Tax News & Views SALT, Strawberries and Cream Roundup

Johnson Says Agreement Reached on $40,000 SALT Cap Increase - Eric Wasson and Nacha Cattan, Bloomberg via MSN:

House Speaker Mike Johnson said Republicans have reached an agreement to increase the state and local tax deduction to $40,000, suggesting a resolution to one of the final issues holding up President Donald Trump’s economic bill.

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The $40,000 SALT limit will phase out for annual incomes greater than $500,000, according to a person familiar with the matter. The cap is the same for both individual taxpayers and married couples filing jointly, the person said.

Blue-state Republicans, GOP leaders land tentative deal for $40,000 SALT deduction - Meredith Lee Hill and Benjamin Guggenheim, The Hill. "The new deduction cap, which would be per household, will be limited to taxpayers making below $500,000. Under the tentative deal, the income cap and the deduction will grow 1 percent every year over a ten-year window. The deduction stays in place after the 10-year window and doesn’t snap back to previous levels."

A More Generous SALT Deduction Cap in the Big, Beautiful Bill Would Cost Revenue and Primarily Benefit High Earners - Garrett Watson, Tax Policy Blog:

Most taxpayers also saw a net tax cut from the TCJA, even when accounting for the SALT cap. The cap was just one aspect of the package—the lower rates and brackets, expanded child credit, and smaller AMT, among other items, add up to net tax savings for all but the highest of earners.

Distributionally, only very high earners would benefit from a higher SALT cap (see Table 2). Even with an income phaseout for taxpayers earning over $400,000, the top 20 percent of taxpayers would be the only group to meaningfully benefit. Under a $62,000 cap (double for joint filers), the top 1 percent of earners would see a 0.9 percent relative increase in after-tax income compared to the existing House proposal; the bottom 80 percent of earners would see no benefit.

GOP tries to push Trump’s big beautiful bill to floor as key hearing drags into daylight - Mychael Schnell, The Hill: It remains unclear when the committee will hold a vote on adopting a rule — which governs debate on legislation and is the final step before the bill hits the floor — and wrap up its work on the legislation."

A Long Day

Trump’s IRS Pick Defends His Record Promoting Tax Breaks - Richard Rubin, Wall Street Journal:

Sen. Ron Wyden (D., Ore.) detailed how Billy Long was paid more than $65,000 to refer friends to a firm that sold purported tax credits that the IRS has told Democratic lawmakers don’t exist. Then, according to official filings, people connected to those credits donated to Long’s dormant political campaign after Trump picked him to lead the IRS. Those donations effectively went directly to Long, because he used money from them and others to retire a $130,000 debt that the campaign owed to him.

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Long, a former Republican congressman who left office in 2023 and became a tax adviser, said all he did was make referrals and encourage people to consult their own tax experts. He declined to say whether the tribal tax credits are real.

“I can’t answer yes or no,” Long said. “I think the jury’s still out on that.”

There is no such tax credit.

Trump’s IRS Pick Unsure if Credits He Promoted Are Real - Benjamin Valdez, Tax Notes ($):

During his May 20 confirmation hearing, Long told Senate Finance Committee members that he’s never spoken to anybody at White River Energy Corp., a company that has come under scrutiny by Democrats on the committee for selling the so-called tribal tax credits to investors, and that his work referring interested buyers was through an intermediary called Capitol Edge Strategies LLC.

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The business dealings of Long, a former Republican House lawmaker from Missouri, have come under heightened scrutiny by Democrats in recent weeks. In filings with the Office of Government Ethics, Long disclosed that he received about $65,000 in referral fees from Capitol Edge Strategies.

The article notes that no GOP senators discussed the tribal credits, a sign that they will all go along with the nomination.

Finance Panel's Dems Pan Trump IRS Pick Over Ethical Issues - Stephen Cooper, Law360 Tax Authority ($):

Sen. Ron Wyden, D-Ore., the ranking Democrat on Senate Finance Committee, said committee staff asked the IRS about these credits, "and the IRS told us: 'We can confirm that these tax credits do not exist. Taxpayers who claim credits that don't exist are subject to penalties and possible examination. Furthermore, promoters of these credits may be subject to civil or criminal penalties.'"

