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Friday, February 5, 2016

Ideas for Retirement Savings Reform

Most people won't look like this in retirement.
On 1/28/16, the Senate Finance Committee held a hearing on - Helping Americans Prepare for Retirement: Increasing Access, Participation and Coverage in Retirement Savings Plans.  This isn't the first time for this topic.  There were a few hearings on this in 2014. I'm not sure if anything is driving the renewed attention to this topic now.  While tax reform is challenging in an election year, this important topic seems good for any year.  There is a need for reform of the tax rules for retirement plans to make them more equitable and simple to help more people save for retirement.

Here are a few suggestions I have for reform in this area.  They focus on equity.  I submitted these to the Senate Finance Committee in April 2015 when they were seeking ideas for tax reform via their working group project.  I'll likely submit them again and add more on simplification. One overall reform I recommend is to change the focus of retirement plans from the employer to the employee, making them truly portable from job to job and if in employee or contractor status or both.

Bring greater equity to retirement savings rules and better enable young people to save for retirement. Possible approaches include:
·         A simple system to enable all workers (employees and self-employed individuals) to have a retirement savings account. This should occur for both part-time and full-time workers and even if an employer does not help with administration or contributions.
·         Retirement savings contributions should be coordinated with payroll tax deductions. A system to enable self-employed individuals to also make contributions along with self-employment tax payments should be considered.
·         Find ways to help individuals improve their financial literacy.
·         Portability. Be sure the system allows for contributions to be made to one account even if a worker changes employers or also has income from self-employment.
Example of a new approach: The first time an individual receives a W-2 or pays self-employment tax (whichever happens first), the government could set aside a set dollar amount in a retirement account for that person. This would constitute the start of their retirement account that would be used for all future contributions; there would be only one account. When the individual works for an employer who also wants to contribute to employee retirement accounts, such funds are placed in the individual's existing account. Also, for each paycheck or quarterly estimated tax payment of a self-employed individual, an amount would be contributed to their retirement account. Individuals could be allowed to transfer their retirement account to a commercial broker for management or let it stay with the federal government. The federal government could be allowed to transfer management to third parties for a fee.
Annual reporting would be required to let individuals know their account balance and other details. Rules would continue to exist, but in more simplified form, governing how much could be contributed annually, how much employers could also contribute, the age when distributions may begin, hardship withdrawals, etc.
Benefits of this type of approach:
·         All individuals who work would have a retirement account. This single account would be used whether they are an employee or sole proprietor or both.
·         The initial contribution from the government ensures that all workers start a retirement account.
·         The initial contribution from the government may also encourage individuals to be tax compliant from the start of the time they begin earning money.
·         The system ties to payroll tax withholding and so should not be burdensome to any size employer since they already are required to comply with payroll tax rules.
·         For low-income workers, the annual contribution could be made via part of the earned income tax credit (EITC) the worker receives.

What do you think? What would help all individuals better save for retirement?

Monday, January 25, 2016

Recent Tax Law Change Cautions

There were numerous public laws enacted in 2015 changing our federal tax system. The largest in terms of number of change (over 130) is Public Law 114-113 (12/18/15). See basics and links in my 1/10/16 post. That's a lot of changes.  There are a variety of effective dates including many that are retroactively effecting back to 1/1/15. Did we need all of these changes? I don't think so.  Or at least not all at once. 

I want to note a few cautions based on what I've learned from reading this and thinking about it for the past several weeks.  I've been covering many of these updates in update presentations I've been making for the past few weeks.

