Tax Reform and Other Current
Issues in Taxation
Kim Honaker, DBA, CPA
May 1, 2014
AGENDA
• Tax Reform - Chairman
Camp’s proposal
– Overview of “Tax Reform
Act of 2014”
– Impact exercise –
quantifying change
• 2014 Update
– Tax Extenders
– Schedule UTP reporting
Tax Reform Act of 2014
• Released February 26, 2014
– Full draft is 979 pages
– Section-by-Section Summary is available (194 pages)
– Technical Explanation from the Joint Committee on Taxation (JCT) also
available (Title I for individual section is 138 pages)
• Goals of reform
– Make tax code simpler and fairer for families and employers
– Strengthen the economy and therefore create more jobs.
• Anticipated benefits
– Create 1.8 million new private sector jobs
– Allow 95% of taxpayers to claim standard deduction while minimizing
taxes
– Strengthen economy and increase GDP by up to $3.4 trillion
– All without increasing the budget deficit
Tax Reform Act of 2014
• Effective date
– Changes generally take effect for tax year 2015
– Some changes phased in or phased out
• Areas impacted
–
–
–
–
International taxation
Tax treatment of pass-throughs
Business taxation
Individual taxation
• Joint Committee on Taxation issued two revenue
estimates:
1.
2.
A traditional “static” estimate
A “dynamic” estimate which attempts to estimate the
impact of reform on future economic growth
Tax Reform Act of 2014
Google search of “chairman camp tax reform” turns up 30
pages of links. Sampling of coverage since release:
• PWC, Deloitte, and other
accounting firms
• Media (on-line or in print),
such as Forbes, WSJ, CNN,
US News, Time,
Washington Post
• politico.com
• newrepublic.com
• accountingtoday.com
• accountingweb.com
• taxanalysts.com
• taxfoundation.org
• independentsector.org
• sifma.org (Securities
Industry and Financial
Markets Association)
• rila.org (Retail Industry
Leaders Association)
• semiconductors.org
(Semiconductor Industry
Association)
• National Association of
Realtors
Key Individual Proposals
• Replace existing tax
brackets (7 total) with two
brackets (15% and 25%)
• Create 10% surtax for
certain income earned by
high income taxpayers
• Increase standard
deduction
• Eliminate personal
exemption
• Eliminate preferential rate
associated with qualified
dividends and long-term
capital gains
• Repeal deduction for state
and local taxes
• Reduce loan cap on
deductible mortgage
interest from $1 million to
$500k
• Limit deductible retirement
savings
• Simplify education
incentives
• Repeal numerous tax credits
• Repeal and/or modify
various deductions,
exclusions, and provisions
Key Individual Proposals
• Tax rates
– 10% on taxable income (TI) < $35,600 ($71,200 joint)
• Phased out for taxpayers with MAGI over $250,000 ($300,000)
– 25% on taxable income above those amounts
– 10% additional surtax on Modified Adjusted Gross Income
(MAGI) above $400,000
• MAGI = all income subject to 10%/25% + excluded foreign earned
income (or income from US territories) + tax-exempt interest +
various tax-exempt benefits
• Note that certain types of income, such as qualified domestic
manufacturing income, will not be subject to the 10% surtax
– All brackets indexed for inflation using a “chained CPI”
– Individual AMT is eliminated
Key Individual Proposals
• Investment Income
– No longer a preferential rate on long-term capital
gains
– Non-corporate taxpayers entitled to above-the-line
deduction equal to 40% of adjusted net capital gain
(net of 15% for most taxpayers – 60% at 25% rate)
– Exclusion on gain on sale of principal residence
remains but with changes to holding period
requirement, how often exclusion can be used, and
phase-out.
– No change to 3.8% Net Investment Income tax
enacted as a result of Affordable Care Act
Key Individual Proposals
• Education-Related Incentives
– Consolidates Hope credit, lifetime learning credit,
tuition deduction, and temporary American
Opportunity Tax credit (AOTC) into a permanent AOTC
• Maximum credit and phase-outs similar to current AOTC
– No significant changes to
• Deduction for work-related education
• Gift tax exclusion for tuition payments
• Tax-free 529 savings plans
Key Individual Proposals
• Other Deductions
– Increased standard deduction of $22,000 (joint) or
$11,000 (single).
