There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

Roger Harris: Hello everyone. It's time for another federal tax update podcast. It's Roger and Annie and Annie. How are you doing today?

Annie Schwab: I'm doing pretty good. We're, uh, into a good part of the summer, so I'm feeling the heat here in Texas, but otherwise things are moving along.

Roger Harris: Yeah, we're kind of in what I guess is usually the quiet time of summer, and kids [00:00:30] are out of school and things are supposed to be quiet and calm, but nothing's ever completely quiet and calm in the tax world. And, um, we're going to talk a little bit about that. We've had a couple of hopefully you've listened to our last couple of episodes where we've had some great guests and, um, now you got me and Annie again. Just. We're back together. Yeah. Just us, but there's there's some stuff we're going to talk about that's kind of current events going on at the IRS tax bills, things such as that. We're also going to do an episode. [00:01:00] We think right after we know what this bill finally looks like with our DC representative. But as you'll learn from our podcast today, we never really know, um, what's going to happen and when it's going to happen and what it's going to look like. But that's so today is kind of just where do we stand today? What do we think to is going to happen, what to look out for, what to be aware of. So it's going to be more of a current events that I think fits into [00:01:30] the slow summer time.

Annie Schwab: Yes. And of course current events is only current as of today. Like you said. Um, something could change tomorrow so you never know what's going to happen.

Roger Harris: And in many cases it will change tomorrow. So. So, um, I guess the big news that is out there right now, um, is this whole idea of this one beautiful bill. And where does it stand? What does it look like? Um, what might [00:02:00] it look like? When will something happen? What are the sticking points? So where do you want to start?

Annie Schwab: Well, we can start there. I mean, the Republicans are still pushing forward with the one big, beautiful bill. Um, the Democrats are expressing concern, giving their opinions. Um, it's probably unlikely that it's going to pass exactly the way it came out of the house. Um, there's very much concern about this will increase the deficit and some of the provisions unfairly benefit [00:02:30] the wealthy. Um, so, I mean, I guess we we, the Republicans still want to get this done by July 4th. Uh, that's, you know, coming up pretty quickly here. So it does require in order to pass that does require 51 votes. And there are 53 Republicans in the Senate. So could it. Yes. Will it in its original format or state. Unlikely. But I don't know. Roger. You're so interesting. You were trying to explain to me how they score these bills. [00:03:00]

Roger Harris: Yeah, yeah, there's so many things about this, but you hear a lot of. And it's because of what side of the aisle you're on, you hear arguments. Is this going to increase the deficit? Reduce the deficit. How much does it cost. How much does it cost. And and it can be terribly confusing because you have two people looking at the same bill telling us exact opposite results. So I thought it might be helpful for those of you that don't really know what they're talking about, to go [00:03:30] over a couple of things to consider. First of all, cuts in Washington are different than cuts anywhere else. Any you and I think if I want to cut my spending, that means if I was spending $10 now I have to spend nine or less to call it a cut. In the world of politics in Washington, a cut can be. I spent $10 last year. I expected to spend 15 next year. [00:04:00] So if I only spend 13, that's a cut. It qualifies because it's $3 more than last year, but it's $2 less than I thought. So sometimes you have to be careful when people are talking about cuts, or they're really talking about cuts, or are they talking about a decrease in spending. So that's one of the terms that you need to make sure you understand when you hear these things. You'll also hear something about what they call dynamic scoring. So here's something you probably [00:04:30] have heard. If you've paid any attention to this on the news, the big part of this bill is keeping the current tax law in place. In other words, the Tcga is set to expire at the end of December. So in theory, if nothing happens, taxes go up.

Annie Schwab: Mhm. Because it'll expire if nothing happens.

Roger Harris: If nothing happens it will go up and taxes will go up. So in the world of Washington, if they don't go up, that is spending because [00:05:00] we're cutting or that's that's a reduction in revenue. We're going down from what could happen. Not no one really expects this not to be extended unless we just have a complete meltdown, which is possible. So how do you score a bill when doing nothing causes tax to go up, even if no one believes they'll ever go up? But that's where you see some differences in how this bill is scored in terms of what its spending is. Because in the Democrats mind, that [00:05:30] difference between what the law is and what it could be is additional spending that has to be paid for or in the Republican's mind. How do you do that when nothing has changed? So there's just a lot of politics and back and forth and words and, um, you know, you hear a lot about spending on Medicare. Uh, you know, this is going to kick people off of Medicare. Well, they can both be right. The bill doesn't do anything to cut [00:06:00] down on the benefits directly paid to people on Medicare. It does put some requirements as to how people are eligible and how their eligibility changes. So for example, it puts a work requirement in. So if you're healthy and not working you would not be able to sign up for Medicare. Okay. Is that a cut in Medicare. Is that waste fraud and abuse, whatever it is. So I think the message of all [00:06:30] and it can fall. I mean, you can make an argument for both of them. I'm not saying I was.

Annie Schwab: Just about to say it's they're probably both right in their own methodology of sure of expressing it. It's just really hard for like the even me and I'm very familiar with some of this stuff. It is difficult to understand, well, who's right, who's wrong, who's making stuff up, who's telling the truth. Like, how are we supposed to know? Yeah. So I think it's very confusing to the taxpayers.

Roger Harris: Oh, sure. Sure. And you're going to fall in the camp that you tend to.

Annie Schwab: You [00:07:00] know. Right.

Roger Harris: Of course. Fall in in most kinds, but you make a great point. No one's right or wrong. It's it's the different perspective that we look at something and how we define it. So I think as people who maybe are being asked for advice from clients, we have to try to stay in the middle lane and not get into the the rhetoric around it and kind of deal with the facts of what's being discussed. I'm not smart enough to know the impact on deficits. And you know what our borrowing limit needs to be. [00:07:30] And we'll talk a little bit about IRS and how many employees they need or what their budgets need to be. So I think we're all better off if we stay to things that are factual and let the client, if they want to draw an opinion as to whether it's good or bad policy, let them draw their own conclusion.