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Wyden alleged that Long's failed Senate campaign received more than $165,000 from White River and other tribal tax credit promoters. All but $35,000 went into Long's pockets to pay pack his personal loans, said Wyden, adding, "Folks, this sounds as corrupt as it gets, and I've asked the IRS to investigate."

IRS Chief Nominee Says He’ll Resist Trump Political Pressure - Chris Cioffi, Bloomberg ($):

Democrats also asked Long whether he would bend to pressure from Trump and use the IRS to target tax-exempt groups. The president has threatened to yank the tax-exempt status of Harvard University and scrutinize tax-exempt applications and status of other perceived adversaries.

“I don’t intend to let anybody direct me to start an audit for political reasons,” he said in response to questioning from Sen. Elizabeth Warren (D-Mass.).

You can look at Mr. Long's X/Twitter activity and decide for yourself whether he is likely to resist President Trump.

Back to the Tax and Budget Bill

Rules of engagement - Jack Blanchard and Dasha Burns, Politico Playbook:

As of 6 a.m. this morning, there are still plenty of moving parts … but the momentum appears to be with Johnson, who has pledged to get the bill through the House before Memorial Day if he can. That means winning a vote on the floor of the House — and keeping almost every GOP representative paddling in the same direction — before tomorrow night.

This really matters. Of course, these to-and-fro machinations in Congress can feel repetitive and opaque. But this bill is in many ways the centerpiece of Trump’s second term. So much of what the president has done this year has been delivered via executive order or social media post. This bill is a laundry list of real-life policy shifts that will affect household budgets throughout the country. It may yet prove one of the most-decisive factors in next year’s midterm elections.

Divided House GOP tries to push Trump’s tax bill over the finish line - Jacob Bogage and Marianna Sotomayor, Washington Post. "But the GOP’s narrow majority is far from unified around the proposal. And although Trump visited the U.S. Capitol for a conservative pep rally Tuesday, warring Republican factions on both sides dug in to oppose what is now officially called the One Big Beautiful Bill Act. The House GOP’s narrow majority means leaders can only afford to lose a handful of votes — and for now, they don’t have the support they need to pass the measure."

GOP hard-liners threatening late revolt over megabill - Ben Leonard and Meredith Lee Hill, Politico. "House Speaker Mike Johnson is facing a last-minute rebellion from conservatives on Republicans’ megabill, with a deal on a key tax deduction with blue-state Republicans and a lack of progress on settling other key provisions frustrating hard-liners."

Another tax bill slides right through.

Senate Unanimously Passes No-Tax-on-Tips Bill - Doug Sword, Tax Notes ($):

The Senate passed a six-page no-tax-on-tips bill similar to a version tucked into the giant House reconciliation bill.

A nine-page, temporary version of the tip deduction legislation is included in the 1,082-page reconciliation bill that may come to a vote on the House floor in the coming days.

3 Key Takeaways From The ‘No Tax On Tips’ Bill Passed By The Senate - Nathan Goldman, Forbes:

The No Tax On Tips Act provides a tax deduction for cash tip wages reported to employers. However, there are key limitations. First, the amount that can be deducted is capped at $25,000. Thus, the bill actually means that some (rather than no taxes) will be paid on tips. Second, the deduction will not apply to taxpayers that earn more than $160,000. Third, the taxpayers who can take this deduction will be limited to certain occupations, which, according to The Guardian, will be provided by the US Department of Treasury within 90 days.

Maybe the chatboxes aren't quite ready to replace the IRS

IRS Chatbot Performance Lags Amid Staff Cuts - Lauren Loricchio, Tax Notes ($):

While initial results for the IRS’s use of chatbots and voicebots were promising, data obtained by Tax Notes through a Freedom of Information Act request indicate a recent decline in the percentage of interactions in which users were able to resolve their issue without escalating to a person.

