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Top tax news developments in 2013

BY ALISTAIR M. NEVIUS, J.D.

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The past year featured a large number of tax developments, some of which got extensive coverage in the media, and many of which got less coverage but affect almost all taxpayers and practitioners. As we get ready to welcome a new year, here’s a look back at the most important tax developments from 2013.

The American Taxpayer Relief Act

The biggest tax news of the year happened on Jan. 1, as Congress finally dealt with the so-called fiscal cliff. The American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240, permanently extended provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), P.L. 107-16, and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), P.L. 108-27, that technically had expired at midnight Dec. 31, 2012. 

ATRA retained the individual marginal tax rates from EGTRRA and JGTRRA (10%, 15%, 25%, 28%, 33%, and 35%) and added a new top rate of 39.6% on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

ATRA also created a 20% rate for capital gains and dividends of individuals whose income is above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

The act also dealt with estate and gift taxes and permanently extended various temporary tax provisions from EGTRRA. However, some provisions were extended only temporarily (see “Expiring Provisions and Tax Reform,” below).

For coverage from the year, see:


3.8% net investment income tax

A new tax on the net investment income of higher-income taxpayers took effect in 2013. Sec. 1411(a)(1) imposes a tax equal to 3.8% of the lesser of an individual’s net investment income for the tax year on the excess (if any) of the individual’s modified adjusted gross income for the tax year over a threshold amount. The threshold amounts are $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for other taxpayers. The tax also applies to estates and trusts, with different threshold amounts.

Although the tax was enacted in 2010 as part of the health care reform legislation, regulations governing the tax were not finalized until late this year, after the tax was already in effect. The final regulations (T.D. 9644) adopted with changes proposed regulations that were issued late in 2012 (REG-130507-11). The regulations cover the definition and calculation of net investment income; the application of the tax to individuals and trusts and estates; the treatment of passive activities; the treatment of income from working capital; exceptions for distributions from qualified plans; exceptions for self-employment income; and controlled foreign corporations and passive foreign investment companies.

Proposed regulations (REG-130843-13) issued at the same time as the final regulations covered various issues not dealt with in the final regulations.

For coverage from the year, see:


Health care reform implementation

Various portions of 2010’s health care legislation took effect this year—and certain portions were postponed. The IRS also issued guidance on several health care law provisions, making health care reform implementation the busiest area of federal tax in 2013. The biggest news in this area, of course, was not tax related, but instead involved the myriad problems associated with the rollout of the health care exchange websites on Oct. 1 and subsequent efforts to fix those sites.

In July, the Treasury Department announced that it was postponing the Sec. 4980H shared-responsibility penalty that applies to applicable large employers that fail to provide minimum health coverage to their employees. This was being done in conjunction with delays in the Sec. 6055 information-reporting requirements for self-insuring employers and other parties that provide health coverage and in the Sec. 6056 information-reporting requirements for employers that provide health coverage to their full-time employees. The provisions now will take effect in 2015 instead of 2014. In September, the IRS issued proposed regulations to make these postponements effective and provide other guidance (REG-132455-11 and REG-136630-12).

One of the first actions the IRS took in 2013 was to issue proposed regulations on the (later postponed) Sec. 4980H large-employer shared-responsibility penalty (REG-138006-12). Under Sec. 4980H, an applicable large employer is subject to a penalty if its employer-sponsored health coverage does not provide “minimum essential coverage” or is not affordable relative to the employee’s household income and at least one full-time employee has been certified as having enrolled in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee. An employer is an “applicable large employer” for a calendar year if, during the preceding calendar year, it employed on average at least 50 full-time employees. An employee is a full-time employee for any month if he or she was employed, on average, at least 30 hours per week.

January’s proposed regulations discussed who is an applicable large employer, who are full-time employees for purposes of the penalty, and how the penalty is assessed.

The IRS also issued proposed regulations on the Sec. 45R credit for small employers that offer health insurance coverage for employees (REG-113792-13). The proposed rules cover the mechanics of the credit, eligible employers and employees, and the new Small Business Health Options Program (SHOP) exchange, which small employers are required to use to qualify for the credit.

In May, the IRS promulgated final regulations on the Sec. 36B health insurance premium tax credit for individuals (T.D. 9590). It also issued proposed regulations on determining whether an eligible employer-sponsored health plan provides minimum value for purposes of that credit (REG-125398-12).

The “individual mandate”—the Sec. 5000A requirement that individuals obtain minimum essential health care coverage beginning in 2014 or pay a penalty (or tax)—was also the subject of regulations this year. Proposed regulations came out in January (REG-148500-12), and they were finalized in August (T.D. 9632).

For coverage from the year, see:


Tax treatment of same-sex married couples

The Supreme Court made one of its rare forays into the world of tax in June when it held in an estate tax case that one section of the Defense of Marriage Act (DOMA), P.L. 104-199, was unconstitutional, thereby permitting the plaintiff, who was legally married under New York law, to claim the spousal exemption from estate tax ( Windsor, 133 S. Ct. 2675 (2013)).

The case, however, had ramifications far beyond estate taxation because it invalidated the provision in DOMA that defined marriage for federal law purposes as the legal union of one man and one woman. Therefore, legal same-sex marriages must be recognized under federal law for various purposes, such as insurance benefits, Social Security benefits, and the filing of joint tax returns, as well as the unlimited marital estate tax exemption that was at issue in the Windsor case.

The IRS responded to the Windsor decision in August, announcing that “same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes.” These marriages will be recognized for federal tax purposes, even if the state in which the couple currently reside does not recognize same-sex marriages (Rev. Rul. 2013-17).

Under this ruling, same-sex married couples generally will file their 2013 tax returns as either “married filing jointly” or “married filing separately.” They may also file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitation, if they were legally married during that tax year.

