The Senate Finance Committee (SFC) advanced President Donald Trump’s nomination of Charles Rettig for IRS Commissioner. The SFC approved the nomination on July 19 by a 14-to-13 party line vote.

The Senate Finance Committee (SFC) advanced President Donald Trump’s nomination of Charles Rettig for IRS Commissioner. The SFC approved the nomination on July 19 by a 14-to-13 party line vote.

Qualified Nominee

Several SFC Democrats and Republicans praised Rettig’s qualifications to serve as the next IRS Commissioner. SFC ranking member Ron Wyden, D-Ore., said that he is a "qualified nominee."

However, Democrats voted against his nomination in protest of new IRS guidance ( Rev. Proc. 2018-38, discussed later in this Issue) that limits donor reporting for certain tax-exempt organizations.

"The Trump administration has taken a qualified nominee and dumped him right into the middle of a dark money political firestorm of their own creation," Wyden said. Wyden announced the day before the vote that he would not support Rettig’s nomination unless Rettig committed to reversing the IRS’s new rules on certain Schedule B donor disclosures.

However, SFC Chairman Orrin G. Hatch, R-Utah, noted during the markup that the IRS reporting rules are unrelated to Rettig’s nomination. "I know that some of my colleagues have expressed dissatisfaction with new IRS reporting rules released recently and want to oppose the important appointment of an IRS commissioner because of these new rules, over which he had no control,"Hatch said. Hatch, praising Rettig’s qualifications, expressed confidence that Rettig, if confirmed, would "lead the IRS with integrity."

Next Steps

Rettig’s nomination now heads to the full Senate. If confirmed, Rettig will oversee the implementation of tax reform enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

Rettig previously told the committee that restoring taxpayer trust in the IRS would be a top goal as IRS Commissioner. "If I am privileged to serve as Commissioner, my overriding goal will be to strengthen and rebuild trust between the IRS, the American people, and their representatives in Congress," Rettig said. "That trust is critical to all that the IRS does."

President Donald Trump and House GOP tax writers discussed "Tax Cuts 2.0" in a July 17 meeting at the White House. The next round of tax cuts will focus primarily on the individual side of the tax code, both Trump and House Ways and Means Chair Kevin Brady, R-Tex., reiterated to reporters at the White House before the meeting.

President Donald Trump and House GOP tax writers discussed "Tax Cuts 2.0" in a July 17 meeting at the White House. The next round of tax cuts will focus primarily on the individual side of the tax code, both Trump and House Ways and Means Chair Kevin Brady, R-Tex., reiterated to reporters at the White House before the meeting.

Individual Tax Cuts

The discussion between Trump and several top House GOP tax writers was set to focus, in particular, on how to further strengthen the economy post-tax reform, Brady said. "We think the best place to start is with America’s middle class families and our small businesses," he added. Brady has said that making permanent the individual tax cuts that are set to expire in 2026 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) is a top priority for Republicans.

Corporate Tax Rate

Trump is also calling for lowering the corporate tax rate to 20 percent. The corporate tax rate was lowered last December from 35 percent to 21 percent by the TCJA.

Brady told reporters earlier in the week of July 16 that discussions between House GOP tax writers and the White House were continuing on the possible proposal. While Brady did not openly commit to the notion of further lowering the corporate tax rate, he did tell reporters that he thinks the president is right that global competitors will likely respond in kind to last year’s tax reform.

Tax Cuts 2.0 Timeline

The House is expected to vote on the Tax Cuts 2.0 package in September, Brady told reporters at the White House on July 17. Additionally, Brady stated that he anticipates the "Senate setting a timetable, as well."

Brady’s estimated timeline for votes on the tax cuts package is in line with his statements in June that House GOP members will receive a legislative outline of the proposal this month. Further, a draft of the tax package is expected to be released publicly in August.

Senate

At this time, the Tax Cuts 2.0 package is not expected on Capitol Hill to fare well in the Senate. The package would need at least nine Democratic votes to clear the chamber.

"The GOP tax scam was a huge tax break for big corporations," Sen. Tammy Baldwin, D-Wis., said in a July 17 tweet. "We should reward work, not just wealth," she added. While Democrats remain outspoken against the TCJA for primarily benefiting corporations, Republicans are hopeful for Democratic support, just prior to midterm elections, on a measure that focuses on individual tax cuts.

The Senate Finance Committee’s (SFC) leading Democrat has released a report critiquing Republicans’ 2017 overhaul of the tax code. The report, focusing primarily on international tax reform, was released by SFC ranking member Ron Wyden, D-Ore., on July 18.

The Senate Finance Committee’s (SFC) leading Democrat has released a report critiquing Republicans’ 2017 overhaul of the tax code. The report, focusing primarily on international tax reform, was released by SFC ranking member Ron Wyden, D-Ore., on July 18.