Annie Schwab: Makes sense.

Roger Harris: In this country today. If you pick a side, you're going to be wrong half the time.

Annie Schwab: So that's true. And there are quite a few things. I mean, I think both the Republicans and the Democrats want to see some of the Tcja remain permanent. I mean, there's [00:08:00] definitely there. It's not that they're arguing on every single item. There are some, you know, they're both in it to win it. But there are also some understanding of they both want this or this is good for for everybody or this is good for, you know, the environment or whatever they're, they're having. It's the specifics that go beyond it. For example, like you know, the state and local tax deduction.

Roger Harris: Right.

Annie Schwab: You know, they both think it's good or they both are for it. But the dollar amount is [00:08:30] where they're arguing about or you know, the specifics of how how that is handled.

Roger Harris: I actually heard and we should talk a little because this is where we can get into hard numbers. So you can advise your clients. But I actually did hear Senator yesterday say he completely thinks there should be no Salt deduction.

Annie Schwab: Oh, really?

Roger Harris: Yeah. I mean, his argument was assault. This is a political argument. I'm not saying we'll talk about the details of what's being kicked around, but his argument was why should a low state. He happens to live in a state that doesn't have a state income tax. Right. Subsidize the tax bills [00:09:00] of people who live in high income states. So in his opinion, you should not have a Salt deduction because that's a subsidizing of a in his world of inefficient state right now that's not going to happen. We're going to have a Salt deduction. It's currently 10,000. I don't think there's a chance in the world it's going to go to zero.

Annie Schwab: Yeah I don't think so either.

Roger Harris: The question is how much higher if any, will it go. So let's start by talking [00:09:30] a little bit about what's in the House bill. And then we'll talk about what the Senate is talking about.

Annie Schwab: Right. So currently as it states in the House bill, they raise the salt cap to 40,000, Which which has never been thrown around. I've heard 40. I've heard 30. A lot. Um, I have not heard zero. So that was that was news to me.

Roger Harris: But that was one Senator.

Annie Schwab: Right, right. Um, and so they also tied it to the pass through entity tax. So that's that whole, um, being able to pass through the state and local deduction [00:10:00] through the 1099 A. Um, so there's some changes that are, um, being tossed around tying the salt to the pass through entity tax, um, which is small business. More small businesses would suffer from it.

Roger Harris: Right.

Annie Schwab: Um, you got both sides. I don't know how far that's going to go. I did hear one senator say to keep it at ten. Um, I heard some compromising around the $30,000 [00:10:30] mark. Um, where it'll land, I don't know, I agree, I don't think it's going below ten, and I don't think it's going over 40 either. I think it's going to I think that's that's our range.

Roger Harris: Yeah. We're somewhere between 10 and 4. And again, this is politics. Because in a normal world, if all our only goal was, is to not let the Tax Cuts and Jobs Act expire, we would just pass the same extension of the current bill.

Annie Schwab: Right.

Roger Harris: But this is where you get into politics in [00:11:00] the House, as we all think we know, there's a very small Republican majority. I think they can lose three votes or four votes or something, but they have to. They've got very few people they can live. And in the house you have a lot of congressmen on the Republican side who are from these high income states, of course. And so their constituents are arguing that a $10,000 salt cap is way too low, and it penalizes [00:11:30] the people in their district. Conversely, when you go to the Senate, there are no blue state Republican Senators, so they're not hearing about it at the same level that the House is. So the House crafted this $40,000 number cap.

Annie Schwab: Yeah.

Roger Harris: To get enough Republicans to vote for it in blue states, but not running off enough deficit hawks in [00:12:00] the Republican Party who were concerned about the deficit, because, again, that difference in ten and 40 is considered spending, which, you know, the government's already overspending. So it raises our deficit. So they struck this balance of 40. And I think there's some incremental 4% increases or something like that.

Annie Schwab: That is in there that is in there like an inflation adjustment each. Right or whatever.

Roger Harris: So now it goes to the Senate which has a different political dynamic.

Annie Schwab: Mhm.

Roger Harris: And um, you [00:12:30] have that one senator who thinks it could go to zero. You've got some who think it should be not capped at all. It should go to whatever it is. And the other argument is, and you touched on this earlier, whatever the Senate does, unless they don't change anything, which I don't think has ever happened in the history of bills, is that politicians just take what somebody else did and say, yeah, that's good. We'll just leave it there. But every change or any change that they make requires the bill that the Senate passes [00:13:00] to then go back to the House. And so if you dramatically change that 40 back to say, 20, you're backing that argument about, you know, getting votes with that narrow margin. So we're really into a political discussion of is there a number between 10 and 40 that the Senate can pass with their 53 votes? That will keep the one vote? Remember, the House bill passed by one vote. So there's not a lot of leeway [00:13:30] there. So if they drop it, what can they do now? As we talk about this and some other things, keep in mind this is the signature piece of legislation for President Trump, and it's hard to imagine that the Republicans aren't going to coalesce around something that can pass both House and Senate. But it is very much a political battle right now more than a lot of the details of what's in it. So we'll talk in a minute about, you know, some of the new stuff that's [00:14:00] clearly coming from the the campaign. It wasn't in the tcja, but Tcja.

Annie Schwab: But but do you think that July 4th is really a reasonable time frame? I mean, that's like two and a half weeks. Yeah. I mean, is that I mean, I know they really want to to, you know, hit that deadline that they set, but do you think that they're going to make sacrifice like sacrifice the. I don't know the conflict just to make that deadline. Do you think that they would give something [00:14:30] up just to hit the deadline, or do you think they'll stand strong?