The IRS continues to issue guidance on the effects of the Windsor decision on various aspects of federal tax law. In September, the IRS announced the procedures employers should follow for filing refund claims for overpaid Federal Insurance Contributions Act (FICA) and income taxes paid on employer-provided benefits for same-sex spouses that, because of the Windsor decision, are now tax free. On Dec. 17, it issued a notice dealing with elections and reimbursements for cafeteria plans, health savings accounts (HSAs), and health, adoption, and dependent care flexible spending arrangements (FSAs) (Notice 2014-1).

For coverage from the year, see:


Tangible property regulations

Practitioners spent much of the year waiting for final regulations to be issued on the tax treatment of expenses related to tangible property—the so-called repair regulations. The regulations were finally issued in September (T.D. 9636), and they affect all taxpayers that acquire, produce, or improve tangible property. The new rules, which generally allow taxpayers to determine if expenses incurred to acquire, produce, or improve tangible property are deductible or must be treated as capital expenses, generally apply to tax years beginning on or after Jan. 1, 2014.

For coverage from the year, see:

 

Expiring provisions and tax reform

As discussed above, ATRA only temporarily extended some expiring provisions and did not tackle the issue of fundamental tax reform. As a result, 2013 ends as so many recent years have ended, with a large number of temporary provisions scheduled to expire. And unlike most previous years, Congress has not acted to address those expiring provisions in late-in-the-year legislation, leaving taxpayers in limbo for 2014.

With the passage of ATRA, there was some hope during the early part of 2013 that Congress might also tackle the issue of tax reform. The House Ways and Means Committee set up 11 working groups to study specific areas for reform, and the committee posted discussion drafts of various proposals. However, in the end, this work bore no fruit in 2013, and it remains to be seen if anything will happen in 2014, a midterm election year.

For coverage from the year, see:


Tax season delays and government shutdown

IRS delivery of services to taxpayers took a hit during the year, for various reasons. The 2013 filing season was delayed because of the late passage of ATRA, which affected many forms and IRS systems. The IRS was unable to accept any returns until Jan. 30, and many forms could not be filed until March. However, despite the late start, taxpayers and practitioners got no relief from the April 15 deadline because it is set by statute.

During the year, the IRS had to shut down on some days because of the effects of sequestration—the mandatory cuts in federal spending enacted as part of the Budget Control Act of 2011, P.L. 112-25, to try to provide Congress with an incentive to pass a federal budget. The IRS chose to cease all operations and furlough all employees on those sequester shutdown days. The IRS originally scheduled five furlough days but was able to reduce the number by finding other cost savings.

Then, in October, the federal government underwent a partial shutdown for 16 days in a dispute over a continuing resolution to fund the government and over extending the debt ceiling. During the shutdown, most IRS operations were suspended, including the issuance of refunds. Because the IRS was not updating its forms and computer systems during the shutdown, this led to an announced delay in the start of the 2014 filing season, which will not begin until Jan. 31 (although the IRS will begin accepting certain business returns on Jan. 13).

The IRS ended the year with the announcement that several taxpayer services will become online-only starting in 2014.

For coverage from the year, see:


IRS scandal

The tax news that got the most coverage in the mainstream media was the scandal involving the IRS’s improper handling of certain applications for tax-exempt status under Sec. 501(c)(4). A report by the Treasury Inspector General for Tax Administration (TIGTA) released in May found that the IRS used inappropriate criteria that identified for review applications for tax-exempt status from certain groups based on their names (e.g., if they contained the words “tea party”) or policy positions instead of focusing on the activities of the organizations and whether they met the requirements under the law for tax-exempt status.

The issuance of the report led to an outcry in Congress, in the media, and among taxpayers. Congressional hearings were held to discover the extent of the problem. Acting IRS Commissioner Steven Miller resigned, and the director of the IRS Exempt Organizations Division, Lois Lerner, was placed on administrative leave (she later retired). The Justice Department announced the opening of a criminal investigation in May, but so far the results of that investigation have not been reported.

On top of that, another TIGTA report found that the IRS was wastefully spending money on various conference expenses, including expensive rooms, outside event planners, motivational speakers, and promotional items.

On its last working day in December, the Senate confirmed John Koskinen to be the new IRS commissioner. He was nominated because of his prior experience as “an expert at turning around institutions in need of reform” (as President Barack Obama put it in a statement at the time of the nomination).

For coverage from the year, see:


Tax return preparer regulation

When the year started, the IRS was well underway with plans to regulate all previously unenrolled paid tax return preparers. Under the plan, which was first rolled out in 2011, all paid tax return preparers would be required to obtain and use a preparer tax return identification number (PTIN), and those who were not CPAs, attorneys, or enrolled agents would have to pass a qualifying exam, take continuing education courses each year, and, for the first time, be subject to Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10).

However, that plan came to a halt in January, when a federal district court held that the program exceeded the IRS’s statutory authority and enjoined the IRS from enforcing the regulations issued to implement the plan (Loving, No. 12-385 (D.D.C. 1/18/13)). The IRS accordingly shut the program down while it appeals the decision. Oral arguments have been heard in the appeals court, and a decision is expected soon.

The IRS also temporarily suspended the PTIN registration system, but the district court then clarified that it had not struck down that portion of the program, so the requirement that all paid return preparers obtain and use a PTIN remains in effect.

For coverage from the year, see:


Routine but important updates

Finally, the IRS continued to issue its routine updates during the year, containing crucial inflation adjustments and other information that practitioners need to know about.

For coverage from the year, see:

 

— Alistair M. Nevius ( anevius@aicpa.org ) is the JofA’s editor-in-chief, tax.

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