Criticism of GOP Tax Reform

The Democratic SFC report, "Trump’s Tax Law and International Tax: More Complexity, Loopholes and Incentives to Ship Jobs Overseas," criticizes a number of provisions enacted in last year’s tax reform. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law by President Donald Trump last December.

"Donald Trump and Congressional Republicans continue to peddle the false promises outlined in this tax scam report," Wyden said in a July 18 press release. "Their new international tax regime instead rewards companies for investing overseas while hardworking Americans watch their wages fall."

The report focuses on five areas of international tax reform. According to the report, the new tax law makes the tax code more complicated and incentivizes corporations to move jobs overseas.

Tax Cuts 2.0

Meanwhile, Republicans on the other side of the Capitol continue to tout the positive economic effects of tax reform as they prepare to unveil their next tax cuts package. "Tax Cuts 2.0" will focus on making permanent tax cuts for individuals and passthrough entities, which were enacted temporarily through 2025 under the TCJA.

"It wasn’t that long ago that our economy was sluggish, paychecks were going nowhere, jobs were going overseas -- all that has changed," House Ways and Means Committee Chair Kevin Brady, R-Tex., said in a July 18 televised interview in which he praised the TCJA. According to Brady, Congress and the White House are starting Tax Cuts 2.0 "right now."

"The President is all in," Brady said. Brady, along with several other House tax writers, met with Trump on the next round of tax reform in a July 17 meeting at the White House.

Homeowners will be hurt financially by last year’s tax reform, according to a new House Democratic staff report. The report alleges that real estate developers will primarily benefit from the new tax law at the expense of homeowners.

Homeowners will be hurt financially by last year’s tax reform, according to a new House Democratic staff report. The report alleges that real estate developers will primarily benefit from the new tax law at the expense of homeowners.

The Democratic staff report was released by House Oversight and Government Reform Committee ranking member Elijah E. Cummings, D-Md., on July 5. The report highlights the effects of specific provisions of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) on homeowners across the United States.

Home Equity Interest Deduction

Prior to the TCJA, homeowners could deduct interest on home equity loans up to $100,000, as noted in the report. However, the TCJA, enacted last December, retroactively prohibits homeowners from deducting interest on loans of any amount if used for any purpose other than home improvement. According to Cummings’ staff, many homeowners use home equity loans for a variety of reasons, such as medical emergencies or college education.

Real Estate Tax Breaks

The staff report highlights several TCJA provisions that could benefit real estate developers. Among these tax breaks includes the 20-percent deduction for passthrough business income for certain qualifying real estate companies. Additionally, the report notes that under the TCJA, real estate developers are exempt from the new 30-percent limitation on interest deducted by large businesses. Further, the report notes that TCJA exempts real estate from the repeal of favorable tax treatment of like-kind exchanges of business assets and provides a 20-percent deduction for dividends from qualified real estate investment trusts.

"For the first time, this new report shows how big the payoffs were to wealthy real estate developers – more than $66 billion over the next ten years, according to the Joint Committee on Taxation," Cummings said in a statement. "They [Republicans] chose to take away a longstanding tax deduction that American families have relied on for decades while at the same time creating $66 billion in new tax breaks for real estate developers," he added.

In response to an inquiry about the report, a House Ways and Means Committee majority spokesperson told Wolters Kluwer on July 6 that the Democratic staff report is a "partisan exercise." "Multiple reports from nonpartisan organizations show strong housing numbers for this year...tax reform allows families to keep more of their hard-earned money to spend on what is important to them. This all is good news for homeowners and those seeking to buy a home," the spokesperson told Wolters Kluwer.

National Taxpayer Advocate Nina E. Olson has released her mid-year report to Congress. The report contains a review of the 2018 filing season, and identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year. It also includes the IRS’s responses to each of the 100 administrative recommendations made in the 2017 Annual Report to Congress.

National Taxpayer Advocate Nina E. Olson has released her mid-year report to Congress. The report contains a review of the 2018 filing season, and identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year. It also includes the IRS’s responses to each of the 100 administrative recommendations made in the 2017 Annual Report to Congress.

The report identifies and discusses 12 priority issues the TAS plans to focus on during the upcoming fiscal year. The top five include implementation of the Tax Cuts and Jobs Act of 2017 (TCJA) ( P.L. 115-97), the effectiveness of IRS service channels in meeting taxpayer needs, the development of an integrated case management system, the impact of high false-positive rates on legitimate taxpayers and the protection of taxpayers facing financial hardship from IRS and private debt collection activities. The most significant challenge the IRS faces in the upcoming year is implementing the TCJA, which, among other things, requires programming an estimated 140 systems, writing or revising some 450 forms and publications and issuing guidance on dozens of TCJA provisions. The TAS has launched a new website that lists key tax return items under current law (2017), shows which ones have been impacted by the TCJA and illustrates how the changes will be reflected on tax year 2018 returns filed in 2019.

