for those in the top bracket (over $1 million of income).
  • The Senate rates are 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%.
  • Both change the corporate rate to a flat 20% (rather than today's top rate of 35%). The Senate delays this rate until 2019.
  • Both bills reduce the maximum rate on business income of passthrough entities, other than professional service firms, but in different ways, and both with some complexity!
  • The standard deduction in increased with most itemized deductions other than mortgage interest and charitable contributions remaining. The Senate retains the medical expense deduction.
  • Personal and dependency exemptions are repealed. Both bills have a higher child credit amount and a credit for non-child dependents ($300 in House and $500 in Senate).
  • Increased expensing amounts for limited time periods.
  • Section 199 is repealed.
  • Section 1031 would only apply to real property (other than dealer property).
  • The estate tax exemption is doubled. The House repeals the estate and GST after 2023; the Senate does not.
  • The corporate system is moved to a territorial system with provisions to prevent base erosion.
And there is more.  The House bill is scored to cost $1.5 trillion over ten years as allowed by the recent budget bill.

Next steps is for the House to vote and the Senate Finance Committee to amend its bill and vote and then have it go to the full Senate. Then a conference committee is needed to work out differences to get one bill to go to House and Senate for vote. 

Waiting for ...
  • What all will be temporary due to reality that this will be enacted via budget reconciliation so only 51 votes needed in Senate rather than 60. But bill cannot increase deficit after ten years.
  • Anything new to be added to help reduce cost, if necessary.
  • Whether simplification is possible. While many individuals will move from itemizing to taking the standard deduction, there are still a variety of complex provisions for individuals and busiensses.
We'll see.  I'll have more later

There will be some discussion of tax reform at the CalCPA Federal, State, Local and International Tax Conference on November 15 - 17 at Universal City (and webcast). I'm providing a federal tax update at the start of the program. I'm focusing on cases and rulings and regs, but will note where tax reform might change something.  Other speakers will likely do the same.  AND, for a good discussion of tax reform and the process, Mel Schwarz of Grant Thornton will be talking about tax reform on Wednesday afternoon.  Don't miss that.  Mel knows what's going on in tax reform.

What do you think?