This is not all of the cautions.  Please comment to this post if you have more to offer.
  • Look at the legislative language (go to Division P and Q) and Joint Committee on Taxation explanation to get the real understanding of the change. As noted in my 1/10/16 post, some quick summaries implied that the Section 25D residential energy credit was extended to 2021. That is an overstatement as only two items from the five items at this section were extended. The other three continue to expire at the end of 2016 as was the case before PL 114-113. See the 1/10/16 post for a track change version of Section 25D.
  • At least one change required quick action.  If you have a 529 qualified tuition plan and in 2015 you paid for a qualified expense, such as tuition, but got all or part of it refunded, you have 60 days after 12/18/15 (that should be 2/16/16) to return it to your 529 plan to avoid taxability of it. Going forward you'll have a 60 day period to rollover the refund. Click here to see a track changes version of the changes to Section 529 qualified tuition programs.
  • There are significant changes to bonus depreciation and Section 179 expensing. Take a careful look to determine if property (personal or real) might fall under both and what only falls under one. Still, bonus is only for new assets (original use with the taxpayer) and Section 179 applied to qualified used or new property. But there are also differences between 2015 and beyond 2015 as well as for leased property. And don't forget about the de minimis safe harbor election at Reg. 1.263(a)-1(f).
  • The temporary provision allowing an individual age 70 1/2 or older to transfer up to $100,000 from her IRA directly to a qualified charity and omit the income and the donation from her tax return was made permanent (Section 408(d)(8) - qualified charitable distribution). Be cautious in doing this.  Notice 2007-7 and Pub 590-B (see page 13) and the legislative history to the Pension Protection Act of 2006 (which was the originating legislation) stress that the rules for charitable contribution deductions must be followed. Here an excerpt from the 2006 legislation (PL 109-280; 8/17/06):  “exclusion applies only if a charitable contribution deduction for the entire distribution otherwise would be allowable (under present law), determined without regard to the generally applicable percentage limitations. Thus, for example, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available with respect to any part of the IRA distribution.”
    I believe that means you can have a very bad result if you don't do the charitable contribution part correct. Let's say an eligible person transfers $100,000 but does not get the required "contemporaneous written acknowledgement" from the charity prior to filing the return. The result is that the individual must report the $100,000 of income and doesn't get a charitable contribution deduction!  It would be good to see a draft of the letter before making the contribution and be sure you get it before filing the return and be sure it meets the requirements of Section 170(f)(8) and Reg. 1.170A-13(f).
  • Watch the effective dates. There are several, such as the ability for small businesses to use the research credit against payroll tax or AMT, that are effective for tax years beginning after 12/31/15. However, when you read the Code section, that does is not in the text of the law. Thus, you might think it applies on your 2015 return. Similar issues occur to some of the bonus depreciation changes.  Again, check the legislative language or the Joint Committee on Taxation summary. 
Our tax law became more complicated with PL 114-113, but that's true of every law we've seen in the past 20+ years (post a comment if you know of a law that simplified the federal tax law in the past twenty years). While we tend to like special deductions and credits and exemptions, they make the law more complex.

What do you think?  Any other cautions you have to offer?

Wednesday, January 20, 2016

Filing 2015 tax returns - help for practitioners

Every year out federal tax system becomes more complicated. This is due to both law changes and more complicated transactions that many individuals get involved in such as multistate or international investments and sharing economy activities.

Law changes have a range of effective dates. For example, the 130+ tax changes included in Public Law 114-113 (12/18/15) includes changes effective for 2015, some for tax years beginning after 12/31/15 and a few later than that. Also, for many, the IRS will need to provide guidance to help us fully implement the rules.

I see the AICPA has a lot of resources (once again) for practitioners (some for members only) - Ten Resources for Tax Season. There are a lot of helpful items including assisting victims of identity theft, rates, IRS hotline numbers and more.

What tips do you have?

Sunday, January 10, 2016

PATH and Many Tax Changes - PL 114-113

Big drama as 2015 ended was for Congress to fund the government for the 2016 fiscal year, extend the 50+ tax provisions that expired at 12/31/14, and make numerous other tax changes. The extenders part of P.L. 114-113 (12/18/15) includes 126 changes with several being multi-part changes (for example, making Section 179 permanent with additional changes to it). The extenders part of the legislation is called PATH - Protecting Americans from Tax Hikes.

I have a document here that you may find helpful. It includes:
  • Links to P.L. 114-113 and PATH documents
  • Section 179, Election to expense certain depreciable business assets - showing the changes via track changes
  • Section 25D, Residential energy efficient property - showing the changes via track changes
I include the track changes format because it often really helps in seeing the specific changes. For example, some brief updates may note that the Section 25D credit was extended and phases out in later years. This credit was already in existence through 2016 before PATH.  PATH extends 2 of the 5 credits of Section 25R past 2016 and phases them out through 2021.  See my pdf document for the details.

I'll have more on the relevance of all of these changes to tax reform soon.