• Phased out when MAGI > $513,600 (married) or $356,800
(other)
• Single filers with at least 1 qualifying child can claim an
additional deduction of $5,500 (even if itemize)
– Additional deduction is phased out dollar for dollar when AGI
exceeds $30k
– Personal exemption deduction eliminated
– No deduction (above-the-line or itemized) for an
employee’s employment related expenses
Key Individual Proposals
• Other Deductions (continued)
– Deductions for taxes not associated with a trade or
business no longer allowed
• State income or sales & use tax
• Real property and personal property tax
– Mortgage interest remains deductible, but $1 million
limit reduced to $500k over a period of 4 years
– Charitable contributions remain deductible, but would
be subject to a 2% AGI floor
• Additionally, there would be some modification to limits
placed on deductibility (fair value vs. adjusted basis, AGI %
limitations)
• Elimination of special rule allowing 80% deduction for
amount paid for the right to purchase college athletic tickets.
Key Individual Proposals
• Other Deductions (continued)
–
–
–
–
–
No deduction for personal casualty losses
No deduction for tax preparation fees
No deduction for medical expenses
No deduction for moving expenses
No deduction for alimony payments (and no income
inclusion on the other side)
– Removal of existing 2% floor on miscellaneous
itemized deductions
– Removal of existing phase-out of itemized deductions
for higher income taxpayers
– No exclusion for employee achievement/service
awards
Key Individual Proposals
• Other Credits
–
–
–
–
–
–
–
–
Eliminates dependent care credit
Eliminates adoption credit
Eliminates residential energy efficiency credit
Eliminates alternative fuels vehicle credit
Eliminates health insurance credit
Eliminates first-time home buyers credit
Modifies earned income tax credit
Expands the child tax credit
• Increases amount to $1,500 per child for children under 18 ($500
allowed for non-child dependents)
• Amounts would be indexed annually for inflation
• Significantly higher thresholds for phase-out
Family 1: Estimated Impact
Existing Rules for 2013:
W-2
Schedule C/Sole Prop
LT Gain on sale of stock
Interest
Gambling income
Total Gross Income
Alimony
Education Deduction
SE Tax Deduction
AGI
Std or Itemized Deduction
Exemptions (3)
Taxable Income
Income Tax
Child/Dep Care Exp Credit
Child Tax Credit
Total Income Tax
SE Tax
Total Tax Liability
49,500
118,940
(3,000)
1,245
4,500
171,185
16,000
1,800
8,403
18,630
11,700
26,203
144,982
30,330
114,652
20,521
600
19,921
16,806
36,726
Itemized Deductions
Mortgage Interest
Property Tax
Charitable Contributions
Sales Tax (using calculator)
Gambling losses
Misc ($1,410 before limits)
Medical ($10,850 before limits)
Itemized
vs. Standard Deduction of $12,200
8,870
2,800
4,000
2,460
500
0
0
18,630
Family 1: Estimated Impact
With Proposed Changes:
W-2
Sole Prop
LT Gain on sale of stock
Interest
Gambling income
Total Gross Income
Alimony
Education Deduction
SE Deduction
AGI
Std or Itemized Deduction
Exemptions
Taxable Income
Income Tax
Child/Dep Care Exp Credit
Child Tax Credit
Total Income Tax
SE Tax
Total Tax Liability
49,500
118,940
(3,000)
1,245
4,500
171,185
8,452
22,000
-
8,452
162,733
22,000
140,733
24,503
1,500
23,003
16,806
39,809
Itemized Deductions
Mortgage Interest
Property Tax
Charitable Contributions
Sales Tax
Gambling losses
Misc ($1,410 before limits)
Medical
Itemized
vs. Standard Deduction of $22,000
8,870
0
0
0
500
1,410
0
10,780
Taxable Income increase of $26,081. Tax increase
of $3,082, or 15.47% [(23,003-19,921)/19,921]
Family 2: Estimated Impact
Existing Rules for 2013:
W-2 s
Gain on sale of stock
Interest
Dividends
Total Gross Income
Moving expenses
AGI
Std or Itemized Deduction
Exemptions (2)
Taxable Income
Total Income Tax
Other Taxes
Total Tax Liability
100,500
4,150
1,610
2,430
108,690
1,500
19,500
7,800
1,500
107,190
27,300
79,890
11,173
11,173
Itemized Deductions
Mortgage Interest
Property Tax
Charitable (includes $800 for NCAA sports)
Sales Tax
Itemized
8,000
3,000
