The Inflation Reduction Act Of 2022

On August 16th, President Biden signed the Inflation Reduction Act of 2022 into law.  I’ll stay out of the debate on whether the Act will actually reduce inflation, but whether that’s true or not, the 273 pages of changes and additions to existing law will have some effect on many of our clients.  Many of the provisions of the Act impact corporations exclusively (including a new 15% minimum tax, and the new 1% excise tax on stock buybacks), so I’m going to leave them out of this summary.  The changes for individuals include the following:

1) Modifies the Non-Business Energy Property Credit (this is the credit for energy efficient windows, doors, roofs, etc.) starting in 2023 by extending it through 2032 and making it more robust:

  • The $500 lifetime limit is changed to a $1200 annual limit, though individual types of property have lower limits.
  • The rate increases from 10% of the cost to 30%.
  • Home energy audits (30% up to $150) are now included as eligible for the credit, as well as exterior doors (30% up to $250 per door, $500 total), windows (30% up to $600), insulation (30% up to $600), heat pumps (30% up to $2k, not capped by $1200 overall max), HVAC units /  water heaters / furnaces / boilers (30% up to $600), electrical panel upgrades to at least 200 amps as part of other energy efficient improvements (30% up to $600). 

Energystar.gov will have updated information on each credit by end of 2022.  That’s the most reliable site for ongoing energy credit information.

2) Extends the Residential Energy Efficient Property Credit (think solar panels on your roof) through 2034.  This 30% credit had started to phase out and was reduced to 26% for 2022, on its way to zero in the coming years.  Instead, 2022’s credit has been restored to 30% and that continues through 2032, phasing down to 26% in 2033 and 22% in 2034.

3) Replaces the old Qualified Plug-In Electric Vehicle credit ($7500 for qualifying electric vehicles but only for the first 200k vehicles sold by manufacturer) with the new Clean Vehicle Credit.  This new credit:

  • Runs from 2023 through 2032.
  • Remains capped at $7500 (lower, depending on vehicle sourcing and assembly).
  • Includes other alternative powered vehicles (e.g. hydrogen fuel cell)
  • Has income restrictions…  $150k single, $225k head-of-household, and $300k married filing jointly (though can use the lesser of the income in the year of purchase or the previous year to qualify).  These are cliffs meaning that if you are even $1 over the limit, you receive no credit.  It does not phase out slowly like most credits / deductions.
  • Has MSRP restrictions…  cars with MSRP over $55k and SUVs / light trucks over $80k are excluded.
  • Requires that final assembly of the vehicle occurred in the US and that a certain percentage of the minerals used to make the battery were sourced from North America or certain other countries that have trade agreements with the US.  These restrictions get tougher in later years (40% by 2024, 100% by 2029).
  • Does not have manufacturer sales caps (i.e. Tesla’s that meet the above requirements would qualify).
  • Allows purchasers to transfer their credit to the auto-maker starting in 2024 (means you get the credit as a discount off the purchase price, vs. having to pay full price and claim the credit on your taxes.  No details on how this will actually work.

For 2022, the old rules apply, except that the new assembly requirements are in effect as of the signing of the Inflation Reduction Act.  The Dept. of Energy has published a list of qualifying vehicles.  If you were in a contract for delivery prior to 8/16 and receive delivery prior to the end of 2022, a special transition rule allows you to treat the vehicle as delivered on 8/15 (i.e. no assembly requirements). 

The provisions of this credit are very complex.  The conclusion here is to check with the manufacturer before making the final decision on what kind of car you want to buy and assuming the credit will be available.  The sourcing / assembly restrictions, combined with the MSRP limits could make it tough for vehicles to qualify, especially early in the life of the credit.

4) Creates a new Previously Owned Clean Vehicle Credit that:

  • Runs from 2023 through 2032.
  • Is valued at the lesser of $4000 or 30% of the vehicle cost.
  • Applies to clean vehicles that are at least 2 years old.
  • Has income restrictions…  half those of the credit for new vehicles ($75k single, $112.5k head-of-household, and $150k married filing jointly (though can use the lesser of the income in the year of purchase or the previous year to qualify).  These are cliffs meaning that if you are even $1 over the limit, you receive no credit.  It does not phase out slowly like most credits / deductions.
  • Has vehicle value restrictions…  vehicles over $25k are excluded.
  • Has use restrictions…  Can only use the credit once every 3 years. The credit can also only be applied once per vehicle.

