CONGRESSIONAL UPDATE
DEBT CEILING DEAL REACHED, TAX CHANGES MAY RESULT
Congress and the President reached an agreement on the debt ceiling increase in August, just one day before the U.S. was scheduled to run out of borrowing power. Under the new law, the debt ceiling was raised by
$900 billion immediately and will be raised again by either $1.5 trillion or $1.2 trillion later, depending on the next round of spending reductions. This increase should tide over the U.S. Treasury until 2013, after the next elections. Spending will be cut by at least 2.4 trillion over 10 years. There are no tax increases in the first phase of the agreement, but tax changes could come into the mix in the next phase of the deficit reduction plan.
Deficit Reduction ‘Supercommittee’Named
The debt ceiling bill created a bipartisan Congressional committee, commonly known as the “Supercommittee,” to produce
$1.5 trillion in deficit reduction. The Supercommittee is not limited to spending cuts. It can recommend tax increases or tax loophole closers as well. The 12-member Supercommittee is slated to make its recommendations by Thanksgiving. The recommendations will then be subject to an up or down vote in Congress by December 23rd with no amendments allowed.
The members of the Supercommittee include three House and three Senate members appointed by Republicans and three House members and three Senators appointed by Democrats. A majority of the 12 members must support the package for it to pass. Therefore, with six Democrats and six Republicans, only one member would have to defect from each party to obtain that majority.
If the Supercommittee does not send something to Congress or if Congress does not pass the plan sent to it by the Supercommittee, then automatic spending cuts will take effect. The cuts will be split 50/50 between domestic and defense spending. However, Social Security, Medicare and low-income assistance programs are exempt from the automatic cuts. This means that the Defense Department could face steep cuts because defense spending is such a large part of the non-entitlement budget.
The Tax Angle
Right now, the Bush tax cuts are set to expire at the end of 2012. One thing is clear. Under the new debt-ceiling plan, tax changes are still on the table. If the bipartisan supercommittee does not include tax reform in its deficit reduction proposals or if Congress does not approve the Supercommittee’s plan, the battle on extension of the Bush tax cuts moves to election season 2012.
WHAT IS THE DEBT CEILING?
The debt ceiling is a cap set by Congress on the amount of money the federal government can legally borrow. The federal government borrows money primarily by issuing Treasury bonds. The limit applies to debt owed to those who buy Treasury bonds including individual investors, foreign governments and pension funds. It also applies to intra governmental debt that owed to federal government trust funds such as Social Security and Medicare.
TRADE BILL HAS HEALTH TAX CREDIT FOR WORKERS WHO LOSE EMPLOYER COVERAGE
The House and the Senate have been working on legislation on trade adjustment assistance that contains a tax provision designed to help workers and retirees who lose employer provided health insurance coverage. The bill, H.R. 2832, increases the health coverage tax credit under the U.S. Trade Adjustment Assistance (TAA) Program. The TAA Program is a federal program that provides aid to U.S. workers who have lost their jobs as a result of foreign trade.
The Health Coverage Tax Credit program provides health insurance benefits to TAA-eligible workers and retirees covered by pension plans taken over by Pension Benefit Guaranty Corporation who have lost their employer sponsored coverage. The amendment subsidizes 72.5 percent of the cost of the health care premium, gives workers retroactive payments to help cover the upfront costs of health coverage, and gives coverage to the worker’s spouse and dependents.
The Senate’s version of the bill is different from the House version, so the measure must go back to the House for another vote before it becomes law. The outlook on this legislation is good, as the two sides are close to final agreement.
IRS UPDATE
NEW IRS VOLUNTARY WORKER CLASSIFICATION PROGRAM OFFERS PAST PAYROLL TAX RELIEF
The IRS has launched a new program that allows employers an amnesty of sorts if they agree to reclassify their workers as employees rather than independent contractors. If you want to participate in the program, you would be required to make a minimal payment covering past payroll taxes before the IRS audits you.
Specifically, under the new Voluntary Classification Settlement Program (VCSP), you as an employer can make a payment of just over one percent of the wages paid to reclassified workers for the past year. You also must agree to treat the covered workers as employees instead of independent contractors going forward.
According to the IRS literature, the program is available to many businesses, tax-exempt organizations and government entities that currently “erroneously treat their workers or a class or group of workers as non employees or independent contractors, and now want to treat these workers as employees to avoid an audit and IRS reclassification.”
Here are the eligibility rules:
• You must have consistently treated the workers in the pastas non employees