In her preface to the report, Ms. Olson focuses on the IRS’s customer service challenges. The report says the IRS uses narrow performance measures that suggest the agency is performing well but do not reflect the taxpayer experience. Recommendations to improve customer service include: (1) adopting robust performance measures that more accurately reflect the taxpayer experience; (2) providing taxpayers with modernized "omnichannel"services so that taxpayers can obtain assistance online, by phone or in-person; (3) accelerating the development of an integrated case management system; and (4) using "big data" to help taxpayers as well as to bolster enforcement. Further, Ms. Olson reiterated her longstanding concern that IRS funding reductions have undermined the agency’s ability to provide high-quality taxpayer service and to modernize its aging information technology infrastructure.

Special Report

President Signs Sweeping Tax Overhaul Into Law

The Tax Cuts and Jobs Act (H.R. 1) has been approved by Congress and signed by President Trump. After a last-minute procedural glitch that required the Senate to vote first on the final bill, the most sweeping change to the U.S. tax code in decades cleared the Senate, 51 to 48, in the early morning hours of December 20, followed by House approval, 224 to 201, later the same day. President Trump signed the bill into law at the White House on December 22, 2017.

Special Report

President Signs Sweeping Tax Overhaul Into Law

The Tax Cuts and Jobs Act (H.R. 1) has been approved by Congress and signed by President Trump. After a last-minute procedural glitch that required the Senate to vote first on the final bill, the most sweeping change to the U.S. tax code in decades cleared the Senate, 51 to 48, in the early morning hours of December 20, followed by House approval, 224 to 201, later the same day. President Trump signed the bill into law at the White House on December 22, 2017.

H.R. 1, as approved by Congress, impacts virtually every individual and business on a level not seen in over 30 years. As with any tax bill, however, there will be "winners" and "losers." This historic bill calls for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, enhancing the child tax credit, boosting business expensing, and more. The bill also impacts the Affordable Care Act (ACA), effectively repealing the individual shared responsibility requirement. Most provisions are effective starting in 2018.

INDIVIDUALS

Tax Rates

H.R. 1 carries temporary tax rates of 10, 12, 22, 24, 32, 35, and 37 percent after 2017. Under prior law, individual income tax rates have been 10, 15, 25, 28, 33, 35, and 39.6 percent.

Standard Deduction

H.R. 1 nearly doubles the standard deduction. It increases the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation (using chained CPI) for tax years beginning after 2018. All increases are temporary, starting in 2018 but ending after December 31, 2025. Under prior law, the standard deduction for 2018 had been set at $13,000 for joint filers, $9,550 for heads of households, and $6,500 for all other filers. The additional standard deduction for the elderly and the blind ($1,300 for married taxpayers, $1,600 for single taxpayers) is retained.

Deductions and Credits

H.R. 1 makes significant changes to some popular individual credits and deductions, effective starting in 2018. Many of the changes, however, are temporary, generally ending after 2025, in order to keep overall revenue costs for the new law within budgetary constraints.

Mortgage interest deduction. The new law limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), in the case of tax years beginning after December 31, 2017, and beginning before January 1,2026. For acquisition indebtedness incurred before December 15, 2017, the new law allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately).

The new law also allows taxpayers to continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.

State and local taxes. The new law limits annual itemized deductions for all nonbusiness state and local taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayer filing a separate return). Sales taxes may be included as an alternative to claiming state and local income taxes.

Miscellaneous itemized deductions. The new law temporarily repeals all miscellaneous itemized deductions that are subject to the two-percent floor under current law.

Medical expenses. The new law temporarily enhances the medical expense deduction. It lowers the threshold for the deduction to 7.5 percent of adjusted gross income (AGI) for tax years 2017 and 2018.

Family Incentives

The new law temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child. Up to $1,400 of that amount would be refundable. It also raises the adjusted gross income phaseout thresholds, starting at adjusted gross income of $400,000 for joint filers ($200,000 for all others).

The child tax credit is further modified to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children.

Education

The new law retains the student loan interest deduction. It also modifies section 529 plans and ABLE accounts. It does not overhaul the American Opportunity Tax Credit, as proposed in the original House bill. The new law also does not repeal the exclusion for interest on U.S. savings bonds used for higher education, as proposed in the House bill.

Alimony

The new law repeals the deduction for alimony payments and their inclusion in the income of the recipient.

Retirement

The new law generally retains the current rules for 401(k) and other retirement plans. However, it repeals the rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions to unwind a Roth conversion. Rules for hardship distributions are modified, among other changes.