5) Creates the new High-Efficiency Electric Home Rebate Program.  This program provides qualifying low and middle-income families a total rebate of up $14k to purchase energy-efficient electric appliances.  This includes up to $8,000 to install heat pumps, $1,750 for a heat-pump water heater, $840 for a heat-pump clothes dryer or an electric stove, $1600 to insulate and seal a house, $2500 on improvements to electrical wiring, and $4000 toward upgrade of electrical panels.  The program will be administered by the states (states have to apply for their share of the $4.5B of Federal funding and there doesn’t seem to be any guarantee that all states will, or that their programs will exactly match those described above) and only those earning less than 1.5x the area’s median household income will qualify.  The rebate can’t exceed 50% of the cost of the project if the family income is between 80-150% of the area median income.

An additional, more generalized rebate program, also administered by the states is also available.  A retrofit that reduces a home’s energy use by at least 35% via insulation or other improvements is eligible for up to an $8k rebate, or 80% of the project cost, whichever is less.  For smaller projects that reduce usage by 20-35%, a $4k rebate is available.

6) Extends two ARPA provisions dealing with the ACA (“Obamacare”) through 2025.  As a result, those earning more than 400% of the Federal poverty line will still qualify for subsidies if their cost of purchasing a benchmark health insurance plan exceeds 8.5% of income.  Without this extension, in 2022, the income cap would have been $51,520 for an individual in most of the country, and $106,000 for a family of four.

7) Modifies Medicate Part D and Medicare Advantage Plans to:

  • cap monthly insulin costs at $35, starting in 2023.
  • eliminate additional out-of-pocket costs, starting in 2024, for enrollees who end up with enough covered prescription drug bills to qualify for catastrophic drug coverage.  This differs from today’s structure where enrollees still pay 5% of the bills even after they hit catastrophic coverage protections.
  • cap annual out-of-pocket drug costs at $2000, starting in 2025
  • allows Medicare to negotiate certain drug prices with manufacturers for the first time starting in 2026.

8) Increases funding for the IRS by $80 billion.  While this isn’t a provision directed at individuals, it’s possible it could impact you since a bigger IRS budget means more enforcement (i.e. audits), but, on the bright side, better taxpayer service.  Commissioner Rettig has written a letter describing what the IRS plans to do with the money, in case anyone wants his perspective.

Proposed Credits & Deductions in the Upcoming Infrastructure & Broader Spending Plan

In the last post, I covered the potential “pay-fors” that would… well… pay for some of the spending, deductions, and credits enabled by the proposed infrastructure and broader spending legislation that Congress is working on passing via reconciliation this fall.  That proposed legislation is currently 645 pages, and subject to many changes as it makes its way through committees in both chambers.  There are many proposed changes to the tax code (enough to make the TCJA look simple) to go along with various spending appropriations.  The majority have to do with infrastructure incentives and credits for business.  But, there are a few notable ones for individuals/families.  Keeping in mind that this is just a proposal, here is a non-exhaustive list of the provisions that may provide some benefit to you:

  • Increases the credit for adding solar to a residence back to 30% of the cost.  Extended through 2031, then phases down to 26% in 2032, 22% in 2033, and then expires.  Includes residential battery storage technology as well.
  • Extends the non-business energy property credit (energy-efficient windows, doors, furnaces, , water heaters, etc.) to 2031 and expands the credit to 30% of the cost from the current 10%.  Additionally, it eliminates the (frustrating and hard to track) lifetime limit and replaces it with a $1200 annual limit.
  • Creates a new Plug-In Electric Vehicle Credit ranging from $4000 to $12,500 (limited to 50% of the cost), depending on battery capacity, assembly location, and what portion of the vehicle is made with domestic parts.  It won’t apply to vehicles weighing more than 14,000 lbs or vehicles with an MSRP exceeding certain thresholds. The credit phases out starting at income of $400K single / $800K Joint.
  • Creates a new Plug-In Electric Vehicle Credit for purchase of used qualifying vehicles.  Much lower income thresholds, lower credit amount, and the vehicle must be at least 2 years old.
  • Creates a new credit for certain electric bicycles, and reinstates the employer provided fringe benefit for bicycle commuting (with the max benefit raised to $52.50/mo from $20/mo)
  • Extends the enhanced Child Tax Credit ($3k per child age 6-17, $3600 per child age 5 or under), as created by the American Rescue Plan (ARPA) earlier in 2021, including monthly checks of half of the expected amount of the credit, through 2025 (previously expired in 2021).  However, instead of defaulting to including the monthly checks, the default will be to not have monthly checks sent and the taxpayer will have to opt in in some manner to be determined at a later date by the Treasury/IRS.  Income phaseouts continue to apply as defined in ARPA (phaseout for the original $2k is $200K Single / $400K Married, and for the enhanced $1600 it’s $75K Single / $150K Married.
  • Makes the Child Tax Credit permanently (until changed by future legislation) refundable.  This means the credit amount can exceed the taxpayer’s total tax liability for the year and the taxpayer will still get the full credit.  No longer reverts back to the pre-ARPA rules after 2025
  • Extends the $500 credit for “Other Dependents” through 2025.
  • Makes the Dependent Care Credit changes from APRA permanent.  That increased the maximum qualifying expenses to $8K for one child or $16K for two or more children.  The amount of the credit starts at 50% of qualifying expenses.  If income exceeds $125K, the credit percentage is reduced, until it drops to 20% at $400K.  It then completely phases out if income exceeds $500K.  Also makes permanent the income exclusion for employer provided Dependent Care Assistance (e.g. Dependent Care Flexible Spending Accounts) at the ARPA enhanced level of $10,500 per year (up from the $5k limit pre-ARPA).  Note that employers still need to adopt this change in order for employees to take advantage of it.
  • Creates a new credit for caregivers of 50% of qualified expenses up to a $4K maximum credit.  Begins to phase-out at $75K of income.  This is for people who care for those with long-term care needs in their own home.
  • Enhances the Earned Income Credit.
  • Creates a new credit for contributions to a Public University that provide infrastructure for research.  The credit, available through 2032, is 40% of the amount contributed to the qualifying project (lots of rules as to what qualifies).  Note: this is a credit, not a deduction, so you don’t have to itemize to take it.

American Rescue Plan Act (ARPA) of 2021

With the latest covid relief / stimulus bill now signed into law, I wanted to give the usual summary of the key financial planning / tax-related elements that may impact clients. Another round of stimulus checks has gotten most of the press to date about the $1.9 trillion legislation, but there are quite a few provisions, including those stimulus checks, in here that are worth noting:

  • Direct Payments (Stimulus Checks) – $1400 per eligible individual, $2800 for joint filers, and $1400 per qualifying dependent (which include full-time students under 24 and adult dependents this time). The payment begins phasing out at $75k per individual filer and $150k per joint filer, and is completely phased out at $80k individual and $160k joint, regardless of the size of the payment (different that in previous rounds of stimulus). See the graphic from the Tax Foundation below for a visual depiction of the phaseouts. The IRS will use 2020 income if available, otherwise 2019 to determine the payments. These will be reconciled on 2021 tax forms so that anyone who should have received a payment based on 2021 income and didn’t, will get a credit for the missing amount. Anyone who received a payment and shouldn’t have based on 2021 income will not have to pay it back. Payments are set to start going out the weekend of 3/13/21.
  • Unemployment Benefits:
    • Extension to the first week of September of the additional $300/week of Federal unemployment benefits which is added on to existing state benefits.
    • New provision that exempts the first $10,200 per person of unemployment benefits from tax for 2020. Limited to those with AGI < $150k single or joint (all filers, no phaseouts). The IRS is expected to provide guidance in the coming weeks for those who already filed their 2020 returns and treated the unemployment benefits as taxable. Note that this is for 2020 only. It currently does not include 2021 benefits. The IRS has released guidance on how this should be reported for tax purposes for those who have not filed yet. Tax software will need to be updated over the next few weeks to reflect the change and make sure everything passes through to state returns correctly.
  • Child Tax Credit – formerly $2k per child under age 17, now raised to $3k per child for children age 6-17 and $3600 for those under age 6. Lower income phaseouts apply to the expanded credit through (starting at $150k married, 75k single and reducing the enhancement portion of the credit by $50 for each $1k of income over the threshold). The law also instructs the IRS to pay the Child Tax Credit periodically (monthly?) for the 2nd half of 2021, meaning additional periodic checks to be received by qualifying taxpayers. Keep an eye on this. While we don’t know yet how it will be implemented, if you start receiving checks for the credit through the year and you have withholding set to take the credit into account, then you’ll need to adjust withholding or you’ll wind up owing the credit back in April. When the IRS sets this up, they’re supposed to provide a website which will allow you to opt out. Keep in mind that the IRS hasn’t even opened some mail from mid-2020 yet, so they have a bit on their plate. A good article from Kiplinger in available with more details.
  • Dependent Care Credit – For 2021 only the credit will be worth up to 50% (was 35%) of eligible expenses up to $8k for one child or $16k for more than one (was $3k/$6k) with a sliding scale % based on income. It is reduced at income levels over $125k and reduced below the previous lower bound of 20% at income levels over $400k (i.e. this is a reduction in credit available at those levels vs. previous years).
  • Dependent Care Flexible Spending Accounts (DCFSA) – for 2021 only, you can contribute a max of $10,500 (instead of the usual $5k) toward a DCFSA. But, your employer’s plan has to enact this change and they are not forced to do so. They’d also have to allow mid-year changes in contribution level (which was authorized under the last covid bill). Note that because of the enhancement to the Dependent Care Credit (see above), and the fact that any contributions to a DCFSA reduce the amount of expenses that qualify for the Dependent Care Credit, many taxpayers (generally AGI< mid $100,000’s) would be better off foregoing a DCFSA and using the Dependent Care Credit instead. Again, just for 2021.
  • Affordable Care Act (ACA) – increases subsidies for plans purchased through the ACA exchanges. This includes the level of subsidy for a given income level and the eligibility for any subsidy for a given income level (now > 400% of the Federal poverty level). Total cost after subsidy, regardless of income cannot exceed 8.5% of income. Effective for 2021 and 2022. Also, big change, excess subsidies received for 2020 only will not need to be paid back. And, (even bigger!) if you have any unemployment benefits in 2021, you’re subsidy for 2021 only is 100% of the cost of the second highest Silver plan available to you, regardless of your actual income.
  • COBRA Subsidies – covers 100% (!!!) of COBRA premiums for eligible individuals who are unemployed (lost job or reduced hours, not voluntary termination), and their families, Effective from enactment through 9/30/2021.
  • Earned Income Tax Credit (EITC) – for 2021:
    • raises the maximum credit for those without children to ~$1500
    • makes 19-24 year old workers eligible if they are students
    • makes those over age 65 eligible
    • can use 2019 income to determine EITC instead of 2021.
  • Student Loan Forgiveness – will not be taxable for 2021-2025 (normally debt forgiveness is taxable as income). Note that the new law does not actually forgive any student loans.
  • Employee Retention Credit (ERC) – extended to 12/31/2021, adds new clauses that allow newly formed businesses post 2/15/20 to claim (which wouldn’t be able to claim the credit because they don’t have the required decline in revenue), and adds special benefits to “severely financially distressed employers” with revenue down 90%+ to the same quarter of 2019.
  • Paid Leave Credits – credits for employers that provide paid leave under certain situations (which is no longer mandated). For 4/1/21 – 9/30/21, eligible wages climb to $12k per employee (from $10k), includes vaccination leave as qualified, and increases the leave for self-employed individuals to 60 days (from 50).
  • Executive Compensation Limits – Businesses currently can’t deduct compensation > $1M for CEO, CFO, and the next three highest paid employees. This legislation increases that to the next eight highest paid employees starting in 2027.
  • $15B for new Economic Injury Disaster Loans (EIDL) grants and clarification that EIDL grants are non-taxable and the expenses the money is used to pay are still deductible.
  • $22B toward emergency rental assistance for individuals and families struggling to pay rent and utilities. Renters must meet several conditions to receive the assistance.
  • $10B toward assistance for homeowners struggling to pay their mortgage, utilities and other housing costs.
  • $86B toward rescuing multiple soon-to-fail-without-help union pension plans. The plans that will receive the money cover approximately 11 million people in various unionized trades.
  • $25B Restaurant Revitalization Fund to be administered by the SBA. These are non-taxable grants for qualified businesses.
  • $7B additional funding for Paycheck Protection Program (PPP), mostly under the same rules as before.
  • $350 Billion for state and local government support, which could create more state/local level tax changes or stimulus actions.
  • Various other spending allocations for K-12 schools, vaccines, testing, etc., that are beyond the scope of the financial planning discussions so I won’t dive into the details here. You can read the table of contents of the actual bill/law and dive into those areas if you’re interested. The non-tax provisions are mostly written in English rather than legalese/financialese.

