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Saturday, December 22, 2018

One Year Anniversary of TCJA

On December 22, 2017, President Trump signed an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly referred to as the Tax Cuts and Jobs Act (Public Law 115-97). While there were over 100 hearings on tax reform starting in 2011, and a "unified framework for tax reform" released in September 2017, the final legislation moved quickly over about five weeks. There were no public hearings to analyze proposals or look at the big picture to be sure it was the type of reform needed.  The law has a long name because it was created via the budget reconciliation process so that the Senate could pass it with 51 votes rather than the usual 60. The TCJA was a partisan process.

On its anniversary, I'll offer just a few observations on the TCJA:
  1. It's major goal was to lower the corporate rate and move the corporate system to more of a territorial system. This was accomplished with a flat rate of 21% rather than the prior top rate of 35%.
  2. There are several new areas of complexity including an interest expense limitation of Section 163(j), excess business loss limit of Section 461(l), extra calculations for high income individual business owners under Section 199A (it is simpler if the individual has taxable income below $157,500 ($315,000 if MFJ); and most people are below these levels), and a new international regime with many new rules and complexities.
  3. Most of the individual changes, including the rate reductions are temporary for 2018 through 2025.
  4. With over 100 changes and the need for lots of guidance from the IRS, we continue to find surprises. One that dawned on my a few weeks ago is that while Congress explicitly expanded the preparer due diligence penalty of Section 6695(g) to cover returns where the client claims head-of-household status, it sneakily also causes this penalty to apply when the client claims the $500 dependent credit because Congress put that credit in Section 24 where the Child Tax Credit is which was already subject to the penalty. For more, see my 12/13/18 post.
  5. This legislation is not the end-all of tax reform. There were many areas in need of attention that were not included in the bill for various reasons. Missing items include efforts to reduce the annual $400 billion tax gap (taxes owed but not collected), recognize today's economy that involves intangible assets (most of the TCJA favors tangible assets) and a growing gig workforce (no effort to clarify worker classification or provide a simpler/better retirement system for these workers), address the growing deficit-debt-interest expense which will harm future economic growth and be a big burden for our children and grandchildren, improve IRS operations and the tax compliance process, or address problems with Social Security, Medicare and the Highway Trust Fund. In addition, more work is needed to help our tax system meet principles of good tax policy better, such as improved equity and simplification.
btw - here is my post from 12/22/17.

What do you think?


taxperson said...

Here is an idea on worker classification: CHECK-THE-BOX. Allow the worker to self-classify.. It might have bad social effects, result in less people being insured, and widen the tax gap. However, it would end the controversy.

taxperson said...

Note I did not opine that the idea was any good....

21st century taxation (Annette Nellen) said...

The check-the-box approach for worker classification is a good one provided certain parameters are met. A set of questions should be asked via an online tool and a result obtained. The employer would then meet a safe harbor to treat the worker that way. I think it could just be a few questions, such as do you direct the worker's work, are they paid over $12 per hour, do you train them. The employer has to answer them in good faith to get the safe harbor protection. The UK does something along these lines. In addition, the retirement and benefit systems need to be improved and simplified to help out the growing self-employed workforce.