Summary
- End in Sight for Government Shutdown
- Outlook for Tax Legislation
- Notice 2025-62: Transition Penalty Relief for Reporting on Tips and Overtime under OBBBA
- Treasury Report on Direct File
End in Sight for Government Shutdown
On the evening of Monday, November 10, the Senate voted 60-40 to pass a funding bill after a group of mostly moderate Democrats struck a deal with Republicans. Eight Democrats (including one Independent who caucuses with Democrats), none of whom is running for re-election in 2026, and all but one Republican, voted in favor. The shutdown is the longest in American history. The Senate bill amends the House-passed continuing resolution (CR) that would have funded the government through November 21 bill to fund three of the 12 appropriations categories for the remainder of the current fiscal year, ending on September 20, 2026, veterans affairs/military construction, agriculture and legislative. The Senate bill would also fund the rest of the government under a CR running through January 30, 2026. The bill would provide back pay for government workers, reverse reductions in force undertaken by the Executive Branch since the shutdown started and prohibit such reductions through the length of the CR. After prior shutdowns, government workers received back pay regardless of whether they had been furloughed, but the Trump administration had stated they were considering not doing so this time.
The Senate Democrats who voted in favor of the bill are: Catherine Cortez Masto (D – NV), Dick Durbin (D – IL), John Fetterman (D – PA), Maggie Hassan (D – NH), Tim Kaine (D – VA), Angus King (I – ME), Jacky Rosen (D – NV), and Jeanne Shaheen (D – NH). On Sunday November 9, the same Senators approved a procedural motion to take up the House bill, which enabled Monday’s vote.
The House appears very likely to pass the Senate-passed bill on Wednesday, but this is not guaranteed. Speaker Johnson will swear in Rep-elect Adelita Grijalva, which will bring the House to a 219-214 advantage. Although House Republicans will likely vote overwhelmingly for the bill, at least a handful of Democrat votes may be needed because of a few Republicans voting against the bill. House Democratic leadership criticized the deal and it appears House Democrats will vote overwhelmingly against the bill.
The Senate bill does not address the increased tax credit for health insurance premiums under the Affordable Care Act (ACA) enacted in the 2021 American Rescue Plan Act that expire at the end of 2025. Democrats opposed the House-passed CR over the refusal of Republicans to extend or make permanent those credits or reverse health care policy enacted in the OBBBA. However, as part of the agreement reached on Sunday, Senate Majority Leader Thune (R-SD) promised Democrats a Senate vote on legislation addressing the tax credits. It remains to be seen how that legislation develops. One possibility is a bill making the increased tax credits permanent, which has little chance of being taken up by the House where Speaker Johnson (R-LA) has strongly opposed the tax credits. A bill temporarily extending the tax credits and including some changes, such as income limits, is more likely to be taken up by the House.
Assuming the funding bill is enacted, Congress will likely hold discussions on the ACA tax credits and health policy more generally. There are a wide variety of views in Congress and in the Trump administration on these issues, including various existing and proposed tax incentives for health care. For example, President Trump stated that the government should provide payments to Americans through tax-advantaged health care accounts, rather than provide subsidies through payments to insurance companies under current law.
Some Democrats have held open the possibility of refusing to agree to another funding bill after the new CR (assuming it is enacted) expires on January 30 unless agreement is reached regarding the ACA tax credits.
As in most appropriations bills, the bill contains a variety of very specific items, including increasing Treasury’s $350,000 allowance for “official reception and representation expenses” to $1,350,000.
Tax Legislation Outlook
The prolonged government shutdown has dampened prospects of a tax package coming together at the end of the year. But several possible avenues for tax legislation remain open.
A partisan reconciliation bill some Republicans have floated to address health policy issues might include tax provisions on health care, or also other tax provisions. Although Senate Budget Committee Chairman Graham (R-SC) has held several meetings to develop such legislation, such a bill now appears less than likely.
A partisan reconciliation bill some Republicans have floated to address health policy issues might include tax provisions on health care, or also other tax provisions.
If Congress chooses to address the ACA insurance premium tax credits, other tax provisions on health care or even other tax policies could be included.
