United States: Tax Policy Update - January 20, 2015

Last Updated: February 2 2015
Article by Russell W. Sullivan and Danielle R. Dellerson


The first is the amount in tax increases over 10 years under President Obama's tax plan, which will be officially unveiled during this evening's State of the Union address. The latter is the number of Republicans who have anything positive to say about it. Find more details on the administration's tax proposals in the SOTU TAX PREVIEW below.


Hatch Outlines Committee Priorities for the Year. Just this morning, Chairman Hatch described his vision for the committee's work this year while speaking at an event hosted by the U.S. Chamber of Commerce. In addition to the committee's efforts to make progress on trade agreements and roll back various elements of the Affordable Care Act, Hatch said tax reform is the top priority. He expressed his disappointment with President Obama's approach on individual tax proposals, which is expected to be formally spelled out during tonight's State of the Union address. Hatch also reiterated that any proposal for reform should make the tax code fair, simple, and permanent while promoting economic growth, American competitiveness, savings and investment. Most importantly, it should be revenue neutral. Hatch all but ruled out a gas tax increase to fund transportation and said he would look for other solutions. He also promised to move his pension reform legislation in 2015.

Tax Reform Working Groups Take Shape in Senate. Hatch has already put the wheels into motion to move tax reform ahead this year. He announced last week the creation of bipartisan working groups to analyze current law and weigh tax reform options before submitting a report to the whole committee by the end of May. Former House Ways and Means Chairman Dave Camp (R-MI) formed similar working groups prior to releasing his tax reform discussion draft last year.

The five bipartisan groups will each focus on different aspects of the tax code, including individual, business, savings and investment, international issues and community development and infrastructure.

Each group will work with the Joint Committee on Taxation to create a report to be delivered to Hatch and Ranking Member Ron Wyden (D-OR) by the end of May. The chairs of the working groups are as follows:

Individual Income Tax Co-Chairs:
Senator Chuck Grassley (R-IA) & Senator Mike Enzi (R-WY), Senator Debbie Stabenow (D-MI)

Business Income Tax Co-Chairs:
Senator John Thune (R-SD) & Senator Ben Cardin (D-MD)

Savings & Investment Co-Chairs:
Senator Mike Crapo (R-ID) & Senator Sherrod Brown (D-OH)

International Tax Co-Chairs:
Senator Rob Portman (R-OH) & Senator Chuck Schumer (D-NY)

Community Development & Infrastructure Co-Chairs:
Senator Dean Heller (R-NV) & Senator Michael Bennet (D-CO)

The full announcement is available here.


Rather than make us all wait until 9 p.m. ET to hear the administration's policy proposals during the State of the Union address, the White House released numerous details of the president's tax plans over the weekend in a fact sheet entitled "A Simpler, Fairer Tax Code That Responsibly Invests in Middle Class Families." And who among us doesn't want to spend a holiday weekend sorting through tax proposals?!

Here are the big takeaways so far:

Republicans really, really don't like it. Case in point: read here.

The plan includes $320 billion in tax increases over 10 years, primarily from the following sources:

  • Raising the top capital gains and dividend rate from the current 23.8 percent to 28 percent. The top rate would only apply to individuals and couples with income somewhere around $500,000 or more per year. Exact numbers were not provided.
  • Eliminating the "stepped-up basis" rule that allows individuals to pass on appreciated assets to their heirs without incurring a taxable event. The fact sheet lists a number of rules and exemptions, including an exemption for capital gains at death of up to $100,000 per individual ($200,000 per couple) and an exemption for capital gains of up to $250,000 per individual ($500,000 per couple) for a personal residence would be exempt.
  • Imposing a fee on big banks. A 7 basis point fee would apply to the liabilities of large U.S. financial firms – the roughly 100 firms in the nation with assets over $50 billion.

The plan includes retirement proposals intended to expand middle-class access to workplace savings opportunities. These reforms would be paid for by closing certain retirement tax loopholes for the wealthy.