Dec 2020 COVID Relief

This one hasn’t gotten a fancy name yet (that I know of) like the CARES Act since it is attached to the 2021 Consolidated Appropriations Act (the “2021 spending bill” that funds the government), so I’m just referring to it as the Dec 2020 COVID Relief Bill. It was signed into law on 12/27/2020 and consists of ~$900B of funding, not to be confused with the $1.4T in general “keep the lights on” type funding in the rest of the Act. The full Consolidated Appropriations Act is 5,593 pages. I cannot claim to have read the whole thing. However, I’ve skimmed through it and read enough summaries now to feel comfortable calling out the top line virus-related items and the key tax and personal financial planning items for you. This list below includes the COVID Relief Bill portions, the relevant tax and financial planning-related items from the rest of the Act, and a few other callouts. Here goes:

  • Direct Payments (“stimulus checks”) – ~$170B for direct payments to taxpayers. $600 per individual earning $75k or less, or $1200 per couple earning $150k or less, +$600 per dependent child under age 17 (e.g. $2400 for a family of 4 earning $150k or less). Above the $75k/150k threshold, the payment amount drops by $5 for every $100 of income until it is completely phased out. Income used is the lower of 2019 or 2020. Payments will be sent out by direct deposit or check based on 2019 income, but can be trued up on the 2020 tax return if income was lower or more children were born. For more details, see this fantastic article from Forbes, and this nifty chart from the Tax Foundation
  • Unemployment Benefits – $120B. extends emergency Federally funded benefits (including that for self-employed) for 11 weeks and provides a $300/week Federal amount in addition to existing state-provided benefits.
  • Paycheck Protection Program (“PPP”) – $284B extends PPP v 1.0 and issues a new round of funding for PPP v2.0 Additionally, reverses the IRS interpretation that business expenses used to qualify for PPP forgiveness were not deductible. They clarified that those expenses are deductible. It also broadens the list of qualifying expenses for forgiveness to include operating expenses, supplier costs, property damage costs, and PPE expenses, still subject to the limitation that non-payroll expenses cannot exceed 40% of the forgiven loan amount. Not exactly auto-forgiveness for small loans (many were calling for this), but the Act does tell SBA to create a one-page form to apply for auto-forgiveness (*smacks my head*) for loans < $150k. Side note: Auto-forgiveness = Ease of use as the main course, but with a large side of increased fraud. I think this auto-forgiveness means that an applicant would get forgiveness even if payroll was reduced during the covered period, so long as the PPP money wasn’t used improperly and no fraud was involved. PPP v 2.0 is for businesses w/ < 300 employees (<500 if accommodation or food service) and that had at least one quarter of 2020 with revenue at least 25% lower than the same quarter in 2019. Max loan is $2M or 2.5x avg monthly payroll whichever is less, (3.5x for accommodation or food service).
  • Vaccines, Testing, Health – $63 billion for vaccine distribution, testing and tracing, and other health-care initiatives, most of which will be administered by the states.
  • Transportation – $45 billion for transit agencies, airlines ($15B specifically allocated for airline payroll support), airports, state departments of transportation, and rail service.
  • Education & Childcare & Broadband Support – $82B in funding for colleges and schools, including support for HVAC upgrades to mitigate virus transmission + $10 billion for child care assistance + $7B for enhanced broadband access.
  • Nutrition & Agriculture – $26B for food stamps, food banks, school/daycare feeding programs, and payments, purchases, and loans to farmers and ranchers impacted by covid-related losses.
  • Rental Assistance – the eviction moratorium is extended through 1/31/2021 (for now). $25B is authorized to help troubled renters and landlords by paying future rent and utilities as well as back rent owed or existing utility bills.
  • SBA Loan Relief – The CARES Act authorized SBA to pay up to six months of principal and interest on existing Section 7 SBA Loans for impacted borrowers. This Act extends that by another three months.
  • Economic Injury Disaster Loans (EIDL) – $20B in additional funding for businesses in low-income communities + $15B of dedicated funding is set aside for live venues, independent movie theatres, and cultural institutions.
  • Credit for Paid Sick + Family Leave – this was created by the Families First Act and is now extended through 3/31/2021 (was 12/31/2020).
  • Employee Retention Tax Credit – created under the CARES Act, is extended through 6/30/2021 and improved. It’s now up to 70% of wages capped at $10k of wages per employee per quarter, instead of 50% capped at $10k in total. Business qualifies if revenue for the quarter was down at least 20% from the same quarter in 2019. Important: it appears this credit is now allowed along with a PPP Loan (under the CARES Act, it was one or the other), though you still can’t double count the same wages for the credit and PPP forgiveness.