Federal Estate Tax

The new law follows the original Senate bill in not repealing the estate tax, but rather doubling the estate and gift tax exclusion amount for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. The generation-skipping transfer (GST) tax exemption is also doubled.

Alternative Minimum Tax

The new law retains the alternative minimum tax (AMT) for individuals with modifications. It temporarily increases (through 2025) the exemption amount to $109,400 for joint filers ($70,300 for others, except trusts and estates). The new law also raises the exemption phase-out levels so that the AMT will apply to an income level of $1 million for joint filers ($500,000 for others). These amounts are all subject to annual inflation adjustment.

Affordable Care Act

The new law repeals the Affordable Care Act (ACA) individual shared responsibility requirement, making the payment amount $0. This change is effective for penalties assessed after 2018.

Carried Interest

Under the new law, the holding period for long-term capital gains is increased to three years with respect to certain partnership interests transferred in connection with the performance of services.

BUSINESSES

Corporate Taxes

H.R. 1 calls for a 21-percent corporate tax rate beginning in 2018. The new law makes the new rate permanent. The maximum corporate tax rate currently tops out at 35 percent.

Under the new law, the 80-percent and 70-percent dividends received deductions under current law are reduced to 65-percent and 50-percent, respectively. It also repeals the AMT on corporations.

Bonus Depreciation

H.R. 1 increases the 50-percent "bonus depreciation" allowance to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). A 20-percent phase-down schedule would then kick in. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.

Vehicle Depreciation

The new law raises the cap placed on depreciation write-offs of business-use vehicles. The new caps will be $10,000 for the first year a vehicle is placed in service (up from a current level of $3,160); $16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and $5,760 for each subsequent year (up from $1,875) until costs are fully recovered. The provision is effective for property placed in service after December 31, 2017, in taxable years ending after such date.

Section 179 Expensing

The new law enhances Code Sec. 179 expensing. The Conference bill sets the Code Sec. 179 dollar limitation at $1 million and the investment limitation at $2.5 million.

Deductions and Credits

Numerous business tax preferences are eliminated. These include the Code Sec. 199 domestic production activities deduction, non-real property like-kind exchanges, and more. Additionally, the rules for business meals are revised, as are the rules for the rehabilitation credit.

The new law leaves the research and development credit in place, but requires five-year amortization of research and development expenditures. It also creates a temporary credit for employers paying employees who are on family and medical leave.

Interest Deductions

The new law generally caps the deduction for net interest expenses at 30 percent of adjusted taxable income, among other criteria. Exceptions exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less.

Pass-Through Businesses

Currently, up to the end of 2017, owners of partnerships, S corporations, and sole proprietorships – as "pass-through" entities – pay tax at the individual rates, with the highest rate at 39.6 percent. The original House bill proposed a 25-percent tax rate for certain pass-through income after 2017, with a nine-percent rate for certain small businesses. The original Senate bill generally would have allowed a temporary deduction in an amount equal to 23 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications.

H.R. 1 generally follows the Senate's approach to the tax treatment of pass-through income, but with some changes, including a reduction in the percentage of the deduction allowable under the provision to 20 percent (not 23 percent), a reduction in the threshold amount above which both the limitation on specified service businesses and the wage limit are phased in, and a modification in the wage limit applicable to taxpayers with taxable income above certain threshold amounts.

Net Operating Losses

The new law modifies current rules for net operating losses (NOLs). Generally, NOLs will be limited to 80 percent of taxable income for losses arising in tax years beginning after December 31, 2017. It also denies the carryback for NOLs in most cases while providing for an indefinite carryforward, subject to the percentage limitation.

ENERGY

The original House bill called for repealing many current energy tax incentives, including the credit for plug-in electric vehicles. Other energy tax preferences, such as the residential energy efficient property credit, would have been modified. The new law retains the credit for plug-in electric vehicles and did not adopt any of the other repeals of or modifications to energy credits from the House bill.

EXEMPT ORGANIZATIONS

The new law does not modify or repeal the so-called "Johnson amendment." This provision generally restricts Code Sec. 501(c)(3) organizations from political campaign activity.

IRS ADMINISTRATION

H.R. 1 extends from nine months to two years the period for bringing a civil action for wrongful levy. The new law does not prohibit increases in IRS user fees, as proposed by the original Senate bill.

INTERNATIONAL

The new law moves the United States to a territorial system. It creates a dividend-exemption system for taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when the earnings are distributed. The foreign tax credit rules are modified, as are the Subpart F rules. The look-through rule for related controlled foreign corporations are made permanent, among other changes.

Repatriation

A portion of deferred overseas-held earnings and profits (E&P) of subsidiaries will be taxed at a reduced rate of 15.5 percent for cash assets and 8 percent for illiquid assets. Foreign tax credit carryforwards will be fully available and foreign tax credits triggered by the deemed repatriation would be partially available to offset the U.S. tax.