President Bush has urged Congress to make permanent various tax relief provisions which include (i) the $1,000 per child tax credit; (ii) the 15% dividends and capital gains tax rates, expiring after 2008; (iii) “bonus” depreciation provisions applicable to qualifying property acquired after 5/5/03 and before 1/1/05; and (iv) the estate tax repeal, scheduled to expire on December 31, 2010, at which time the applicable exclusion amount credit would revert to the pre-estate tax repeal amount of $1 million.
The FY 2005 budget includes compliance and enforcement proposals intended to (i) add a new civil penalty for failure to disclose foreign financial accounts; (ii) curtail abusive corporate tax shelters by forcing promoters to register abusive transactions and disclose the identities of investors; (iii) curtail abusive leasing transactions involving tax-indifferent parties; (iv) resolve issues involving IRC § 529 plans relating to changing beneficiaries or account owners, and plan distributions; (v) permit the IRS to enter into installment agreements not guaranteeing full payment over the lifetime of the agreement; and (vi) permit the IRS to engage private collection agencies.
Other proposals would (i) simplify the earned income tax credit (EITC); (ii) simplify higher education tax benefits; (iii) simplify the standard deduction for dependents and eliminate the kiddie tax; and (iv) eliminate special capital gains rates for particular assets such as small business stock and collectibles by taxing 50% of the gain at ordinary income rates and the balance at the standard capital gain rates.
Democratic leaders, citing a dangerous fiscal path, urged that the FY 2005 budget (i) cover at least the 10-year period through FY 2014 to reflect fiscal realities; (ii) address long-term needs of Social Security and Medicare; (iii) clarify whether the budget includes funds for military actions; and (iv) provide for current soldiers, their families, and veterans. Democrats have also cited the need for expanding health care and balancing the budget.
Senator Kerry called on Congress to “restore public confidence in our federal tax system . . . by ensuring that . . . middle class Americans are not the only ones left holding the bill.” Mr. Kerry criticized the Administration’s proposal to eliminate the corporate Alternative Minimum Tax, and also urged Congress to (i) eliminate tax shelters which have “no real economic risk or business purpose — but which capitalize on technical ambiguities in the tax code” and (ii) enact legislation to curtail “offshore tax havens.” The Senator remarked that “[a] tax system which asks working families to pay their fair share, but gives large corporations such as Enron a free ride, is a national disgrace.”
In a report to Congress, the National Taxpayer Advocate concluded that the AMT will, absent a change in law, affect more than 30 million taxpayers by 2010, with more than 70% of its revenues attributable to personal and dependent exemptions, the standard deduction, state and local taxes, and miscellaneous itemized deductions. The NTA also proposed a legislative solution to the estimated $81 million tax gap attributable to unreported income of self-employed individuals: that self-employed taxpayers be subject to withholding at a rate of 5%.
The IRS announced that it intends to counteract transactions designed to avoid the statutory limits on contributions to Roth IRAs through the use of a business to disguise and shift value into a corporation whose shares are owned by the taxpayer’s Roth IRA. (Adv.Notice 2—4-8m 2004-4 IRB).
The IRS has issued final regs revising the definition of “income” in IRC § 643(b) to take into account changes in the definition of trust accounting income under state law. Under the regs, an allocation between income and principal pursuant to applicable local law is permissible if it provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust for the year, including ordinary and tax-exempt income, capital gains, and appreciation. Thus, a state statute which provides that income is a unitrust amount of between 3% and 5% of the FMV of trust assets is a reasonable apportionment. So too, a state statute permitting the trustee to make adjustments between income and principal to achieve impartiality between the income and remainder beneficiaries is generally a reasonable apportionment of the total income of the trust. Reg. § 1.643(b)-1.