Roger Harris: First of all, the deadline is internal ceremonial. You know, the idea that on the July the 4th, we sign an extension of the tax bill, the one, you know, because there's a lot more stuff in it that is defense related, energy related. I mean, it's not just taxes. We're focusing on the tax part, but but again, there was this idea that, you know, we can do this on the 4th of July. We're celebrating our birth as a country, and we're passing this wonderful bill. At the end [00:15:00] of the day, if it's July the 10th, what difference is it really? Does it really matter? Probably the biggest motivator is if it's not passed by July the 4th. A lot of politicians in Washington aren't going on their vacation because, uh, I did hear Senator Thune, who was the majority leader of the Republicans in the Senate, saying, if we don't have this bill signed by the 4th of July, we're not going off on 4th of July break, which is a.

Annie Schwab: All right. That's an incentive.

Roger Harris: That's an incentive. Yeah. So I mean, [00:15:30] I don't know if it'll pass. I mean, there's a lot to be. I think what? We're just kind of reading the tea leaves here. I haven't anybody said this. It sounds like the Senate is getting to the point where they realize they're going to have to accept more of what the House has done than they might like, just because they've got a little more leeway and flexibility in the Senate than they do in the House. So I think it'll have to go back to the House. But I would imagine anything the Senate does has been cleared by Speaker Johnson on the House, that he thinks he can keep [00:16:00] his slim majority on it. But right when it'll happen, who knows? I mean, you know, the world changes so dramatically. I mean, since we last did a podcast, we got Iran and Israel going at each other. You know, we've still got, you know, you know, and there's so much dynamics that can can change things in terms of where our focus is right now. There's a focus on getting this bill done, but who knows. It could change. So I don't know I mean I think that's their goal. I think right now they're still [00:16:30] saying they can meet that goal. But you know we'll see. Yeah I think and again I think can you get it through the I think if you can get it through the Senate with minor changes, the House can move pretty quickly and then it's just a matter of putting it on formalities.

Annie Schwab: Yeah.

Roger Harris: But if they make dramatic changes I don't know that that's going to work. But.

Annie Schwab: Well then they have some new stuff. And so like the you know, Tax Cuts and Jobs Act is one part of it. But now now we've got, you know, a tip deduction. No tax on tips, [00:17:00] no tax on overtime. I've seen there's some enhanced deductions for seniors seniors. Um I've heard stuff about car loan interest being deducted. I've heard stuff about student loans. It's like, you know, 1099 K is back on the table. Just, you know, the threshold.

Roger Harris: Oh 1099 yeah. The whole ten nine. Yeah. I think this is where the politics have come in. And let's talk a little bit about these, because these are things that aren't in the tax cut and Jobs Act today.

Annie Schwab: Correct. These are new.

Roger Harris: We heard about them on the campaign trail. Mhm. [00:17:30] Um, they were very popular politically. In fact, some Democrats even support some of these if they were, you know, isolated and not part of the Tax Cuts and Jobs Act. Um, and he talked about the first one you mentioned, because, again, there's no real dispute about this. We can we want to go. Let me kind of step back. We want to kind of go through and talk about what's in the bill, and then we want to kind of reflect back on our conversation with, uh, Commissioner Werfel about what a bill like this passes. [00:18:00] What does the IRS have to do? What does what kind of work does that put on their plate when we start looking ahead to budgets and hiring and laws? So let's talk about it first in the context of what does the law say and what what might it mean to us as practitioners. But then what it might mean to the IRS and their responsibilities so that our lives are not as difficult as they could be. So let's start. So tell me. Tell them what's in the House. [00:18:30] Bill again, haven't heard any arguments about it in the Senate. So what does it look like?

Annie Schwab: That's true.

Roger Harris: No tax on tips is going to look like.

Annie Schwab: No tax on basically you're not getting taxed on it. But what you're getting is actually a deduction for tips that's already been included in your payroll. Because this one does go back to the beginning of 2025, right. So when you're when you're talking about no tax on tips, you're talking about half the year has already gone by where payroll reporting has been based on federal Labor Standard Act and our current [00:19:00] law. So what this would do is essentially give someone a deduction above the line deduction for.

Roger Harris: Their tax return.

Annie Schwab: Right on their tax return. Um, and then going forward. But then you still have to identify, you know, so these are tipped income which would be cash tips essentially earned um, during an occupation that is customary for having such tips. Um, it would have to be something Most tips are considered voluntary. So you know, now you're dealing with, you know, can you automatically charge a tip [00:19:30] or does it have to be voluntary. So you think about it, you know, just you go to a restaurant and if you have more than a certain number of people at the table, they put the tip automatically in there. So is that no longer voluntary or is it voluntary? Um, so you get and it gets, it gets complicated. Same, same idea with overtime. But this one's going to be kind of interesting because the bill would establish similar, similar idea. You don't get um, no tax on, on overtime. Um, so you would essentially get a deduction same same kind of structure as the tip deduction [00:20:00] would be. Um, but and overtime would be pay would exclude qualified tips as well. So you've got these two things working together. Now if you recall what a W-2 looks like, there is already a box on the W-2 for for tips, but there's not a code or a box or a spot that you would generally put Overtime. So if you start thinking, you know, you start thinking about it, the idea is great. The the okay, I understand where it's coming from. I know who you know how it can benefit, [00:20:30] but you've got a lot of things working, um, that need to work together to make it work. Well, um.

Roger Harris: So a lot of this stuff, you know, seems simple. Like when it says, well, you know, the tips have to be voluntary. Well, somebody's got to decide to your point is, is an automatic service charge that I agreed to as a customer when I sit there with six people at the table, does that make it voluntary even though it's compelled? Or if I leave extra, does the extra count? But the other, [00:21:00] you know, these are all things that legislations don't necessarily. And when in what profession is tipping is customary? Um.

Annie Schwab: I feel like you can ask for a tip everywhere.

Roger Harris: Yeah, some are obvious, but some are less obvious. Interestingly, uh, this is something that I think is an opportunity for us to talk to some of our clients and make them understand. I was waiting to get my hair cut last weekend, and it was funny because all the hairdressers were talking about no tax on tips, and some [00:21:30] of them thought it was already lost. That was the one first interesting thing I heard.

Annie Schwab: So were you educating the whole hair place?