2,500
6,000
19,500
Family 2: Estimated Impact
With Proposed Changes:
W-2 s
Gain on sale of stock
Interest
Dividends
100,500
4,150
1,610
2,430
Total Gross Income
Capital Gain Exclusion
Moving expenses
AGI
Std or Itemized Deduction
Exemptions
Taxable Income
Total Income Tax
Other Taxes
Total Tax Liab
108,690
1,660
-
1,660
Itemized Deductions
Mortgage Interest
Property Tax
Charitable (includes $800 for NCAA sports)
Sales Tax
Itemized
vs. Standard Deduction of
$22,000
8,000
0
0
0
8,000
107,030
22,000
-
22,000
85,030
10,578
10,578
Taxable Income increase of $5,140. Tax
decrease of $595, or -5.33% [(10,57811,173)/11,173]
Family 3: Estimated Impact
Existing Rules for 2013:
W-2
Sole Prop
LT Gain on sale of stock
Interest
Gambling income
Total Gross Income
Education Deduction
SE Deduction
AGI
Greater of Std or Item Ded
Exemptions (4)
Taxable Income
Income Tax
32,500
102,685
(3,000)
215
1,000
Child/Dep Care Exp Credit
(1,200)
Child Tax Credit
Total Income Tax
SE Tax
Total Tax Liab
(1,350)
133,400
3,450
7,254
17,777
15,600
10,704
122,696
33,377
89,319
14,188
11,638
14,509
26,147
Itemized Deductions
Mortgage
Prop Tax
Charitable
Sales Tax (using calculator)
Misc ($608 before limits)
Medical ($3,895 before limits)
Itemized
vs. Standard Deduction of $12,200
9,857
3,000
2,500
2,420
0
0
17,777
Family 3: Estimated Impact
With Proposed Changes:
W-2
Sole Prop
LT Gain on sale of stock
Interest
Gambling income
Total Gross Income
Education Deduction
SE Deduction
AGI
Std or Item Ded
Exemptions
Taxable Income
Income Tax
Child/Dep Care Exp Credit
Child Tax Credit
Total Income Tax
SE Tax
Total Tax Liab
32,500
102,685
(3,000)
215
1,000
133,400
7,297
22,000
-
7,297
126,103
22,000
104,103
15,346
(3,000)
12,346
14,509
26,855
Mortgage
Prop Tax
Charitable
Sales Tax
Misc ($608 before limits)
Medical
Itemized
vs. Standard Deduction of $22,000
9,857
0
0
0
608
0
10,465
Taxable Income increase of $14,784. Tax
increase of $708, or 6.08% [(12,34611,638)/11,638]
Reconciliation of
Change in Tax
Tax calculated under existing rules
Rate change on ordinary income
Rate change on dividend income
Rate change on capital gain income
Capital gain exclusion
Decrease in moving expenses
Decrease in alimony
Decrease in education exp. deduction
Increase in SE tax deduction
Increase in std/item. deductions
Decrease in personal exemptions (3/2/4)
Decrease in dependent care credit
Increase in child tax credit
Tax calculated under new rules
Percentage Change in Income Tax
Family 1
19,921
(2,538)
N/A
N/A
N/A
N/A
4,000
450
(12)
(843)
2,925
600
(1,500)
23,003
Family 2
11,173
(2,538)
243
415
(415)
375
N/A
N/A
N/A
(625)
1,950
N/A
N/A
10,578
Family 3
11,638
(2,538)
N/A
N/A
N/A
N/A
N/A
863
(11)
(1,056)
3,900
1,200
(1,650)
12,346
15.47%
-5.33%
6.08%
Key International and
Pass-Through Proposals
International
Pass-Throughs
•
•
•
•
•
•
•
•
Designed to move US toward territorial
system for taxing US multinational
corporations
95% Dividends Received Deduction
(DRD) on foreign dividends received by
US corporations
One-time tax on all untaxed foreign
earnings held overseas (deemed
repatriation)
Taxation of intangible income from
foreign markets at a rate of 15%
(subject to phase-in)
CFC look-through rules made
permanent
Thin cap rules limiting interest
deductions
And other changes
•
•
•
•
•
•
•
Ordinary income treatment for “carried
interest”
Changes to real estate investment trust
(REIT) rules
Removal of 7 year limit on gain
recognition for contributed property
Changes to partnership IRS audit
procedures
Repeal of technical terminations
Repeal of guaranteed payment
treatment
Changes to applicability of selfemployment tax to earnings of limited
partners and S-corp. shareholders
(looks at material participation as a
trigger)
And other changes
Key Business Proposals
• Flat 25% tax rate phased in
over 5 years
• Phase-out Section 199
deduction, with eventual
elimination
• Eliminate MACRS and establish
longer depreciable lives
• Section 179 expensing made
permanent at $250k (phaseout begins at $800k
investment)
• Increase Section 197
amortization to 20 years