The data show that, as of the week of October 7, 2024, 29 percent of chatbot users were able to self-serve or resolve their issue without escalating to a live assister, a 13 percent drop from the previous year.

Blogs and Bits

5 states, 10 cities would benefit the most by a SALT cap hike - Kay Bell, Don't Mess With Taxes. "The top five states whose residents would benefit most are California, Connecticut, Massachusetts, New Jersey, and New York."

Health savings accounts and their triple tax benefits - National Association of Tax Professionals. "The money your client contributes to their HSA is generally tax-deductible, even if they don’t itemize any deductions on Schedule A, Itemized Deductions."

How to Reduce or Avoid Estimated Tax Penalties - Tax School Blog. "Taxpayers can avoid penalties by making appropriate and timely payments. Withholding from Forms W-2, 1099s, and other forms applicable to line 25c of the Form 1040 is considered to have been paid one-fourth on each payment due date."

What Tax Advisers Should Tell U.S. Clients Moving to Latin America - Virginia La Torre Jeker, US Tax Talk. "As Latin American nations push for greater global integration, they’re crafting policies to attract remote workers, investors, and entrepreneurs. US tax advisers should counsel clients looking to move to the region on the nuances of cross-border taxation and help them avoid overlooking tax obligations. Ecuador’s and Costa Rica’s laws are instructive examples."

"Execution isn't everything, but it's a lot."

No QTIP Election, No Marital Deduction for $2 Million Bequest - Tax Notes Research. "The Tax Court, in an estate tax deficiency case, held that a $2 million bequest for a decedent’s spouse wasn’t qualified terminable interest property because a QTIP election wasn’t made so it doesn’t qualify for the marital deduction and is includable in the estate, but a $300,000 bequest created a separate trust that wasn’t terminable interest property and qualified for the deduction."

This case illustrates Peter Reilly's Fourth Law of Tax Planning about the importance of careful execution. If a bequest meets the "QTIP" rules, it is treated as going to the surviving spouse, avoiding estate tax for the first spouse to die. It relates to property that is available for life to the surviving spouse, but then is allocated pursuant to directions provided in the will of the deceased spouse. If such a bequest doesn't qualify under the QTIP rules, it doesn't qualify for the estate tax marital deduction and is included in the taxable estate.

The estate reported the amount as a direct bequest to the spouse, rather than as "qualified terminable interest property," on the Form 706 estate tax return. The IRS examiner reclassified the amount as property not qualifying for the marital deduction.

Tax Court Judge Nega takes up the story:

The parties agree that the $2 million bequest is a terminable interest and, therefore, does not qualify for the marital deduction unless it meets the requirements for an exception to the terminable interest rule. The only relevant exception noted by the parties is the exception for QTIP in section 2056(b)(7)(A).

The estate did not make a valid QTIP election for the $2 million bequest on Form 706...

The estate contends that the $2 million bequest might still be QTIP because respondent did not mention a problem with the QTIP election (or lack thereof) during the audit process. Because of this supposed shortcoming, the estate invites us to adopt a novel substantial compliance approach and analyze whether the $2 million bequest might qualify as QTIP. The estate's argument is a nonstarter.

At the 40% estate tax rate, this is an $800,000 problem. Devin Hecht, head of the Eide Bailly Wealth Transition Services practice, comments:

Estate of Martin W. Griffin reinforces the importance for estates and executors in making timely QTIP elections on Form 706 (Estate Tax Return) to qualify for the marital deduction. This case reminds us that executors must make an affirmative election to designate property as QTIP property. Griffin highlights a recent trend of strict IRS enforcement in the QTIP space and the real-life tax deficiencies for failures to follow the formalities in making the QTIP election. Clients should work with their tax advisors on a detailed and coordinated approach between the trusts/estate planning documents and the Estate Tax Return when making any QTIP elections.

In other words, execution is a lot.

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Tax News & Views SALT, Strawberries and Cream Roundup

Joe B. Kristan, CPA