Roger Harris: No, I was just listening. I was just I was just listening. Uh, I don't want to get into a tax discussion with hairdressers. Uh, who again? Some thought it had already started. Others expected to see an immediate boost in their paychecks. Well, what they don't understand is because it's an above the line deduction on your tax return, the only way to see your paycheck increase [00:22:00] is to go complete the wonderfully simple W-4 form that no one knows how to figure out, and fill it out in such a way that they withhold less on your wages so that you know you're getting the money in real time.

Annie Schwab: Um, right. I that's a logical. That's logical to me, too. I mean, if you're not familiar with how the payroll system works, you know, if they think, oh, I'm not going to get taxed on my tips. Well, you think you'd get more [00:22:30] money every paycheck? I mean, that's. Yeah, I see the thought process I see.

Roger Harris: Oh, sure. Sure. It's just interesting when you hear people, you know, and again, you're glad you they don't know what you do. So they don't come asking you to join the discussion. But. Yeah. But you know, I mean, it's going to be something as simple as could the number you mentioned the W2 and there is a box on W-2s for tips. Does that mean that we can rely 100% on the number in that box, or would something go in that box that would qualify as a tip on [00:23:00] a W2 that wouldn't qualify as a tip on the tax return for, you know, for example? I mean, I don't I'm trying to think of a crazy example where, you know, tipping isnt customary. Um, You know, you go into your doctor's office and you tip the doctor. Yeah. And somehow the doctors W-2 they actually put the tip on his W-2. Well, it would be in the box, but that's not a business where tipping is customary, so it doesn't qualify. So [00:23:30] in addition to just. Yeah. So can we just will we be able to rely on the number? I'm assuming most people will. They'll just take the number and not box and they'll say there you go. And there's some limits. I mean, it can't be $1 million worth of tips. And you know, there's.

Annie Schwab: Right. There are some there's some caps and thresholds associated with it.

Roger Harris: But this is where and we're going to we'll touch on it in more detail when we get to overtime just because it's a better example. But this is where I don't think I don't know how to say this. Politicians recognize [00:24:00] what sounds simple in a bill is really complicated. When you hand it over to the IRS and say, all right, you got to come up with the rules. You got to come up with the guidance, you got to come up with the forms, you know. And you got to do all this before filing season next January depending on when this bill passes. So this is where, you know, our concern about the, the the readiness, if you will, of the IRS could could be a real problem next filing season. Yeah. [00:24:30] So but I think to to wrap up tips this is going to be part. If this bill passes tips no tax on tips will be part of it.

Annie Schwab: Yep. I see.

Roger Harris: Yeah.

Annie Schwab: And I think no tax on overtime for to some limit is also going to end up in there. My opinion. But I think it's I think that one's going to be even harder.

Roger Harris: This is going to be much harder because first of all I think the way the law is written, it says you can no tax on overtime based on the Fair Labor Standards Act [00:25:00] now. Right. Does all businesses use the Fair Labor Standards Act to do overtime? Can you have.

Annie Schwab: No you can have unions. Yeah.

Roger Harris: Yeah. I mean so you know again Secondly, other than getting to the payroll, let's just say you pay every Friday. The only time I really have to worry about internally keeping up with overtime is week to week or month to month, paycheck to paycheck, I guess is the best way to put it. Once I calculate the pay, I don't store that information anywhere. I just pay them and withhold taxes and [00:25:30] we move on to the next pay period. Now payroll systems are going to have to somehow store that information, because there will be a box we've been told for overtime on the W-2 doesn't exist today, don't know what it'll look like. But somewhere, as a tax preparer, we're going to have to be able to look at that W-2 and rely on that number on the W-2 to be the overtime wages that are tax free [00:26:00] or potentially tax free to our client. So, uh, and we don't really have I have been told, I don't know this personally, that they tried this in Alabama once it started, and it was just a complete disaster and they repealed it. I mean, it just became so difficult and so cumbersome and so hard to enforce and interpret that they just said this.

Annie Schwab: The business owner, the business owner has to have their formality, their records, what do they have to keep. And then the taxpayer, what do they get to give to their, you know, the taxpayer? What are they going to give to their [00:26:30] tax practitioner to do on the tax return? And then the IRS has to have the form and the software has to be updated. And then you have to educate people about it. It's you know, multi multi steps there.

Roger Harris: And it's going to create another interesting argument discussion. Not sure what the right word is if you've been involved. Tension. Tension. Good word. If you've been engaged with with uh small business owners in the past, you've known that that they wanted to throw everybody into a salaried position [00:27:00] to get around paying overtime. Right. And so finally, they've had to come up with guidance about how many people do you manage and what what's your roles and all these different sorts of things. Uh, so that you could exempt yourself from paying overtime. And now you're going to create a real reason that people are not going to want to, uh, be exempt and be on a salary. So you're going to exacerbate that tension between the employer and the employee to some extent. The [00:27:30] other I'm going to flip back a minute because I just thought about it with tips. What's going to be really interesting is for years, I think we've all known that tipped people were getting a break already.

Annie Schwab: Yeah. Under the table. Right. That kind of break.

Roger Harris: There is there is no way in the world that they were reporting all of their tips, unless they were all on a credit card or some way of, you know, being tracked by the business. So it's going to be interesting now to get a true sense of what tips might really be, because now they're tax free. Except [00:28:00] this part of the law is only good for four years.

Annie Schwab: I did see that 2025 through 2028.

Roger Harris: So let's say that for the next four years, all the temp employees in the country are reporting 100% of what they get because it's tax free and this expires in four years. What is the IRS or anybody going to track the fact that all of a sudden tips went up when they became tax free and they declined significantly when they were taxed again.

Annie Schwab: And you're [00:28:30] right.

Roger Harris: You're going to create a.

Annie Schwab: Great incentive to do one way or the other, depending on what year it's in.