  • Payroll Tax Deferral – the president signed an executive order in September allowing employers to opt in to a payroll tax deferral for employees. Almost no one did (except the government) because it was too risky on the employer and deferral for a few months was pretty meaningless. Those that did were supposed to repay the deferral by 4/30/2021. That has now been extended to 12/31/2021, giving more time to spread out the payback.
  • Lookback for Earned Income Tax Credit and Refundable Child Care Credit – taxpayers can, but don’t have to, use 2019 income instead of 2020 income to qualify for these in 2020.
  • Residential Solar Tax Credit – this was reduced to 26% of the cost of the project in 2020, scheduled to drop to 22% in 2021, and then eliminated after 2021. The Act extends the 26% credit for 2021 and 2022, dropping to 22% for 2023. It is now eliminated in 2024, unless additional legislation is passed.
  • Employer Paid Student Loans – Employers can continue to give up to $5250 per year tax-free to employees for student loan principal and interest repayment (either direct to the loan or to the employee to pay the loan). This is extended through 2025 (was set to expire at the end of 2020).
  • Tuition Deduction / Lifetime Learning Credit – The tuition deduction, unless extended in other legislation, is gone. Instead, there is now a higher income threshold for the Lifetime Learning Credit, now sync’d up with the American Opportunity Credit phaseout ($80-90k single / $160-180k married).
  • Student Loan Payment Forbearance – this WAS NOT extended in the Act. Student loan payments resume 1/1/2021.
  • Retirement Plan Distributions / Loans – The CARES Act allowed up to $100k of distributions from retirement plans for covid-impacted individuals, waiving the 10% penalty, and allowing the amounts to be repaid over 3 years such that no net tax would be owed. It also raised the 401k loan amount to the minimum of $100k or 100% of the balance (from $50k or 50%). These were effective through 12/30/2020. This treatment is now extended to non-covid-related Federally declared disaster areas between 1/1/2020 and 2/25/2021 where the individual has their principal place of residence and is economically impacted by the disaster.
  • Retirement Plan Required Minimum Distributions – these were waived by the CARES Act for 2020. This WAS NOT extended by the new Act. RMDs will be required for 2021 unless additional legislation is passed.
  • Medical Expenses Deduction – the deduction for medical expenses has been bouncing back and forth between a 7.5% AGI floor and a 10% AGI floor for years. It’s 7.5% for 2020 and was supposed to revert back to 10% for 2021. The Act sets this to 7.5% PERMANENTLY. One thing I can stop writing about every year!
  • Mortgage insurance premiums – remain deductible for another year through 2021.
  • The taxability of forgiven housing debt (foreclosure/short-sale) – is extended to 2025, but the amount is reduced to $375k single / $750k married.
  • Charitable Giving – The $300 charitable contribution deduction for those who don’t itemize is sticking around for 2021 now and joint filers will get $600 instead of $300 for 2021. Remember this is for cash donations only and donations to a Donor Advised Fund don’t count. And, the cap on the portion of your income you can give via a cash donation (other than to a Donor Advised Fund) and deduct stays at 100% for 2021.
  • Healthcare & Dependent Care Flexible Spending Account (FSA) flexibility – The Act allows plans to allow 2020 unused amounts can carryover to 2021 and 2021 can carryover to 2022. Additionally, the Act allows 2021 elections to be modified even though benefits enrollment is now closed for most employees. However, this only updates what the law will allow employer plans to do. The plans themselves would have to adopt the change in order for employees to be able to use the increased flexibility. Check with your benefits rep to see if your plan is adopting / has adopted the change.
  • Educator’s Deduction – this is the $250 per year that teachers get to deduct for money spent on school supplies for their classrooms (as if that’s all teacher’s spend on their classrooms). PPE and cleaning supplies now qualify for that $250.
  • Business Meals – for business owners, restaurant meals are 100% deductible for 2021 and 2022 (formerly only 50% deductible) as long as they meet the requirements of the previous 50% deduction (i.e. non-lavish, taxpayer is present, etc.). Note that this still does not include employee expenses, only schedule C filers. Applies to dine-in or take-out.
  • Surprise Billing Fix – an attempt to reduce the amount of “surprise billing”, which typically occurs when a patient goes to an in-network facility and uses an in-network doctor, but is provided services by an out-of-network provider along the way (e.g. anesthesiology, transportation, etc.). There are lots of carve outs and exceptions, so I’m skeptical of how much this really fixes, but it’s a start at least, going into effect in 2022. I’m sure much more will be written on the implications here soon.
  • Financial Aid Changes – Student Loan Application (FAFSA) simplification – lots of changes here, but they don’t go into effect until 2023. In the interest of time, I’ll table this one for now. Just know there are changes coming. Additionally, the number of Pell Grants will be increased.

