On Sept. 14, the House Ways and Means Committee passed three "Tax Reform 2.0" bills. The full U.S. House is expected to take up the bills at the end of September or sometime in October. It's not expected that the U.S. Senate will vote on the bills before the November midterm elections. However, there's a possibility that the Senate may take up the retirement portion (for which there's bipartisan support).
The bills focus on making permanent provisions of the Tax Cuts and Jobs Act, promoting family and retirement savings, and promoting new business innovation, including allowing businesses to write off more of their start-up costs. The bills are titled: the "Protecting Family and Small Business Tax Cuts Act of 2018," the "Family Savings Act of 2018" and the "American Innovation Act of 2018."
The Family Savings Act would allow small businesses "to join together to create a 401(k) plan more affordably." Among the other proposed changes, it also would treat certain taxable nontuition fellowship and stipend payments as compensation for IRA purposes; repeal the maximum age for traditional IRA contributions, and allow penalty-free withdrawals from retirement plans for births and adoptions.
Taxpayer loses claim that settlement wasn't taxable. Damages that a taxpayer receives in a settlement for physical injury or illness can generally be excluded from taxable income. In a recent case, a settlement payment was received by a taxpayer for employment discrimination, so the U.S. Tax Court ruled it must be included in income. The court rejected the taxpayer's argument that the employment discrimination led to a later physical injury. In addition, the court noted that, when the Veterans Administration agreed to pay the settlement, there was no mention of any physical injury suffered by the taxpayer. (TC Memo 2018-127)
Taxpayer with canceled debt doesn't qualify for the insolvency exception. If you have debt that's forgiven by the lender, you may still owe taxes on the amount forgiven. However, there might be an exception if you can prove you're insolvent. In one case, a taxpayer received debt forgiveness for a mortgage and another loan, totaling $364,179. He then received Forms 1099-C ("Cancellation of Debt") for the amount of the forgiven debt. The taxpayer ignored the forms and failed to file a tax return, on the basis that he had little income. The U.S. Tax Court found he didn't qualify for the insolvency exemption. (TC Memo 2018-140)
It may be time for some year-end tax moves if you converted an IRA to a Roth IRA last year. It's the last chance for taxpayers to unwind 2017 IRA-to-Roth IRA conversions. Those who made a regular-IRA-to-Roth-IRA conversion in 2017 may regret the decision due to factors such as stock market declines. Fortunately, such taxpayers may unwind their conversions (transfer the converted amount from the Roth back to a regular IRA). But they must act no later than Oct. 15, 2018. Contact us if you need more information.
Prepare for natural disasters. Hurricane Florence reminds us all that it's a good time for individuals and businesses to create or update emergency plans. Make sure you have copies of key documents (such as bank statements, tax returns, deeds, titles, insurance policies) in a waterproof container, and keep duplicates in a safe place outside the disaster area. Or, scan them electronically onto a device such as a flash drive. Take photos or videos of high-value items in your home or business for insurance claims. For more safety tips from the IRS: https://bit.ly/2OeLYsf