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Sikich Tax Update: A Legislative Update from Washington as You Head off on Your Summer Vacation

Sikich Tax Update: A Legislative Update from Washington as You Head off on Your Summer Vacation

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An Overview of Each Item Addressed by Congress Before the August Recess

Summer arrived late in many parts this year, and many folks are reveling in later than normal vacations, Congress included. In fact, Congress headed back to their districts for the annual August recess. One key piece of legislation that Congress needed to address before its August recess was to pass legislation to suspend the statutory debt limit until 2021 and remove the lids on discretionary spending for two years. The Bipartisan Budget Act of 2019 (H.R.3877) passed the House on July 25, 2019, cleared the Senate on August 1, 2019, and was signed by the President the following day. This legislation was a “must-pass” bill and there was speculation that congressional leaders might attach some tax bills to this budget package, but this did not happen.

Items Addressed by Congress Before August Recess

So, Congress addressed several tax bills before they left town but did not finalize all that is on their plate. They have many tax irons in the fire now, but keep in mind these bills are much smaller than the Tax Cuts and Jobs Act (TCJA) passed in December 2017. With Congress gone now, some work will continue behind the scenes in order to push these tax measures forward once the legislators return after Labor Day. These tax bills cover a wide range of issues, and each bill has its own group of interested taxpayers monitoring the latest developments. We addressed the status of tax legislation in April. Here are some of the tax proposals simmering now in Congress that will receive attention this fall:   

  1. IRS Reforms
  2. Retirement Provisions
  3. Tax Extenders
  4. TCJA Technical Correction Items
  5. Repeal of the ACA’s Cadillac Tax
  6. Social Security
  7. Tax Relief for Same Sex Couples
  8. Underfunded Multi-employer Pensions

Here is a brief overview of each of these tax bills and the prospects for passage this year.

An Overview of IRS Reforms

IRS reform legislation is one tax initiative in Congress that made it all the way to the finish line. The “Taxpayer First Act of 2019” (H.R.3151; now Public Law No.116-25) was signed into law by the President on July 1, 2019. We addressed this bill in a recent Sikich article: Sikich Tax Update: Congress Passes IRS Reform Legislation.

An Overview of Retirement Provisions

We addressed this retirement bill, Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, in our June 2019 update. Again, some of the key provisions in SECURE include repeal of the maximum age of 70½ for traditional IRA contributions (beginning for tax years in 2020); increase in age for the required beginning date for mandatory distributions from 70½ to 72 (effective in 2020); and modifications of required minimum distribution (“RMD”) rules for designated beneficiaries – a new ten-year distribution payout period on the death of the IRA owner. This bill was approved in the House by a large bi-partisan margin. The bill also has widespread support in the Senate but is being blocked now by a procedural “hold” measure. It is uncertain when and how this stalemate will be resolved, but eventually a retirement bill (likely with all or most of the provisions contained in the SECURE bill) will survive this year as there is overwhelming support for it.

Sikich Forecast: Likely to be enacted this year.

An Overview of Tax Extenders

Again, tax extenders were addressed in our earlier update. There has been much discussion recently on these extender items. The Senate is eager to move forward with extenders, but there has been no real movement in the House. It is still uncertain now if any extender legislation will move in 2019, and if so when. Note – if these items are once again extended retroactively for 2018, taxpayers will most likely need to amend their 2018 tax returns to obtain these tax savings.  

Sikich Forecast: Uncertain if this will be enacted this year.

An Overview of TCJA Technical Correction Items

We also covered this earlier. There are several provisions from the TCJA that were inadvertently miswritten when this tax reform bill was drafted. Congress, however, must pass legislation to fix this situation, and this needs bi-partisan support, which is lacking now. This political drama could play out over the balance of the year.

Sikich Forecast: Uncertain if this will be enacted this year.

An Overview of the Repeal of the ACA’s Cadillac Tax

The Affordable Care Act (“ACA”) was a comprehensive health care bill enacted in 2010. This highly publicized legislation has been the subject to several challenges since its passage. Without getting into the controversy and political issues of the ACA, there are two provisions (the “Cadillac tax” and the Medical Device Excise tax) that have garnered little support since ACA was passed. While these two ACA taxes remain unpopular, members of Congress have been unable to muster enough support to repeal these taxes.   

The Cadillac tax imposes a 40% tax on the costliest health insurance plans sponsored by employers. These plans offer coverage of approximately $11,200 for individuals and $30,100 for families. The 40% tax on businesses would apply to the portion of the health insurance plan above these thresholds. This tax was originally scheduled to apply beginning in 2018 but has been delayed twice by Congress and is now set to take effect in 2022. 

