Here’s a look at recent tax-related happenings on the Hill, including the status of tax-relief legislation in the Senate, the SALT Marriage Penalty Elimination Act failing to pass, and the IRS commissioner questioned on the Form 1099-K threshold.
Lately on the Hill
Senate Finance Committee Chair Ron Wyden (D-OR) is urging Senate leadership to take a vote on the Tax Relief for American Families and Workers Act of 2024 (Act) when the Senate returns from recess on Monday, February 26. The Senate agenda, however, will be packed as the House of Representatives delivers to it articles of impeachment of Secretary of Homeland Security Alejandro Mayorkas, and the first round of appropriations funding is due by Friday, March 1. While the impeachment charges are expected to resolve quickly, procedural requirements may consume the scant time the Senate has for pressing tax and fiscal matters. If Congress cannot pass an appropriations agreement or another continuing resolution by midnight on March 1, there will be a partial government shutdown. These monumental undertakings offer minimal room for passage—let alone debate and amendments—of the Act, and sentiments are surfacing that if the Act isn’t passed as a standalone bill or included in another legislative vehicle in March, it may not happen at all.
The SALT Marriage Penalty Elimination Act, introduced by Rep. Mike Lawler (R-NY), failed to pass on a procedural vote in the House of Representatives last week. The bill received 195 yes votes to 225 no votes as a coalition of Democrats, disagreeable with legislation benefitting high-income taxpayers, and conservative Republicans, opposed to federal support of high-tax states, joined in opposition. The legislation sought to provide a cap increase from $10,000 to $20,000 on deductions for state and local taxes (SALT) for married filing joint taxpayers with adjusted gross income under $500,000. The current $10,000 cap is scheduled to sunset as of December 31, 2025. The SALT cap limitation has been a notable campaign issue in high-tax states, including last week’s special election in New York’s 3rd congressional district, which saw Democrat Tom Suozzi reclaim his House seat formerly held by the expelled Republican George Santos, further narrowing the GOP’s thin majority.
On February 15, IRS Commissioner Danny Werfel was under the microscope as he fielded questions from the House Ways and Means Committee, including a broad array of topics such as the Employee Retention Credit (ERC), IRS funding, and delayed implementation of the lowered threshold for reportable transactions on Form 1099-K, Payment Card and Third Party Network Transactions.
Werfel revealed that the IRS has paid out approximately $1 billion in ERC claims since the September moratorium on new claims and is processing about 1,000 to 2,000 claims per week. He commented on the Tax Relief for American Families and Workers Act currently with the Senate, which would terminate the beleaguered program early, as of January 31, 2024. The accelerated termination date would help the IRS process its backlog, which continues to rise as the IRS received an additional 17,000 to 20,000 claims just the week prior, according to the commissioner.
When pressed about the agency’s actions to continue to delay implementation of the Form 1099-K threshold, Werfel stated, “we realized that immediate implementation posed a high risk of taxpayers being confused, and given the complexities of the 1099 reporting, some potentially paying taxes they didn’t actually owe.” Werfel was admonished by Republican lawmakers for not enforcing the law, even though they do not agree with the provision passed under a Democratic-controlled Congress. Originally, the law was applicable to taxable year 2022, lowering the threshold from $20,000 and 200 transactions to $600. The IRS unilaterally delayed implementation deeming 2022 as a “transition year,” and later further expanded the transition through 2023 and implemented a more palatable $5,000 threshold for 2024.
Noteworthy Decisions
Earned Income Credit and Head of Household filing status denied as taxpayer’s grandchild did not live with her for more than half of the taxable year. Turner v. Commissioner, No. 19487-22, T.C. Memo 2024-20.
