A common misconception among taxpayers is that the new tax law, the Tax Cuts and Jobs Act of 2017 (TCJA), passed in December 2017, contains the necessary information to calculate your 2018 taxes.
That would indeed make sense. In actuality, however, the TCJA made numerous changes but left the details to be sorted out later.
The TCJA was considered and passed in a record-breaking seven weeks. The previous major tax act (passed in 1986) took 13 months to craft before it was passed.
In a way, this is normal. There are always details to be sorted out after major legislation is passed. That is what regulations are for. In applying tax law, there is rarely a singular calculation that results in the lowest possible correct tax liability. CPAs and tax preparers must almost always make interpretations and exercise judgment.
This time, however, the TCJA contains many more areas that were left to be defined by regulations, and the regulations and details are slow in coming.
What areas are still unsettled?
Numerous areas of tax law remain unsettled under TCJA. Here are a select few major areas:
- The new 20% qualified business income deduction (for individuals with business and possibly rental income)
The TCJA included this new tax break, which enables individuals with pass-through income from self-employment activities, sole proprietorships, partnerships, single-member LLCs, and other pass-through entities to significantly reduce the tax rate on their “business” income.
However, the details of who can claim the deduction and how remain unclear. The calculation of the deduction takes into account the overall income of the taxpayer, the nature of his or her business, the type of business income generated, the age and amount of assets used, the employment wages paid, among other factors.
On August 8, 2018, the IRS released 184 pages of guidance and clarifications on this topic, with more expected in the coming months.
- Itemized deductions
Several itemized deduction matters remain unsettled, the most contentious of which has been the deduction for state and local taxes.
The TCJA capped the deduction for state and local taxes at $10,000 per year (including both income taxes and property taxes). Last December, this sent taxpayers scrambling to make property tax payments before year-end in order to maximize their 2017 deduction before the cap went into effect.
Ever since, states have been passing work-arounds to minimize the impact of the cap on their residents. One highly publicized work-around is the move by certain states to allow residents to make charitable contributions to the state in exchange for state and local tax credits.
The work-arounds have produced tension between the IRS and state taxing authorities, and the IRS released proposed regulations on August 27, 2018, to limit them. Final regulations may not be completed until after the April 15 deadline next year. The IRS also issued an FAQ related to charitable contributions in exchange for state and local tax credits. Expect some of these matters to go to court.
The IRS has released four notices on this topic alone and has promised more to come.
- State tax return calculations
States are still deciding whether to “conform” to the new federal tax law changes under the TCJA.
Since many states use federal tax calculations as the starting point for their state tax calculations, the TCJA directly affects their bottom line. States must now evaluate the impact of the federal changes on their state revenue and decide whether to adopt the federal changes completely, in part, or not at all. Then, they must share that information with the rest of us!
- Taxation of foreign businesses owned by U.S. citizens and residents
The TCJA introduced the “Transition Tax” or “Repatriation Tax,” which was one of the few provisions that taxpayers needed to address on their 2017 (rather than 2018) tax returns. This one-time tax was an unpleasant surprise to many owners and officers of foreign corporations.
Although the tax was due by April 17, 2018, the guidance for calculating it and the forms for reporting it were not released until just before the deadline. In addition, the IRS has been releasing ongoing guidance for those who did not properly pay or report the tax and for those who paid the tax but have yet to file their returns.
On August 1, 2018, the IRS released 249 pages of proposed regulations related to Repatriation Tax, including guidance on the taxation of income and accumulated earnings of foreign corporations.
Once taxpayers have sorted out the one-time Repatriation Tax, they must still comply with another new provision of the TCJA, the Global Intangible Low-Taxed Income (GILTI) Tax.
GILTI is similar to a global Alternative Minimum Tax, and it will affect many individual owners of controlled foreign corporations on their 2018 and future tax returns.
On September 13, the IRS released 157 pages of proposed regulations on this topic and also announced that it will issue further guidance in November.
What is next? Will Congress pass Tax Reform 2.0 to fill the gaps?
Even for those taxpayers who believe they may be unaffected by the unsettled matters of TCJA, the 2018 tax season promises to be eventful. (Check out our article on expectations for the tax filing season.)
To complicate matters, Congress has been making noises about passing “Tax Reform 2.0” for months. Congress recognizes that the TCJA contains certain gaps, contradictions, and ambiguities. Plus, Congress can pass an amendment to the TCJA without the same level of support that was needed to pass the original bill.
Consequently, certain lawmakers have indicated their intent to introduce new legislation (dubbed “Tax Reform 2.0”) to amend the TCJA, both to resolve certain problematic sections of the original act and to introduce yet more changes to the tax code (including changes that might have hindered the passage of the original act and were thus previously omitted).
It is unlikely that any legislation passed would completely fix and clarify the issues inherent in the TCJA. Instead, it would likely introduce new tax changes and provisions while only partially addressing issues in the original act.
That said, legislation to amend the TCJA was supposed to be forthcoming back in July. At this point, it has yet to be introduced, and with the November elections looming, it is unclear whether we will see an amendment to the TCJA this year.