Another repeal effort of the Cadillac tax is now underway. The Middle Class Health Benefits Tax Repeal Act of 2019 (H.R.748) was introduced this summer and passed the House on July 24, 2019 by a large margin of 419-6. This bill would repeal the Cadillac tax so it would not be an issue any longer for employers. The Senate will likely follow the House in repealing this tax, but at this point has not announced its timetable or plans for this bill. Finally, this bill does not address the ACA’s medical device excise tax, but this could perhaps be added later or included in separate legislation.

Sikich Forecast: Likely this item will be enacted this year.

An Overview of Social Security

Congress is also looking at shoring up Social Security. Congress realizes it must do something about the looming funding shortfall in the program, but just how to fix this remains elusive. Just prior to the August recess, the House Ways & Means Committee held hearings on “The Social Security 2100 Act” (H.R.860). The Background on Revenue Sources for the Social Security Trust Funds prepared by the Staff of the Joint Committee on Taxation (JCT) in Congress provides more information.  

The House will continue debating this bill and may try to push it through the House later this year. This bill, however, will likely not be supported by the Senate. The Senate also realizes the need to address Social Security’s finances, but has different ideas on how this might be accomplished. Here are some of key provisions found in the House’s Social Security 2100 Act:   

  • First, this bill changes the amount of Social Security benefits that are included in gross income for individual income tax purposes. The proposal replaces the present-law two-tier system of thresholds with a single set of thresholds of $100,000 for joint filers and $50,000 for most other filers and provides that as much as 85% of the benefits may be taxable.
  • Next, the bill changes the earnings base for the OASDI portion of FICA taxes and SECA taxes. Under the proposal, in addition to wages and net income from self-employment below the Social Security wage base, OASDI taxes apply to annual individual wages and net earnings from self-employment in excess of $400,000. This proposal applies to wages or remuneration paid, and net earnings from self-employment derived, in calendar years after 2019. Thus, the first $130,000 or so of wages and earned income would be subject to Social Security Tax, and then also on wages of more than $400,000. This would create a “donut hole” where no Social Security Taxes would apply on wages above $130,000 but less than $400,000.
  • Last, the bill increases the total OASDI tax rate by 0.1 percentage point annually, beginning in calendar year 2020 and through calendar year 2043, after which the rate remains at the increased level. Thus, the employer and employee rates of 6.2% each increase annually by 0.05 percentage point after 2019 to reach 6.7% in 2029, and reach a cap of 7.4% to apply for calendar years after 2042; and the SECA rate increases from 12.4% in 2019 to 13.4% in 2029, and reaches a cap of 14.8% to apply for calendar years after 2042. This proposal applies to remuneration received, and taxable years beginning, after December 31, 2019.

Sikich Forecast: Unlikely this will be enacted this year.

An Overview of Tax Relief for Same Sex Couples

Another tax bill that came up in the House just before the August recess was the “Promoting Respect for Individuals’ Dignity and Equality Act,” the PRIDE Act (H.R.3299). This bill would amend the tax code to provide for equal treatment of same sex married couples. It would permit such couples to amend their filing status to married filing jointly for tax returns outside of the statute of limitations and modifies tax rules relating to married couples to include same sex couples. The bill passed the House by a voice vote and now heads the Senate. The Senate has not announced yet when it will deal with this bill, but with the bipartisan support in the House, it will likely be supported in the Senate as well. 

Sikich Forecast: Likely this will be enacted this year. 

An Overview of Underfunded Multi-employer Pensions

There are many multi-employer defined benefit pension plans that are underfunded. Just before the August recess the House passed the “Rehabilitation for Multiemployer Pensions Act of 2019” (H.R.397). This bill would establish the “Pension Rehabilitation Administration” within the Department of the Treasury and a related trust fund to make loans to certain multi-employer defined benefit pension plans. Pension plans that are critically underfunded may qualify for such loans according to the bill. There are many other details and complexities in this bill: Technical Explanation of Rules Committee Print 116-24, H.R. 397, The “Rehabilitation for Multiemployer Pensions Act of 2019.” The bill passed the House mostly along party lines but faces an uphill battle in the Senate. The Senate also wants to address the underfunding issue with multi-employer benefit plans, however, it has a different approach with how to shore up these plans.  

Sikich Forecast: Unlikely this will be enacted this year. 

There are other tax proposals that have been offered. Some of these will fall by the wayside, but others move forward and perhaps be added to one of the proposed bills above. We will continue to monitor the latest tax developments from Washington. Please consult your Sikich tax advisor with any questions.  

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