Roger Harris: Right. And the reason it's only four years goes back to the discussion we started about how much does a bill cost? What's the deficit. If you put something permanent, which a lot of what they're trying to do with the Tax Cuts and Jobs Act is the reason it was scheduled to sunset this year, was because that restricted the how it was scored because it expired. So now they're trying to make it permanent. That's where some of the argument about spending comes from. [00:29:00] By putting tips and overtime tax free, They accomplish two things. They got it through the Trump term and ended it so that the bill doesn't cost as much. And then theoretically, four years from now, if you don't extend it, it goes away. But you'll learn a lot of interesting information about really what tips are. So um, but again and we'll talk we'll go back to the overtime in a minute and talk about, just think about all that we've touched on some of it. I want to go all the way through everything that has to be done from the IRS [00:29:30] perspective to, uh, to do that. But there's another one in there you talked about. We also heard on the campaign no tax on Social Security. Well, we didn't quite get that far. So but they did we get.

Annie Schwab: They it's called enhanced deduction for seniors. Um, basically it's like a bonus deduction. So to say um, age 65, uh, ages 65 and over, you get you would get another $4,000 with your standard deduction. That's also adjusted for inflation. But essentially what it's doing is it's [00:30:00] giving, you know our seniors are more of a deduction rather than a less tax on their Social Security benefits.

Roger Harris: Yeah, I think when the math got factored in as to what it would cost to completely exempt Social Security from tax, they couldn't afford it.

Annie Schwab: And I do see some there's support on both sides for this is my understanding. I don't know if the numbers the right number, but there is um, both both Republicans and Democrats, um, in favor of enhanced deductions [00:30:30] for seniors.

Roger Harris: Yeah. And remember, prior to the Clinton administration, Social Security benefits were not taxed. Um, that was a fund raiser or a revenue raiser, you know, in the Clinton tax year. Many states don't still don't tax.

Annie Schwab: That's true. That is one of the state, um, adjustments on a lot of state returns from the federal.

Roger Harris: So this one is very popular. Just I think I personally, selfishly, based on my age, would have preferred that we went back to the pre Clinton things. And because this is basically income that [00:31:00] you've already paid tax on. Yeah. When you paid the Social Security taxes that we would have done more here and less than the other two. But hey, there's not as many of us old folks voting. Evidently there are people getting overtime and tips. Yeah. So talk about the car deduction. So that's again.

Annie Schwab: Interesting. I see the incentive here. Again it's it's just that same 2025 through 2028. But it would allow a deduction up to $10,000 for interest payments on your cars auto loans. But [00:31:30] those would have to be final. Assembly would have to be in the US. And final assembly is something I'm not going to define. But you get you get where they're going with this. Um, they're, you know, promoting buying your cars in the US versus abroad. Um, and I do think this one both has some support on both sides. So I don't know.

Roger Harris: It kind of reminds me a little bit of what we had with the electric vehicle credits where there was a battery made and, you.

Annie Schwab: Know.

Roger Harris: Stuff, you know, where there's going to be a lot of fine [00:32:00] details that we're going to. It's not going to be as simple as this, you know that. No, it's it's a Chevrolet. So it automatically count. Well, when you find out the car was built in Mexico or something, and now it's going to be a question we're going to have to ask when we go buy a car. Does it qualify for this.

Annie Schwab: The dealerships are going to have to know, have this some sort of paperwork and something to give you to know if you get it or you don't get it. And um, so again, there'll be some administrative, um, things that need to come into play [00:32:30] for that.

Roger Harris: If you lease.

Annie Schwab: You know, didn't address leasing.

Roger Harris: Yeah. So is there anything you could impute interest on on leases again? And this is kind of a lead into our next topic. And I think overtime is a good place. Again, I keep referring back to our podcast with Commissioner Werfel and we and we're going to talk about how this filing season went, because I think you and I both agree, this past filing season was actually pretty good.

Annie Schwab: Yeah, I think a lot of people agree. I've seen a CPA and everybody's, you know, writing about [00:33:00] the successes of this past filing season.

Roger Harris: But if you take something like the no tax on overtime and think about everything that has to be done and when it has to start and you hand that over to a reduced workforce, who's I thought one of the best analogies that that Commissioner Werfel gave on our last podcast. If you haven't listened to it, I encourage you to go back. Was talking about the situation where if a football team is going to play in a new stadium, it [00:33:30] takes a while to build the new stadium. So you have to make sure the old stadium is functional until the new stadium is ready. So if you want to make all these dramatic changes to the IRS to improve its technology, to have better people working there and be more efficient, do all those sorts of things. You don't just wake up one day and you've gone from position A to position B, you've got to work through the transition. And this tax bill is going to put a lot of added effort and work.

Annie Schwab: A lot.

Roger Harris: On the IRS [00:34:00] before they're necessarily better than I think we all hope they are because and let's just I think we may have covered all this, but overtime is going to, first of all, take guidance to be written on how to calculate it, how to report it to the employee, what records the business owner has to keep to to back it up. Then the IRS has got to come up with a line or a form or whatever to put it on instructions and answer all these crazy questions about what if I work in a union thing? [00:34:30] What if it's not stated? What if somebody just hires me for a FAQs FAQ?

Annie Schwab: You know.

Roger Harris: All of this, that.

Annie Schwab: Then the software companies have to get it into their software so that it's calculated. The states have to decide what they're going to do about it, because now it's affecting the federal AGI, which most states bounce off of. So you've got the states now coming in, um, and have to figure that out too.

Roger Harris: Yeah, you just made a great point that I hadn't even thought about. A lot of states try to piggyback off the federal government as much [00:35:00] as they can, but now we're going to see some dramatic changes. So does that mean every state is going to accept no tax on overtime, no tax on tips deductible?

Annie Schwab: They don't have to.

Roger Harris: No, they don't have to.

Annie Schwab: They don't.

Roger Harris: Sometimes depending on when their legislature meets, they couldn't do it because their legislature doesn't meet in time to implement the federal rules. So it could could completely complicate state reporting. Again, you know, there's and it's impossible [00:35:30] to think of all the questions. But if if I'm paid $500 a week salary but work 80 hours, but you don't call it overtime, do I get a deduction?