• Amortize certain advertising
expenses over 10 years
• Amortize research expenses
over 5 years
• Make permanent a modified
research credit
• NOL carryback/carryover
limited to 90% of taxable
income
• Eliminate entertainment
deduction
• LIFO and LCM repealed
• Like-kind exchange treatment
repealed
• Corporate AMT repealed
• Various other changes
Tax Extenders
• Temporary provisions impacted include R&D credit, look-through
treatment, Section 179, bonus depreciation, tuition deduction, state
and local sales tax deduction, and various others
• Early April - Senate Finance Committee passed tax extenders package
(typical first step)
– Extends expired or expiring provisions for two years or longer
– Approximately 55 provisions considered
• Full senate expected to vote on package next
• Passage by Senate would put pressure on the House
– Ways and Means Committee version currently focuses on business
extenders
– Some concern that Chairman Camp’s version may ultimately address a
few of the extenders and while letting others expire
• Remember that extension of temporary provisions for 2012/2013
was not signed into law until January 1, 2013
Schedule UTP reporting
• Mandatory IRS reporting of uncertain tax positions
taken in corporate tax return and for which a reserve
has been recorded in the audit financial statements
– Applied to taxpayers with assets > $100 million for 2010
and 2011
– Applied to taxpayers with assets > $50 million for 2012 and
2013
– Applies to taxpayer with assets > $10 million for 2014 and
later years
Resources
Tax Reform
Deloitte (Producer). (2014). Camp Tax Reform Discussion Draft Unveiled: Key Proposals and Implications for
Taxpayers [video webcast]. Retrieved from http://www.deloitte.com/view/en_US/us/Insights/Browse-byContent-Type/dbriefs-webcasts/e5ad0e7317f64410VgnVCM1000003256f70aRCRD.htm
Joint Committee on Taxation (2014). Technical Explanation of the Tax Reform Act of 2014, A Discussion Draft of
the Chairman of the House Committee on Ways and Means to Reform the Internal Revenue Code: Title 1 –
Tax Reform for Individuals (JCX-12-14). Retrieved from
http://waysandmeans.house.gov/uploadedfiles/jct_technical_explanation__title_i___individual__jcx_12_14
___022614.pdf
Pomerleau, K. & Lundeen, A. (2014, February 26). The Basics of Chairman Camp’s Tax Reform Plan. Retrieved
from http://taxfoundation.org/blog/basics-chariman-camp-s-tax-reform-plan
PricewaterhouseCoopers, 2014. Overview of Ways and Means Chairman Camp’s Tax Reform Discussion Draft.
Retrieved from http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-overviewways-means-chairman-camp-tax-reform-discussion.pdf
PricewaterhouseCoopers, 2014. Ways and Means Chairman Camp Releases Tax Reform Discussion Draft.
Retrieved from http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-ways-meanschairman-camp-releases-tax-reform-discussion-draft.pdf
Ways and Means Committee Majority Tax Staff (2014). Committee on Ways and Means Chairman Dave Camp Tax
Reform Act of 2014 Discussion Draft Section-by-Section Summary. Retrieved from
http://waysandmeans.house.gov/uploadedfiles/ways_and_means_section_by_section_summary_final_022
614.pdf
Resources (continued)
Tax Extenders
Cohn, M. (2014, April 14). Tax Extenders in Limbo. Retrieved from
http://www.accountingtoday.com/debits_credits/tax-extenders-in-limbo-70316-1.html
Lee, B. (2014, April 10). What Will Congress Do with the 55 Expired Tax Extenders? Retrieved from
http://www.foxbusiness.com/personal-finance/2014/04/10/what-will-congress-do-with-55-expired-taxextenders/
Lundeen, A. (2014, April 4). Senate Finance Committee Passes $85 Billion Tax Extenders Bill. Retrieved from
http://taxfoundation.org/blog/senate-finance-committee-passes-85-billion-tax-extenders-bill
Vest, C. (2014, April 23). Fate of Tax Extenders Bill Still Uncertain. Retrieved from
http://associationsnow.com/2014/04/fate-tax-extenders-still-uncertain/
Schedule UTP
Internal Revenue Service (IRS). (2013). 2013 Instructions for Schedule UTP. IRS Research Division, Washington,
DC.
Questions?