What do you think about all of the changes?

Thursday, December 31, 2015

Top Ten Items of Tax Policy Interest for 2015 - #10

This post completes (!) my list of ten news items and activities from 2015 that I think have particular tax policy (and tax reform) relevance.  For number 10 - the increased prevalence of the worker classification issue and the increased cost starting in 2015 - and the need to finally address this decades old problem.

The freelance or 1099 or gig economy means a lot more people work as contractors rather than employees. The tax and non-tax federal and state laws have never been sufficient for easily distinguishing between these two types of workers. The consequences for getting it wrong are costly for both the employer and worker. Employers face payroll taxes, penalties and interest for misclassifying employees as contractors. Starting in 2015, some of these employers will also have exposure to the employer mandate which can be a penalty of $2,080 per full-time employee, assuming at least one full-time employee claims the premium tax credit. Employers also have risks of disqualified benefit plans for misclassifying workers.

The new group of workers we seem to hear most about are Uber and Lyft drivers. There is also litigation going on for these companies regarding application of labor laws to the workers. (See my June 20, 2015 post for more and links to District Court decisions that are still in litigation today.) Another complication in these cases, I think, is exactly what type of businesses Uber and Lyft are. They claim they are network platforms that merely connect drivers and riders. But, they don't seem to be like the Yellow Pages or eBay. These companies set the prices, Uber denies tips, they offer incentives to get new drivers and passengers, and state laws require them to do background checks and provide insurance. I saw an ad for a tax analyst for one of these companies a few months ago which made it sound like a transportation provider rather than a matchmaker.  It will be interesting to see what the federal court says in 2016.  And, while these are labor law cases at the moment, I suspect the IRS will take a look (it may be doing so already) and given similar classification schemes, will find a similar conclusion. If that conclusion is employee rather than contractor, for these two companies, I don't see any way they can avoid a significant "assessable payment" under Section 4980H(a) for not offering coverage to all of their full-time employees and their dependents up to age 26.  Employers do not (cannot) offer health coverage to contractors.  And, given the income range of many of the drivers, it's a good bet that at least one (likely many), obtained a premium tax credit.

Briefly, there are two ways the Section 4980H penalty becomes relevant in the worker classification tax issue today:
   First, an employer thinks it is not an "applicable large employer" (ALE) so doesn't worry about the penalty. But, it turns out that one ore more of its contactors who work on average 30 or more hours per week per month is really an employee.  Now, counting these misclassified workers (whether full-time or part-time), the employer finds that in its base year, it had 50 ore more full-time and full-time equivalent employees and is an ALE, potentially subject to the Section 4980H assessable payment.
   Second, the employer already knows it is an ALE. If it has enough full-time misclassified workers, it might find that it did not offer coverage to at least 95% of its full-time employees and their dependents up to age 26 and so has exposure to the Section 4980H(a) penalty if at least one full-time employee claims the premium tax credit.  The penalty is $2,080 per full-time employee, calculated on a monthly basis (so 1/12 of this amount for each month there is a violation).  For a large company, this can be quite a large, non-deductible penalty.

Will Congress step in and provide some clarification?  Why not do what was done for direct sellers and real estate agents years ago and statutorily make these freelancers contractors (non-employees per Section 3508)?  Why not also change non-tax laws to make the workers eligible for more safety net provisions?  I'll have more on this in 2016 - for both state and federal law significance).  I think worker classification is an area definitely in need of and capable of being moved into the 21st century (long overdue).

My complete list of ten news and activities of 2015 with tax policy relevance (no ranking involved):

1. Congress can alter our tax system via a lot of non-tax bills - here
2. IRS funding challenges - here 
3. Justice Kennedy called for a review of the 1992 Quill decision - here 
4. IRS disagreeing with a court decision via a proposed regulation - here 
5. Why not let the Internet Tax Freedom Act just expire - here
6. A growing amount of non-binding "guidance" from the IRS - here 
7. Due date changes starting for 2016 returns to improve tax administration - here 
8. BEPS - base erosion and profit shifting - here 

9. Tax issues in the sharing economy and reality that they can be simplified - here 
10. Worker classification in the freelance/1099/gig economy - above

Happy New Year!    What do you think?