Annie Schwab: Make it works. Make it worse. You work in a restaurant, so now you got tips to.

Roger Harris: Tips and overtime. So. Right. I mean how do you reconcile all these scenarios that are out there. Uh, that's what the IRS should be working on today. In addition to.

Annie Schwab: Yesterday. I don't even know if today is good enough.

Roger Harris: I mean, well, I don't think they know who's working there today [00:36:00] yet. We'll we'll talk about they've got some leadership finally worked out. So I mean, it's just I'm afraid that this next tax season could certainly be depending on this goes back to when does this bill become law. The sooner the better. So the IRS can get working on it. Now they've handled these things before, but we can all remember there's been times that we couldn't file tax returns until later in the filing.

Annie Schwab: Yeah, we've had delays.

Roger Harris: Weren't ready.

Annie Schwab: Yep. Delayed tax season. The start of tax season has been delayed due to. Yes [00:36:30] I remember. Yeah. And all those people who want their their refunds are not happy about that. No.

Roger Harris: So so it could be worse I mean so this upcoming tax season has the potential to be a mess. Uh, and the longer it takes to get to the final bill and the more things that are new, the more difficult. Just extending the Tax Cuts and Jobs Act shouldn't be a problem that's already programed. It's just boom. Yeah, but things like [00:37:00] this add complexity.

Annie Schwab: So and we've only touched on a few. I mean there's all kinds of clean energy things and stuff that we haven't even touched on R&D and depreciation changes and, you know, all the kind of the norm, the normal stuff. But this just adds magnitude to the amount of work that needs to be done. And I'm sure all of our listeners here have heard about, you know, the decrease in in workforce at the IRS, the brain drain, those types of things. It's going to put a lot of pressure, [00:37:30] um, on the IRS to, to make this work by tax season.

Roger Harris: So we haven't and we haven't even touched on the fact that, you know, the 19981999A deduction is changing. Yep. Um, you mentioned earlier the the difference in the salt from the entity level, you know, to the individual level. There's like you said, there's there's some big things and there's a lot of little things tucked in that could potentially take more time on the IRS to figure out than, than the more important [00:38:00] things. So, um.

Annie Schwab: And then you throw in the, the budget and then they're going to cut the IRS budget.

Roger Harris: They're going to cut the we'll talk about that in a minute. We're going to cut the workforce even more. So I guess what we're saying is, I hope you enjoyed the 2025 filing season, because it was it was a good season. I don't know that we'll we'll have the same comments this time next year. But any talk about some of the the stats about that, because I do think the 25 filing season was successful and and it was not because [00:38:30] of lack of volume and work. So talk a little bit about some information that we got on how the IRS did with, uh.

Annie Schwab: It's sort of like a recap of the season. So, um, the agency helped 62.2 million occasions, um, help taxpayers and that was up 3.2%. So I mean, not a huge increase.

Roger Harris: But still more.

Annie Schwab: But it's still more, um, the customer, the toll free customer service lines. Um, that was up. They helped more customers in a faster time. [00:39:00] Um, up 11%. I'll take that. Uh, the, the taxpayer assistance Centers, which are on the chopping block at the moment. But, um, last season it was they helped over 26% more taxpayers. So again, we're seeing this trend of being able to assist more taxpayers in a faster time, whether it be in person or on the phone. Um, they've got uh, revenue was up, um, exceeded 5 trillion this year, which is almost a 9% increase [00:39:30] from the previous year. So again, we're collections of are were better this year. Um, they processed 266 million returns. That's individuals and business and tax exempt. Um, which, you know, and issued close to 553 billion in revenue. Think of all that money that just went back out into the public to be churned and spent. Um, you know, it's amazing. Uh, and with the with the current staff that they had this [00:40:00] past tax season, they did, um, over 500,000 tax return audits, which resulted in 29 billion additional tax or revenue generated. Um, so if you're looking at those stats and this is just a few.

Annie Schwab: I mean, if you look at how many people went on and used the online tools or the portals or some of the resources available on the website, um, all of those are up, up, up, up from years, multiple multiple digits, um, over 10% in almost every category [00:40:30] of resources that the IRS has spent time and energy and money on, that the taxpayers or tax practitioners have taken advantage of to make their tax season easier. Help the IRS get through some of the backlog. Um, so like I said, I've been reading Accounting Today and AICPA and nearly all of them are really, you know, giving a hand, a thumbs up and a hand clap and all the stuff to to the IRS. Um, and I do too. I found this tax season to be much [00:41:00] smoother than clearly the ones during the pandemic, but we've had some struggles in previous years with delayed forms. And you know that K2, K3 year was a tough one. Um, so we I saw improvements and I'll take it because I think next year is going to be rough. Really rough.

Roger Harris: And a couple of these kind of jumped out at me and kind of reflecting back on what we said earlier. The first one was the fact that for the first time ever, over $5 trillion was collected, a 9% increase. [00:41:30] So the the agency that collects all the money to be spent collected 9% more this year than the year before, but our budget deficit and our debt went up. So we have an increase in the money that we get each year. We're just spending it faster than than the revenue is coming in.

Annie Schwab: Yeah.

Roger Harris: Had we let's say we had, if our spending had only increased by 4%, we would have [00:42:00] had a 5% difference. So that number jumped out at me, because a lot of people think that we're not collecting, collecting 9% more this year than the year before. And yet we still went backwards in, um.

Annie Schwab: And our audits generated additional funds, too. Right.

Roger Harris: So, I mean, do we really have a collection problem? You know, but we need an I, right? Yeah. We might. The other thing that was interesting was that that refund number, um, because for most taxpayers, the only interaction they have with the IRS on an annual basis is getting a refund check. [00:42:30] And the IRS has issued, what do we say, $553 billion in refunds, Funds. And I think for the most part they did it within their 21 day.