Susan Turner asserted her grandchild was a qualifying child for purposes of claiming the Earned Income Credit. Under Section 152, a qualifying child is defined as a child of the taxpayer or descendent of such a child, has the same principal place of abode as the taxpayer for more than one-half of such taxable year, meets certain age requirements, and has not provided over one-half of such individual’s own support. The grandchild would have otherwise qualified except that the grandchild lived at a friend’s house for most of the year, preventing Turner eligibility for the credit. Furthermore, Turner’s claim for Head of Household filing status also was denied as she did not have a qualifying child.
Claimed deductions for alimony were disallowed as payments in discharge of a property settlement. Martino v. Commissioner, No. 17336-21, T.C. Memo 2024-18.
Joseph Martino, Jr. entered into a marital settlement agreement pursuant to a divorce from his spouse. The settlement agreement specified an allocation of assets including Martino’s possession of their marital residence and 182 acres of adjacent land in exchange for $3.5 million payable, over time, to his ex-wife for her interest in the property. For 2017 and 2018, Martino claimed alimony deductions under §215 (permanently repealed under the Tax Cuts and Jobs Act) of $300,000 for each year. The IRS examined the returns and determined that the payments were not deductible because they were not alimony but payments of a marital property settlement. Section 71(b) defines alimony which the court explained “[w]hen enacting this definition in 1984, Congress intended ‘to establish an objective standard to distinguish between a payment received in the division of property…and a payment received as spousal support.’ Estate of Goldman, 112 T.C. at 322 (citing legislative history).” The Court sided with the IRS, ruling that the payments “did not constitute alimony but installment payments in discharge of a property settlement.”
Other Important Developments
IRS Technical Guidance
- Notice 2024-24 has been released with guidance on the corporate bond monthly yield curve, spot segment rates, 24-month average segment rates, and the interest rate on 30-year Treasury securities.
- Revenue Ruling 2024-04 has been issued providing the March 2024 various rates for federal income tax purposes, including the applicable federal rates (AFRs), adjusted AFR, adjusted federal long-term rate, and the long-term tax-exempt rate.
- Revenue Procedure 2024-14 has been released providing indexing adjustments for amounts used to calculate the employer shared responsibility payments under §4980H(a) and (b)(1) effective for taxable years and plan years beginning after December 31, 2024. This code section imposes a payment on applicable large employers that do not offer full-time employees minimum essential coverage.
Employee Retention Credit (ERC)
- IR-2024-39 issued by the IRS reminds taxpayers of the March 22, 2024 deadline to participate in the ERC Voluntary Disclosure Program for those who filed ineligible claims of the credit. The alert also provides seven signs an ERC claim could be incorrect, including: too many quarters claimed, government orders that do not qualify, too many employees and wrong calculations, businesses citing supply chain issues, businesses claiming the ERC for too much of the tax period, businesses did not pay wages or did not exist during eligibility period, and promoter saying there is nothing to lose.
- On February 8, 2024, the IRS held a webinar on the ERC Voluntary Disclosure Program. The webinar focused on who can participate, how to apply, advantages of the program, what happens after applying, and available ERC resources. A recording and transcript of the webinar are available on the IRS' website.
Miscellaneous
- IR-2024-42 announces relief for individuals and businesses affected by severe storms, tornadoes, and flooding in certain areas of Michigan currently including Eaton, Ingham, Ionia, Kent, Livingston, Macomb, Monroe, Oakland, and Wayne counties. These taxpayers have until June 17, 2024, to file tax returns and make tax payments. The relief also applies to extensions, although any extension filed between April 15 and June 17 will have to be paper filed.
Continued Coverage of the Inflation Reduction Act (IRA)
- A joint press release from the U.S. Department of the Treasury, the IRS, and the U.S. Department of Energy (DOE) announced that the last day to apply for the IRA’s Low-Income Communities Bonus Credit Program for the 2023 program year is February 29, 2024. Only applications for categories with remaining capacity, as found on the DOE website dashboard, will be considered. Additional information on the credit and a link to apply can be found on the DOE website.
This newsletter features developing content that is subject to change at any time. It does not constitute legal or tax advice. Consult your professional advisors prior to acting on the information set forth herein.