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Legislation Watch: Fall 2018

Recent Developments

States can now decide to require Internet sales tax collection. In South Dakota v. Wayfair Inc., the Supreme Court ruled that remote retailers, online marketplace providers, and other online sellers can be instructed to collect sales tax in states, where they have no brick-and-mortar footprint. This alters the playing field not only for buyers, but also for sellers (who must now figure out whether the products they sell are taxable, what states they will collect sales taxes in, how to calculate said taxes, and how to adjust their accounting operations and tax compliance, accordingly). Some states began requiring sales tax collection at the start of July, while many others have set start dates of October 1 or January 1, 2019. The SCOTUS decision could pave the way for a federal law to establish nationwide standards on this matter.1

I.R.S. cracks down on SALT workarounds for individual taxpayers. High-tax states including Connecticut, New Jersey, and New York recently created paths to help individuals work around the new $10,000 federal limit for the state and local government programs, allowing a taxpayer to claim a state tax credit for a charitable contribution. The Internal Revenue Service responded on August 23 with pending regulations aimed to limit such workarounds. Under the proposed new rules, a federal charitable deduction for an individual’s charitable contribution to one of these charities or programs would only be allowed once the amount of the donation surpasses the amount of the state tax credit resulting from the gift. (An exception would occur if the resulting state tax credit is 15% or less; in that instance, the individual would be allowed to deduct 100% of the donated amount from their federal taxes.) The new regulations only apply to state tax credits; they do not apply to instances where a taxpayer gets a state tax deduction in exchange for a charitable donation. These rule changes will likely be in effect by the end of 2018. (In early September, new I.R.S. guidance stated that these oncoming rule changes would not apply to businesses, which may still deduct payments to charities as business expenses.)2,3

 

Other News

President Trump signs executive order urging I.R.S. to review RMD calculations. A little-known fact: the life expectancy tables used by the I.R.S. have not been updated in 16 years. The average American now lives nearly two years longer than in 2002, so this executive order (signed August 31) directs the I.R.S. to review and possibly revise these tables, which retirees use to calculate yearly Required Minimum Distributions (RMDs) from traditional IRAs and other qualified retirement plans. Annuals RMDs might be lower with the life expectancy tables updated. The order also requested a review of regulations governing multiple-employer retirement plans, to explore the possible options for small businesses to band together and share retirement plan administrative costs (as trade associations do).4

New 1040 form design unveiled. In early summer, the I.R.S presented a draft of a new, shorter federal income tax form. This new form (two-sided, roughly the size of a large postage card) would replace the current 1040, 1040A, and 1040EZ forms. It has just 23 line items as opposed to the current 79, but it is intended to be supplemented by at least six schedules. The I.R.S. placed more than 50 drafts of revised 1040 forms and schedules on its website through the spring.5

New lawsuit could potentially upend the Affordable Care Act. As this edition of the Legislation Watch goes to press, a federal district court in Texas is poised to hear opening arguments in Texas v. United States, a lawsuit brought against the federal government by 20 state attorneys general plus the governors of Maine and Mississippi. The plaintiffs assert that since the Tax Cuts & Job Act of 2017 legally repealed the individual tax penalty for not having health coverage, the ACA’s individual health insurance mandate is now unconstitutional – and by the extension, so is the entire ACA, for they content that the law’s individual requirement for health coverage is inseparable from its other requirements. At minimum, the plaintiffs seek a preliminary injunction that would suspend the ACA until the court rules on Texas v. United States. Judge Reed O’Connor, presiding over the case, could possibly issue an immediate ruling on the constitutionality of the individual mandate and other aspects of the ACA. Should the court rule that the individual mandate is unconstitutional, insurance carriers could again be allowed to price coverage based on pre-existing conditions, age, gender, and other factors; if the whole ACA is ruled invalid, then that could result in the loss of health insurance for roughly 17 million Americans. An appeal by whichever side loses seems probable, and a lengthy appeals process could precede the case heading to the Supreme Court.6

 

Looking Ahead

Capitol Hill lawmakers could vote on “tax reform 2.0” legislation this month. The Tax Cuts & Jobs Act of 2017 radically revised parts of the Internal Revenue Code; could the tax law changes it authorized for individuals become permanent? A new bill emerging in the House of Representative aims to achieve that goal; it may have little chance of passing in the Senate. One point of contention among both parties: making the SALT cap permanent. Many of the changes the TC&JA made are set to expire in 2026.7

A new idea: use leftover 529 plan fund to pay off student loans. Most 529 plan balances are fully spent by the time the beneficiary leaves college, but the version of the above-mentioned “tax reform 2.0” bill that reached the House Ways and Means Committee in September contained this provision. If passed, the bill would also allow homeschooling costs and apprenticeship fees to be paid with 529 plan funds. In theory, grandparents and parents could cleverly and legally address education debt through this feature. A parent’s 529 plan could be exhausted first while a child is enrolled in college, with barely any impact on financial aid eligibility; later, a family could turn to a 529 fund created by a grandparent and use those funds to reduce a student loan debt burden .8

Changes might be ahead for retirement plans. Another new bill ready for introduction in the House, the bipartisan-supported Retirement Enhancement and Security Act (RESA), contains a few proposals for altering the retirement plan landscape. One idea: make it easier for workplace retirement plan providers to offer guaranteed income contracts to plan participants. Another idea: make these contract easily transferable to an IRA or to another employer-sponsored plan. Other amendments mentioned would let traditional IRA owners keep contributing to their accounts after age 70½, require 401(k) plan providers to project future retirement income for plan participants, based partly on their current account balance, and force beneficiaries of inherited IRAs or workplace retirement plan accounts exceeding $450,000 to distribute the entire account balance within five years.9

 

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Citations.

1 – tinyurl.com/ydflzsxc  [9/9/18]

2 – latimes.com/business/la-fi-state-local-tax-deduction-20180905-story.html [9/5/18]

3 – tinyurl.com/y98zhloa [8/23/18]

4 – cnbc.com/2018/08/31/trump-seeks-changes-to-retirement-accounts-in-executive-order.html [9/3/18]
5 – forbes.com/sites/kellyphillipserb/2018/08/30/heres-how-the-new-postcard-sized-1040-differs-from-your-current-tax-return/ [6/30/18]
6 – nytimes.com/2018/09/04/health/obamacare-trump-texas-case.html [9/4/18]

7 – latimes.com/business/la-fi-tax-cuts-20180905-story.html  [9/4/18]

8 – cnbc.com/2018/09/07/529-plans-could-be-used-for-student-loans-in-new-tax-legislation.html [9/7/18]

9 – cnbc.com/2018/08/31/changes-on-the-way-for-401ks-maybe.html [8/31/18]

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