There are a wide variety of tax policy items being considered by Congress, including digital assets, that are potential candidates for inclusion in a bipartisan tax bill.
On October 30, Sens. John Curtis (R-UT) and Maria Cantwell (D-WA) introduced the Fusion Advanced Manufacturing Parity Act, S. 3088. The legislation would expand eligibility for the Tax Code section 45X advanced manufacturing production credit, which incentivizes the production of clean energy components, to include fusion energy components. Under the bill, covered fusion energy components would include superconducting magnets, capacitors, fusion chambers, blanket systems, high-energy lasers, and other essential materials. The bill is identical to companion legislation H.R. 5441, which was introduced in the House on September 17 by Reps. Carol Miller (R-WV), Suzan DelBene (D-WA), Claudia Tenney (R-NY), and Don Beyer (D-VA).
The section 45X credit, which was created by the Inflation Reduction Act, encourages the domestic production of eligible clean energy components by providing per-unit tax incentives for U.S.-based manufacturers. The components covered by the credit include solar panels, wind turbines, battery modules, inverters, and critical minerals, but currently, not fusion components. Though the OBBBA terminated the section 45X credit for wind energy components produced and sold after 2027, the credit still applies to other categories of eligible components through at least 2029.
Notice 2025-62: Transition Penalty Relief for Reporting on Tips and Overtime under OBBBA
On November 5, Treasury and the IRS issued Notice 2025-62, providing penalty relief for the 2025 tax year in connection with new reporting obligations under the OBBBA for qualified tips and overtime compensation. Sections 70201 and 70202 of the OBBBA included new deductions for qualified tips (Tax Code Section 224) and qualified overtime compensation (Tax Code Section 225), and corresponding information reporting rules for employers, payors, and third-party settlement organizations under Tax Code Sections 6041, 6041A, 6050W, and 6051. These changes are effective for tax years beginning after December 31, 2025. Failure to meet such reporting requirements is generally subject to penalties under Tax Code Sections 6721 and 6722. However, because Forms W-2 and 1099 will not be updated to reflect these changes for 2025, the IRS is treating the year as a transition period for reporting purposes.
The notice provides relief from penalties under Sections 6721 and 6722 for failing to include the new required data (including separate reporting of cash tips, overtime, and occupation codes) on required information returns and payee statements for taxable-year 2025. Relief applies to filings under Tax Code Sections 6041, 6041A, 6050W, and 6051, provided the filer otherwise submits a complete and correct return.
While optional for 2025, the notice encourages employers and payors to provide employees and payees with occupation code, overtime, and cash tip data to help them determine whether they qualify for the deductions. The IRS suggested employers may furnish this information via online portals or supplemental statements.
The notice states that additional taxpayer guidance on claiming these new deductions will be forthcoming.
Treasury Files Report to Congress on Replacement of Direct File
In Section 70607 of the OBBBA, Congress directed the Department of the Treasury to submit a report on the Direct File program. Treasury sent the report to Congress on October 2. In the report, Treasury stated that it has instructed the IRS to suspend Direct File and strengthen its public-private partnerships with tax preparation companies.
Direct File was introduced in March 2024 as an option for eligible taxpayers to file their federal individual income tax returns online directly with the IRS at no cost to the taxpayer. However, according to the report, Direct File experienced low overall participation and imposed relatively high costs and administrative burdens on the federal government compared with other free filing options. For tax year 2024, returns submitted using Direct File accounted for less than 0.5% of the approximately 146 million returns filed. Direct File had a cost to the federal budget of at least $41 million for tax year 2024 returns—an average of $138 per return accepted through the system.
The report highlights and recommends other successful, longstanding programs, such as Free File, moving forward.
In the report, the Treasury and IRS announced they will: (1) conduct an updated taxpayer survey on preferences over different filing options that addresses methodological and other challenges present in earlier surveys; (2) convene a Free Filing Modernization Summit; (3) create a common understanding of a “free return” across all filing options available to taxpayers; (4) collect more robust usage data from software providers; and (5) provide a supplemental report to Congress, including updates based on these action items.