On December 22, 2017, the Tax Cuts and Jobs Act (P.L. 115-97) was signed into law with most of it starting to be effective just ten days later. Give the roughly 115 changes in the law, that was a lot of work for the IRS to issue guidance on which is likely to take many years (we are still waiting for some guidance on the Tax Reform Act of 1986). It’s also a lot for taxpayers and tax professionals to deal with.
We likely need another year of data to know if the TCJA might stimulate the economy. According to the Congressional Research Service in a June 2019 report (page 14), the lowering of the top corporate rate from 35% to 21% led to a “record-breaking” amount of corporate stock buybacks.
For most individuals, the law did not add any complexity other than dealing with no more personal and dependency exemptions and that effect on wage withholding. A bigger complexity might be the IRS change to the Form 1040 including eliminating 1040-A and 1040-EZ. For about 15% of individuals, there is new complexity from new deduction and loss limitations.
The Joint Committee Bluebook indicates there are about 74 technical corrections needed to make the statute do what the lawmakers suggested. Who knows if these will ever be enacted now that we are two years out and nothing has been fixed.
On 12/20/19, President Trump signed the Further Consolidated Appropriations Act, 2020 that funds the government through 9/30/20 and includes several tax changes. They include:
1. Renewal of over 30 provisions many of which expired at the end of 2017, generally through 2020. Affected taxpayers will need to file amended 2018 returns. Query: Why weren’t these addressed by the Tax Cuts and Jobs Act?
2. Repeal of three Affordable Care Act taxes including the Cadillac tax which never went into effect.
3. Change the “kiddie tax” to go back to the calculation that existed before the TCJA with taxpayer being able to elect to do the same for 2018 and 2019 returns. This change is due to the TCJA change resulting in some children to have a higher marginal rate on unearned income than their parent’s marginal rate which was not the outcome intended by the kiddie tax.
4. Change in the TCJA making tax-exempt employers who provide certain fringe benefits, such as parking or transit passes, to no longer be subject to unrelated business income tax on that cost, effective back to 2018. This change exacerbates a flaw in the TCJA. The House Republicans wanted to have greater parity between what employers deduct as employee compensation and employees report as wages. That means doing something with fringe benefits where the employer deducts the costs of providing them but employees are allowed to exclude them from income. For qualified transportation fringe benefits, Congress decided to get to parity by having the employees continue to exclude that income. Congress could have instead (and likely should have given that these benefits are similar to cash wages) repealed the employee exclusion for these benefits and continue to let employers deduct the cost of providing them to employees.
Many tax-exempt employers complained of having to pay tax on their cost of providing qualified transportation fringe benefits to their employers. That makes sense because they don’t necessarily have funds to pay that tax. But, this is the right result once Congress opted to provide parity of employee and employer compensation amounts by denying employers a deduction for the cost of the benefits. So, we have one provision of the TCJA now modified contrary to good tax system design, but helpful to the tax-exempt entities.
Beyond the kiddie tax and tax-exempt employer/transportation fringe benefit change, will other changes by made to the TCJA? We’ll see. Some candidates for office are calling for repeal of the TCJA. We’ll see if that happens as it provided a tax cut to the vast majority of individuals (voters) although the issue of how the tax cut should be distributed among different income levels was not discussed.
What do you think? If you could change one item in the TCJA what would it be and why?