New Withholding Calculator/Guidance On Carried Interest Expected Soon

The IRS is expected to release a new calculator tool during the week of February 19 so that employees can double-check their withholding, Treasury Secretary Steven Mnuchin told House lawmakers at a Ways and Means budget committee meeting on February 15. At a Senate Finance Committee meeting on February 14, he also predicted within the next several weeks the release of guidance to restrict avoidance of the new rules on carried interest.

Take away. Although the IRS has been scrambling to keep up with both implementing the Tax Cuts and Jobs Act of 2017 provisions and plugging perceived loopholes within the new law, the issue of adequate IRS resources at the IRS has yet to be fully addressed. One official recently forecasted most proposed regulations and other stop-gap guidance to be released by the summer, with final rules likely sometime in early 2019.

Revised withholding calculator

The revised withholding calculator that is expected shortly will allow employees to verify the proper amount of federal tax to be withheld from their paychecks under the new tax law, according to Mnuchin. In January, the IRS released updated 2018 withholding tables, which is expected by the IRS to increase most employee paychecks.

The new tables reflect the increased standard deduction, repeal of personal exemptions and changes in tax rates and brackets. The revised calculator will reflect not only the increased standard deduction, repeal of personal exemptions and changes in tax rates and brackets, but also the changes in available itemized deductions, increases in the child tax credit, the new dependent credit and repeal of the dependent exemption.

Hedge-fund avoidance

The IRS will be issuing guidance shortly to address the potential for hedge-fund managers to avoid the new holding-period restriction on carried-interest profits, Mnuchin testified.

Under the new tax law, hedge-fund managers and other applicable investment players must now hold investments for three years to qualify for lower capital-gains tax rates on profits effectively set at 23.8 percent (20-percent capital gains rate plus the 3.8 percent on net investment income). Previously, the law only applied the general holding period of one year to these profits. The controversy now centers on the technical fact that the legislative language does not require the longer holding period for pass-through entities such as S corporations.

“I believe taxpayers will not be able to get that loophole,” Mnuchin said at the Senate Finance Committee meeting. He reported that he had just met with the IRS on the issue that morning and went on to promise lawmakers that the issue will be “resolved.” He offered no further specifics but, apparently, his position indicates a belief that a legislative fix would not be necessary and that the IRS has enough leeway within existing legislative language to administratively plug this new loophole.