• Re: 2017 Third Quarter Federal Tax Developments

    Dear Client,

    During the third quarter of 2017, there were important federal tax developments. This letter highlights some of the more significant developments for you. As always, contact our office if you have any questions at (636)530-1040.

    Tax reform: President Trump and Congressional Republicans released a framework for tax reform in September. The framework proposes three individual tax rates (12, 25 and 35 percent) and a 20 percent corporate tax rate. The framework leaves open the possibility that "an additional top rate may apply to the highest-income taxpayers." The framework also calls for eliminating most individual and business tax breaks, raising the standard deduction, repealing the federal estate tax and abolishing the alternative minimum tax; a special 25 percent tax rate for non-corporate businesses, with yet undetermined provisions to prevent "gaming" that benefit, has also been proposed. Some groups are already lobbying against restricting the state and local tax itemized deduction, as well as any restrictions on the mortgage interest deduction.

    Disaster relief: President Trump signed the Disaster Tax Relief Act in September. The law provides targeted and temporary tax relief to victims of Hurricanes Harvey, Irma and Maria. Among other measures, the new law enhances the deduction for personal casualty losses, allows penalty-free access to retirement funds, creates a tax credit for employers, and permits taxpayers to use prior year income for the earned income tax credit and the child tax credit. Legislation to create permanent disaster tax relief has also been introduced in Congress.

    In response to Hurricanes Harvey, Irma and Maria, the IRS announced the postponement of certain tax deadlines for affected taxpayers. The IRS has also issued guidance to encourage leave donations and more. Additionally, the IRS cautioned taxpayers to be on guard for scams that surface after disasters.

    Tax regulations: Since taking office, President Trump has issued several Executive Orders (EO) on regulations, EO 13789 directed the Treasury Department to review all significant tax regulations issued since January 1, 2016. In July, the Treasury Department identified eight recent tax regulations for reevaluation under EO 13789. In October, the Treasury Department followed-up with news it plans to withdraw, revoke and/or modify some of these regulations.

    Audit coverage: The Treasury Inspector General for Tax Administration (TIGTA) reported in September the IRS examined one of every 143 individual income tax returns in fiscal year (FY) 2016. This reflected a 16 percent decline compared to FY 2015, according to TIGTA. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, represented a decline of 29 percent compared to FY 2015. TIGTA also reviewed the IRS’s examinations of other taxpayers, including corporations, S corporations and partnerships.

    Partnerships: The IRS held a hearing in September on proposed rules for partnership audits. The hearing focused on the centralized partnership audit regime put in place by the Bipartisan Budget Act of 2015 (BBA). The BBA’s centralized partnership audit regime replaces the TEFRA procedures, under which the IRS currently conducts partnership audits.

    Per Diem rates: The IRS announced the 2017-2018 special per diem travel rates to be used in substantiating as ordinary and necessary an employer’s reimbursement of amounts incurred while traveling away from home. The IRS-approved per diem rate for high-cost areas is $284 (up from $282 for the previous per diem). The IRS-approved per diem rate for all other areas is $191 (up from $189).

    Income: The Tax Court found in September the IRS failed to show a nexus between payments from renting farmland and the agricultural arrangement requiring the taxpayer’s material participation. Therefore, the payments were excluded from the taxpayer’s self-employment income, the court held.

    Losses: In August, the Tax Court found a casual gambler taxpayer was not engaged in the trade or business of gambling. Therefore, the taxpayer could not deduct his gambling losses against his gambling winnings above-the-line. For nonprofessional gamblers, losses are itemized deductions, which means they are deductible only from adjusted gross income, and only if the taxpayer foregoes the standard deduction, the court reiterated.

    Medical expenses: Affirming the Tax Court, the Court of Appeals for the Eleventh Circuit upheld in September the IRS’s disallowance of a claimed medical deduction related to in vitro fertilization.

    Conservation easements: The Court of Appeals for the Fifth Circuit found in August a home site adjustment provision did not prevent a conservation easement from satisfying the perpetuity requirement. Modifications would not violate the perpetuity requirement. The appellate court vacated the Tax Court’s decision and remanded the case back to the Tax Court.

    Virtual currency: Bipartisan legislation has been introduced in Congress to allow consumers to make small purchases with cryptocurrency (also known as virtual currency) of up to $600 without needing to satisfy current reporting requirements.

    Retirement: The Treasury Department announced in July the myRA savings program will be discontinued. Treasury attributed the end of the program to low demand.

    Social Security: In August, the Social Security Administration's Board of Trustees released its annual report. The Board estimated the Social Security wage base for 2018 will be $130,500. The Social Security wage base for 2017 is $127,200. The Social Security Administration will announce the official wage base for 2018 before year-end.

    ITINs: Some one million taxpayers can expect to receive Individual Tax Identification Number (ITIN) renewal notices by mail, the IRS announced in August. Legislation passed in 2015 provided any ITIN not used on a federal tax return for three consecutive tax years expires on December 31 of the third consecutive tax year of nonuse. For ITINs issued before 2013, ITINs will no longer be in effect according to a certain schedule, unless the ITIN has already expired due to nonuse for three consecutive years.

     If you have any questions about these or other federal tax developments, please contact our office.