IRS Tips For October 16 Tax Filing
1. Potential Tax Benefits – Low and moderate-income taxpayers may qualify for the earned income tax credit (EITC), the Saver’s Credit or the American Opportunity Tax Credit for education benefits. Check www.irs.gov for the EITC Assistant or for information on the Saver’s and American Opportunity Credits.
2. eFile and FreeFile – The IRS reports that 87% of returns this year will be filed electronically. If you have income of $64,000 or less, you may use www.irs.gov/FreeFile to prepare your tax return. The best and quickest way to receive your tax refund is through a direct deposit to your bank account.
3. Free Tax Help – You can search www.irs.gov for “free tax preparation.” The IRS website will help you locate a Volunteer Income Tax Assistant or a person with the Tax Counseling for the Elderly program. These volunteer tax preparers are IRS-certified.
4. Easy Payment Options – If you owe tax, Direct Pay from your checking or savings account is an easy way to make the payment. You also may use a debit or credit card to make the payment. The IRS does not charge any fee for a debit or credit card, but there may be bank fees. You also can enroll in the Electronic Federal Tax Payment System. Everyone must file by October 16 even if they cannot make the required tax payment at that time.
5. Tax Relief Programs – If your tax bill is under $50,000, you can use the “Online Payment Agreement.” Alternatively, you can file IRS Form 9465 to set up a payment plan with the IRS. Some taxpayers may qualify to make an “Offer in Compromise.” The IRS will negotiate with these taxpayers to determine a payment amount. This payment amount is based upon an IRS estimate of the financial capability of the taxpayer.
House and Senate Budgets Pave Way for Tax Reform
On October 5, the House passed a budget by a vote of 219 to 206. On the same day, the Senate Budget Committee passed its version of the budget. The Senate bill will go to the full Senate for a vote in mid to late October.
House Ways and Means Committee Chair Kevin Brady (R-TX) was clearly pleased with the vote. He stated, “Today, the House passed one of the most significant budgets many of us will ever vote on — a budget that paves the way for once-in-a-generation, transformational tax reform. We are closer than ever to finishing what we have started for the American people.”
President Trump also supported the House bill. He noted, “This resolution is a key step towards Making America Great Again by supporting the Administration’s legislative agenda, as it, among other things, drives economic growth and job creation, creates a pathway to fix our rigged and burdensome tax code and establishes a framework for rebuilding our military and securing the border.”
The Ranking Member on the House Budget Committee is John Yarmuth (D-KY). He did not support the bill and stated, “By voting for this shockingly extreme budget proposal, House Republicans have said loud and clear that they care more about giving giant tax breaks to the wealthy and big corporations than supporting our families or growing our economy. This budget makes deep cuts to Medicare, Medicaid and nearly every investment in our future, all so millionaires can walk away with a $230,000 tax cut.”
The Senate Budget Committee bill creates a $1.5 trillion provision for potential tax reductions. With this allocation, a future tax bill can pass the Senate using the reconciliation method even if it is “deficit neutral” rather than “revenue neutral.” The potential Senate plan is to pass the tax bill by the end of the year under the reconciliation rules. This requires a minimum of 50 senators plus the Vice President voting in favor of the bill.
Editor’s Note: Chairman Brady is rapidly drafting a comprehensive tax bill. The bill will likely range from 1,000 to 2,000 pages of legislative language. Rep. Peter Roskam (R-IL) suggested there may be a markup of this bill by late October. Chairman Brady has been meeting with representatives from the White House, conservative Republicans and “Blue Dog” moderate Democrats in an effort to build support for his bill.
New Tax Reform Bill Pros and Cons
As Chairman Brady drafts a bill for markup by the House Ways and Means Committee in late October, there are many choices to make. Both tax principles and politics will greatly impact these decisions.
There are at least seven “hot button” issues that will produce strong debate.
1. State and Local Tax Deduction – There are over 30 Republican Representatives from high-tax states (New York, California, Illinois, New Jersey and others). These Members of Congress are likely to oppose repeal of state and local tax deductions. However, unless Chairman Brady repeals these deductions, it is going to be very difficult to have a substantial reduction of personal income tax rates. The probable solution is that Chairman Brady will find some method of compromise and perhaps there will be a significant phase-in period for this repeal.
2. Mortgage Interest – Mortgage interest is currently deductible on loans up to $1 million. There has been discussion of reducing this deduction level for new loans to $500,000. The National Association of Home Builders has indicated they will mount a strong defense and oppose any reduction in the ability to take home mortgage interest deductions.
3. Charitable Deduction – Taxpayers may give and deduct amounts up to 50% of adjusted gross income for gifts to public charities. Chairman Brady and other members of Congress have supported the charitable deduction and indicate there will not be a change in these rules. However, if the standard deduction increases, fewer taxpayers may itemize and take these charitable deductions.
4. Alternative Minimum Tax (AMT) – The AMT adds a great deal of complexity to the code. While it does raise revenue, Chairman Brady and the other five major tax writers have agreed to appeal AMT.
5. Estate Tax – With a large estate exclusion amount, the estate tax only affects 0.2% of estates. Chairman Brady will draft a bill that repeals the estate tax. However, two or three Republican senators have suggested they may not support estate tax repeal. Because the challenge of gaining 50 votes for the Senate bill is significant, these senators may be able to force a compromise on this issue.
6. Corporate Rate – The White House has proposed a rate of 20%. In order to reduce the rate to that level and receive the same revenue, nearly all the corporate deductions must be eliminated. The House and Senate may possibly compromise at a somewhat higher tax rate.
7. Passthrough Rate – The White House proposes a 25% rate on business income from partnerships, LLCs, Subchapter S corporations and other passthroughs. Everyone agrees that it will be difficult to write effective anti-abuse provisions in the code to ensure that only the intended recipients receive the lower rate.
Chairman Brady may have a complete tax reform bill prepared by the end of October. If the House passes the bill in November, it will then be sent to the Senate. It seems probable that the Senate will not vote on a tax reform bill until December.
Applicable Federal Rate of 2.2% for October — Rev. Rul. 2017-20; 2017-41 IRB 1 (19 Sep 2017)
The IRS has announced the Applicable Federal Rate (AFR) for October of 2017. The AFR under Section 7520 for the month of October will be 2.2%. The rates for September of 2.4% or August of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.