Annie Schwab: Yeah, they said between two weeks, two weeks into 21 days. So, you know, that's that's processing and generating checks and getting it out to people really quickly. Um, and there's more e-filing, more direct deposit, like all of those kind of proactive, let's get this, you know, [00:43:00] wheel churning. Let's get the money out. Let's get it done. Um, all of those numbers went up and they go up every year. Direct deposit go up every year.

Roger Harris: So if you summarize these stats and then we'll come into some new ones. Um, got more work. The IRS had more work this year than in the past, but they collected more money than in the past and got out refunds in a timely manner. For most people, that's a good year. Now, those are the good stats, Annie. What about the future [00:43:30] proposed budget for the IRS that has been put out there and how that might impact next filing season and filing seasons to come.

Annie Schwab: So again, this is proposed. I just want to remind everybody of that. But it's outlined in what's called the annual congressional budget justification. Fancy terms for this is how much money you're going to get. This is how much money we're allotting to you. And currently, where this proposed budget stands is that there would be a budget reduction of 37% [00:44:00] from the previous year. Big number 37%. Huge big number. Um, the fiscal year 2026 proposed budget is 14.2 billion, and that is down from 22.5. So you're looking at like nine 9 billion. It's going to completely reduce, you know, funding that was previously slated through the IRA which is the Inflation Reduction Act. Um, and so we're a lot of it's being pulled back or rescinded, so to say, uh, the [00:44:30] shrinkage at the IRS workforce, 20%, 20% is about 78,000 employees. Um, that's that will be the lowest since before Covid. Um, and that is a big, a big decrease, um, a concern for many agencies, including tax practitioners and taxpayer services. Um, and so it is there is a uh, inevitably there will be, uh, you know, taxpayers are going to have a harder time [00:45:00] getting through the phone service or receiving answers to questions. Um, there's a lot of those service centers in person service centers that have either already been chopped off or could potentially be on the chopping block. Um, so we're going to, you know, we're probably going to see higher wait times, longer processing times, harder to get your, you know, notices or questions answered from the IRS. Um, they do have some of the online services that um, over, I guess, like the last 2 to 3 years [00:45:30] have really improved. Some of that stuff is being pulled back. Not all of it. Some of it is. So we'll see, you know, a struggle there to get copies of records and, and, um, even the direct file, the IRS direct file looks like it's going to be gone. Um.

Roger Harris: So it pretty much changes.

Annie Schwab: Yeah. Changes are coming, I don't think. I think what they've taken away is not under consideration for being put back, but I [00:46:00] don't know, I guess.

Roger Harris: Well, and and I want to go back and say something, Annie, I have said before, it may very well be that these numbers of employees and budgets are what the IRS should be able to function with.

Annie Schwab: Oh, sure, I have no idea.

Roger Harris: I just I have no idea. But it's a big it's a big drop from point A to point B when all we're doing is dropping. I don't know that we've thought through it enough. And can we get all there in one year, or do we need to gradually work towards it versus [00:46:30] just saying, well, we got to get rid of all these employees. And I agree, their computer system needs to be upgraded.

Annie Schwab: Well, it's.

Roger Harris: Easy to say, but it's hard to to just drop it in in one day.

Annie Schwab: So do it right.

Roger Harris: Yeah. I'm not smart enough to know if these numbers are better or right or reasonable. I'm just concerned that if we move too quickly and again, just personally knowing a lot of the, uh, people who have left the service, you just don't replace those people overnight. It takes a while to, [00:47:00] to get into a situation and learn it and understand it to be as efficient and as effective no matter what you think. I mean, there was inefficiencies and ineffectiveness at the IRS. I'm not saying.

Annie Schwab: Oh, sure, any any agency, any agency is going to have, you know, some fat that can be trimmed, some procedures that could be changed. Um, but I'm with you. It seems like we're we're taking away, taking away, taking away, but then adding more work. And so I just don't know how that you know where the sweet spot is. And we may [00:47:30] not know the sweet spot. It may take several years to figure out. You know what? What is the the right size of the IRS or how much funding do they need? And, um.

Roger Harris: It may take one bad tax season to, to actually make the point that it's an agency that's easy to be critical of. Um, we've I can't think of anybody in our profession that hasn't criticized the IRS many times in their career. And a lot of those criticisms were warranted and, you know, justified. I'm concerned [00:48:00] that, you know, we run the risk again. You throw all these reductions in force and money and technology on top of changing in tax law and all the other things. And, you know, I just have this fear. We've got one bad tax season ahead of us. And everybody will say, well, that didn't work. We got to go do something different. And, you know, it may take a while to get through. So I, you know, I think I would prepare my clients for this again. We'll see. The IRS has always said that, you know, they react [00:48:30] when they have to do something. They find a way to get it done. So I hope they're right in this case. But it's just I know how the attitudes of the people there, the nervousness we're still not through. I mean, you talked about all those layoffs. They don't all know who it's going to be yet.

Annie Schwab: And I was just about to ask you, how was how was the tension when you were in D.C. last, last time, 2 or 3 trips ago? You were like, these people don't know if they're coming to work tomorrow.

Roger Harris: Yeah. No, they didn't. And some of them still don't. Um, yeah. You know, because they're still working through who took the voluntary retirements. And, [00:49:00] you know, if that doesn't work, who's going to be let go? And, you know, we've got some departments that lost 70% of their workforce, some that lost less, you know. So how do you make up? I know one of the things that I don't remember what venue it came up on, but the stakeholder liaison group is a group that is really important to the practitioner community. We have these local stakeholder liaisons that are the kind of the liaison between the IRS and DC and the practitioner [00:49:30] down on the street. And that has been cut by half or more. And you're not going to have that one on one relationship with the IRS that you were used to for all these years. You're going to find most of that. If you're not part of an association of some sort or organization, you better become part of one, because they're almost being forced to communicate through those organizations and rely on the organizations to communicate down to the individual practitioner. Uh, [00:50:00] just because most of the people were let go. And so it's going to be a transition. Um, and they'll probably do better than I'm expecting, but I'll take that. Yeah. We'll see. Now, one thing that has changed since last time we were here, and I keep mentioning this, but I think one of the things that Commissioner Werfel said on our last podcast was he thought permanent leadership at the IRS would help. And Annie, I think we now have [00:50:30] permanent leadership.