  • Automatically enroll Americans without access to a workplace retirement plan in an IRA. Every employer with more than 10 employees that does not currently offer a retirement plan would be required to automatically enroll their workers in an IRA. These so-called "auto-IRAs" are intended to allow employees to start saving for retirement without sorting through a host of complex issues, such as opening an account, contribution management, and investment selection. Auto-IRAs would provide employees the option to opt out.
  • Provide tax cuts for auto-IRA adoption, as well as for businesses that choose to offer employer plans or switch to auto-enrollment. Any employer with 100 or fewer employees who offers an auto-IRA would become eligible to receive a $3,000 tax credit. Also, the existing "start-up" credit would be increased to $4,500. Finally, an additional tax credit of $1,500 would become available to small employers who already offer a plan and add auto-enrollment.
  • Ensure long-term, part-time workers can contribute to their employer's retirement plan. Employers who offer plans would be required to permit employees who have worked for the employer for at least 500 hours per year for three years or more to make voluntary contributions to the plan.
  • Prevent wealthy individuals from using loopholes to accumulate huge amounts of tax-favored retirement benefits. The proposal would prohibit contributions to and accruals of additional benefits in tax-preferred retirement plans and IRAs once balances are about $3.4 million, which is enough to provide an annual income of $210,000 in retirement.

The education tax plan includes:

  • Taxing the distributions from 529 plans. Distributions from 529 plans would no longer be tax-free despite being used for qualified higher education expenses for new contributions. This rolls back the tax savings that were enacted in 2001. In addition, Coverdell accounts would slowly fade away as contributions would no longer be accepted.
  • Making permanent the American Opportunity Tax Credit (AOTC) with additional beneficial features. The AOTC would become permanent, while the Hope Scholarship Credit and Lifetime Learning Credit would be repealed. Additionally, students would now be able to claim the credit for five years instead of four and may receive up to $1500 as a refundable credit.. To further expand the AOTC eligibility, a limited credit of $1250 is provided to part-time students.
  • Repealing deductions for student loan interest, and tuition & fees. The student loan interest deduction would not be available to new borrowers, but would be retained for current borrowers. Expensing of qualified tuition and fees would no longer be permitted.
  • Exempting student loan forgiveness and Pell Grants from income. All student loan forgiveness and Pell Grants would not be included in determining gross income.

POTUS Proposes New Infrastructure Bond. Last week, Obama also previewed what will likely be added to the list of direct asks of lawmakers during tonight's State of the Union – a proposal to encourage investment in infrastructure around the country through the creation of a new municipal bond called a Qualified Public Infrastructure Bond (QPIB).

The QPIB bond program would have no expiration date, no issuance caps and interest on these bonds will not be subject to the alternative minimum tax, according to a fact sheet from the White House.

Also today, the administration is launching a new, interagency Water Finance Center at the Environmental Protection Agency to increase innovative financing support for water systems across the country, the White House said. Read more about the QPIB proposal here.


Claiming R&D Credits on Internal Use Software. The Treasury Department released proposed regulations pertaining to the research and development tax credit under Section 41 of the tax code. The regulations clarify that the research credit is available when internal use software is used in providing services in its trade or business. Many businesses were unsure on the definition of "primarily" and avoided claiming the credit. The proposed regulations provide examples, and it can be found here.

IRS Private Letter Ruling on Multinational Storage Company REIT. The IRS recently published a private letter ruling submitted by a multinational storage company addressing various REIT-related issues. The company was a storage company providing storage for paper, media records, and other items in facilities. The company intended to be a REIT structured with taxable REIT subsidiaries (TRS). The IRS responded to twelve different requests, and the ruling can be found here.


Supreme Court to Hear Same-Sex Marriage Cases. On Friday, the US Supreme Court granted a writ of certiorari to hear same-sex marriage questions. The questions are whether the 14th Amendment requires a state to license same-sex marriage and whether the Amendment requires a state to recognize an out-of-state same-sex marriage. This will affect whether the individuals are married for federal tax purposes. Additional information can be found here.



President Obama's State of the Union Address.

The address will begin at 9:00 PM ET and can be viewed on every major network as well as on the White House website here.

Thursday, 1/22

Senate Finance Committee

The full committee will meet to hold a hearing on "Jobs and a Healthy Economy." A witness list has not yet been provided. A complete list and additional details will be posted here when available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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