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Monday June 18, 2018

Washington News

Washington Hotline

IRS Supports Simplified Tax Code

On June 21 IRS Commissioner John Koskinen spoke at the IRS Tax Policy Center Joint Research Conference in Washington. He explained that as IRS Commissioner, he is regularly asked his opinion about tax reform.

Koskinen stated, "I have had people asking me whether the IRS might resist significant tax simplification, and actually the opposite is true. No one would be more delighted with a more simplified tax code than IRS employees. There are many significant benefits on the administrative side if the code itself were simplified as much as possible . . . making life easier for taxpayers, and it is a message we are continuing to take to Congress."

The 10 million words in the current tax code and regulations create complexity. Koskinen observed that this is the case in three specific areas.

There are six separate definitions of "child." The rules for deciding who is eligible for the earned income tax credit (EITC) are very complex. There are also multiple tax benefits or credits for students attending colleges or universities.

In an effort to reduce the number of government regulations, the White House directed all departments to remove two old regulations when one new regulation is published. Koskinen noted, "Historically, IRS regulations have been treated as different than the normal government regulations, on the sense that what we do is not impose new burdens or opportunities on people. We basically provide guidance as to how to operate under the statutes that Congress passes under the Code."

Koskinen did not state whether the IRS plans to follow the directive to remove two old regulations for each new regulation that is published.

Editor's Note: There has not been comprehensive tax reform since 1986. During these three decades there has been a dramatic increase in the size and complexity of the tax system. Even taxpayers who take the standard deduction now use tax software or an advisor to prepare taxes. For the 30% of taxpayers who itemize deductions, nearly all use tax software or a tax preparer. While the House, Senate and White House have all talked about comprehensive tax reform, there still is no proposed tax reform bill in Congress.

Senate Releases Healthcare Bill

For the past two months, 13 senators have been meeting to draft the Better Care Reconciliation Act (BCRA) of 2017. On June 22 Majority Leader Mitch McConnell (R-KY) released the Senate bill. It is substantially different in many ways from the American Health Care Act (AHCA) passed by the House of Representatives.

Healthcare bills are both extensive and comprehensive because they impact many aspects of patient care and the entire system of doctors, clinics and hospitals. The principal areas of BCRA are the following:

1. Insurance Subsides - Both AHCA and BCRA set up healthcare credits to help fund insurance premiums. The BCRA credits are larger for lower income persons. The credits phase out at incomes that are over 350% of the poverty level.
2. Insurance Pricing - The insurance premiums for older persons may be up to five times those of younger persons. This change may reduce premiums for younger persons, but could lead to higher premiums for more senior individuals.
3. Insurance Coverage - There are ten mandatory coverage areas for medical insurance. However, states may petition to request the opportunity to offer major medical policies with lower costs and less coverage. People who are in better health may prefer the lower cost and reduced coverage.
4. Children Under Age 26 - Under current law and both ACHA and BCRA, children may be covered under their parents' plan until age 26.
5. Preexisting Medical Conditions - BCA permits the insurers to charge more for some preexisting medical conditions. There also is funding for state high-risk pools that are intended to cover some of these individuals.
6. Taxes - Both ACHA and BCRA repeal the 3.8% tax on passive income. BCRA implements this in 2023. The 0.9% Medicare payroll tax on upper income persons is repealed in 2017. There also are larger permitted contributions to health savings accounts.
7. Medicaid - There is a transition to a different funding method for Medicaid after 2021. There will be block grants to states which will provide greater administrative authority to the states.

Editor's Note: This objective overview of the healthcare bills is offered as a service to our readers. Healthcare bills are complicated and yet of interest to all Americans. Will this bill pass? Several Republican Senators and most Democratic Senators oppose the current draft. If the bill does pass the Senate, then there is likely to be a House-Senate conference committee. The process still will involve substantial negotiation and compromise.

Speaker Ryan Seeks 2017 Tax Reform

In a speech on June 20 to the National Association of Manufacturers (NAM), Speaker of the House Paul Ryan (R-WI) outlined his priorities for tax reform. He started with some history and stated, "You may recall that the last time we did this was three decades ago - the same year I got my driver's license. Yes, a lot has changed since then. Our economy is more interconnected with the rest of the world than ever before. The internet has transformed the way we do business and go about our lives."

In his view most Americans approach tax filing season with a "sense of dread." They "wade through a seemingly endless amount of deductions and credits, each with its own rules and eligibility requirements. And then, after you tally up those deductions you are placed in up to seven different federal tax brackets based on your income level."

Ryan outlined six specific areas for tax reform.

1. Repeal - The estate tax and alternative minimum tax would be repealed.
2. Retain Deductions - A bill should retain deductions for mortgage interest, charitable gifts and retirement contributions.
3. Tax Brackets - The current seven tax brackets would be simplified to three brackets. The simplified brackets should permit the use of a postcard tax return.
4. Lower Rates - By reducing many of the credits and itemized deductions, there will be tax savings that may be used to reduce the personal income tax rates.
5. Business Taxes - The top marginal rate for pass-through businesses is now 44.6% and the top corporate rate is 35%. Canada has a top business tax rate of 15%. Ryan suggests that there is a need to reform taxes and lower the rates.
6. Territorial System - The United States is the only first-world nation that taxes worldwide income of businesses. Ryan proposes that overseas earnings should be able to be returned to America without tax.

Ryan concluded, "But I am here to tell you: we are going to get this done in 2017. We need to get this done in 2017. We cannot let this once-in-a-generation moment slip by."

Editor's Note: Speaker Ryan and Chairman of the House Ways and Means Committee Kevin Brady (R-TX) continue to promote tax reform. However, Chairman Brady has not yet produced an actual bill. Both may be waiting for the resolution of the reform of the medical system. As the calendar steadily moves forward and the number of available legislative days in 2017 declines, it will be more and more difficult to move a comprehensive tax bill forward this year.

Applicable Federal Rate of 2.2% for July -- Rev. Rul. 2017-14; 2017-27 IRB 1 (16 June 2017)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2017. The AFR under Section 7520 for the month of July will be 2.2%. The rates for June of 2.4% or May of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published June 23, 2017
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