Annie Schwab: We do. As of June 12th. So about a week ago or so, the Senate did confirm Billy Long as IRS commissioner. It was a vote of 53 to 44. So he will remain the commissioner. Unless something changes. He will remain the commissioner until November of 2027. So that's the the the expiration of his term. I correct me if I'm wrong, but I believe that he is the sixth, um, [00:51:00] commissioner this year who's held this spot. Is that right?

Roger Harris: Six. That's close. I'm trying to think of when did Werfel resigned? And then we went to a lot of Temporaries Temporaries. Uh, well, Actings, I guess is the acting commissioners is the term. Um, it's it's the fifth or sixth.

Annie Schwab: Yeah, only one of them, like, only lasted a day.

Roger Harris: Yeah.

Annie Schwab: Somebody. Somebody was in and out in a day. So anyway, I agree, you might [00:51:30] like him. You might not like him. If you saw any of the the hearings, there are definitely some issues that were brought up. But we do have someone who is now the commissioner. Um, and permanent leadership, like you said, is is going to be crucial to implement all the new stuff coming down the pipeline.

Roger Harris: Yeah, we'll have we'll have permanent leadership. Now, interestingly, he's only serving out the remaining part of Commissioner Werfel's term. He doesn't get the traditional five year term of a new commissioner. So theoretically, um, we [00:52:00] would be going through this nomination and approval process again in a couple of years, whether they would bring him back.

Annie Schwab: Or bring.

Roger Harris: Him over. And now we're going to be overlapping administrations. I don't know, but we do have a commissioner. I think it's going to be interesting to see who he surrounds himself with in terms of advisors, because he does not have a big history of working in the tax system. Right. Uh, and so, uh, a lot of people have said as a person he is very friendly [00:52:30] and someone that people like. There's some concern about his background in knowledge of the tax system. And I think that's why who he surrounds himself with will will be critical to see, uh, where he's getting his advice from. Um, it's going to be interesting. It's going to be interesting. But now we at least have permanent leadership. And we do have a commissioner, and that process is now behind us. The interesting you mentioned it was 5344. That was exactly down party lines. Not a single Democrat voted [00:53:00] for him and not a single Republican voted against him. And if you took any time to watch the hearing, you kind of knew that's the direction playing out.

Annie Schwab: Yeah.

Roger Harris: Go. Um, so, uh, we're heading into a what normally would be a quiet summer for all of us, but we have a lot to keep our eye on. And from a tax bill to the Tax Administration agency now under new leadership and changing dramatically. So [00:53:30] get your rest before next tax filing season, because I think we'll be fine through the extension period because we're still dealing with, you know, the old the old system, if you will, the current year system. But none of this stuff's going to hit until next filing season. And but I do think we prepare people to say, you know, phone calls aren't going to get answered as quickly. Um, it's not going to be maybe I think the IRS can probably process the returns properly. But if you have a problem, it's just I'm afraid it's going to just take longer to resolve [00:54:00] it. And who knows what it's going to do to compliance and audits.

Annie Schwab: Yeah that's true. Less workers you know are we going to see non-filers more non non-filers this year I don't know.

Roger Harris: Yeah. We'll we'll we'll will, particularly people in the business community to take advantage of the diminishing resources and be a little more willing to gamble on what they do and deduct and don't report and do report and things such as that. Yeah. You know, the individual taxpayers probably stuck because all their information [00:54:30] is already in the IRS computer. It doesn't take people to to run them down. But you know, the business community, the sole proprietors, you know, the people, you know, we're raising the 1090, you mentioned the 1099 K or 1099 period number goes from 600 to what, uh, 2025 for 1090 K. But I think it went up to 2000 just for the regular self. 1099 yeah. So there you go. There's less now in the system. So there's.

Annie Schwab: There's.

Roger Harris: More relying [00:55:00] on. So it's going to be an interesting summer and fall and interesting tax season. And um still got to watch the tax bill. Don't know where it's going to land. Pretty sure we'll get something. Republicans are not going to let the taxes go up on all voting, right? Country before an election that's just not going to happen, right? What it looks like and what else is there? We'll see. Um. Interesting time.

Annie Schwab: Yeah. And, you know, we'll keep you up to date on what's happening. And if [00:55:30] it's just us or we have another speaker come in or guest speaker, um, you know, we'll keep you in.

Roger Harris: We do have a guest speaker lined up that we're trying to hold off on. He he he's he's actually our works for the firm that follows us. All the tax stuff in DC for us and NEA for that matter. But we're trying to wait till we have more certainty. Uh, so we'll have a better sense of what the final rules look like, but we'll probably bring him on sometime in July and August, uh, to give us some final, because right now you're getting Annie and [00:56:00] I's. I will be kind to us and say educated opinions.

Annie Schwab: There you go.

Roger Harris: But they are opinions. But, uh, when we have Thad on who he's been on before, if you, uh, have heard him before, we'll be talking, you know. Exactly then. Yeah, yeah. Anything else?

Annie Schwab: Nope. That was a lot of information for random podcasts in the middle of the summer. But, um, like I said, we'll be bringing anything new to you as soon as we know it.

Roger Harris: Yeah, we made it through without a guest, and we're [00:56:30] back again, so we'll have to try it again next time.

Annie Schwab: Yep.

Roger Harris: All right. Annie, thank you for putting help. Put all this together. Thank you, as always, for listening to this podcast. We hope you'll recommend us to your friends and, uh, join us in a couple of weeks for another federal tax update podcast. And we'll be talking about whatever's on the minds of Annie and I and the tax practitioner community in the next few weeks. So thank you for listening. Thank you. We'll see you soon.