In order to reach a bipartisan agreement, both of the following WERE NOT INCLUDED in the Act:

  • Business liability protection (i.e. can’t sue if you get covid at a business as long as they were following CDC guidelines), which Republicans wanted
  • State and Local Aid above and beyond that specifically budgeted for the items in the Act, which Democrats wanted.

I suspect there will be more to come, though the type of relief/stimulus likely depends on the outcome of the GA Senate run-offs. There is already a proposal to increase the $600 direct payments to $2000, supported by the House and the President, but that will have a difficult time in the Senate. We’ll have to wait and see what happens.

Coronavirus Aid, Relief, and Economic Security (“CARES”) Act

This week Congress passed and the president signed into law the CARES Act. This 335-page (840 under bill format), $2 trillion dollar piece of legislation contains a LOT of complicated provisions. I’ve skimmed through it and read multiple commentaries in detail to try to create a summary of the financial pieces that are most important to PWA clients. As always, there will be a lot of interpretations, details, and guidance that will follow from the IRS, the Dept. of Labor, the Treasury, SBA, etc. Here’s what I understand at this point:

· Direct Payments to Individuals – $1200 for individuals ($2400 for joint taxpayers) that are not dependents of another taxpayer + $500 for each child under age 17. The payments are reduced if income exceeds $75k (single), $112,500 (head of household), or $150k (joint), by $5 for every $1k in excess of the threshold (see the Tax Foundation’s excellent graphic on how this will work). For threshold income, the IRS will use 2019 adjusted gross income (AGI) for the initial payment. If you haven’t filed your 2019 return by the time the payment is calculated, they’ll use 2018 instead. The amounts you receive with then be reconciled against income on your 2020 tax return. If you should have received a payment based on 2020 income but did not, you’ll get the excess as a credit on your 2020 return. If you received more than you should have based on 2020 income, my understanding is that you will not have to repay the difference. Because of this, it may be best to make sure you get your 2019 tax return in ASAP if you’d qualify based on 2019 income, but not 2018 income, or to delay 2019 if you’d qualify based on 2018 but not 2019. These direct payments will be made by 4/6/2020 via direct deposit on file with the IRS as of the latest filed tax returns, or along with Social Security payments if you receive Social Security, or by check if you don’t receive Social Security and there is no direct deposit information on file or if the direct deposit information cannot be used for some other reason. The IRS is going to provide a phone number for issues around payments that aren’t received but should have been received. If you just cringed/laughed at the idea of millions of people potentially calling one IRS number and sitting on hold for days, so did I. It is what it is.

· Expanded Unemployment Benefits – $600 / week increase in benefits + 13 more weeks of benefit available + an expansion of benefits to those who normally don’t qualify (self-employed, independent contractors, and those with limited work history) + elimination of the one-week waiting period. Note that the average unemployment compensation amount prior to this expansion was only $372 / week nationwide, so an additional $600 / week is significant. For some workers, it may even be more than they were earning while working.

· Partially Forgivable Small Business Loans – The “Paycheck Protection Program”. $350 billion authorized. Businesses (including sole-proprietors and independent contractors) with 500 employees (full or part-time) or less, can borrow up to the lower of $10M or 2.5x monthly payroll (avg of the last year), excluding any amount over $100k per year for each individual. Self-employment income supposedly counts as payroll. I would venture to guess that S-Corp profits do not, since they don’t pay payroll taxes. Loan proceeds can be used for payroll support, employee salaries, mortgage payments, rent, utilities, and any other debt obligations incurred before the covered period. Loans are non-recourse (no personal guarantee or collateral needed) unless the proceeds are used for a non-approved purpose. Interest can’t exceed 4%. Loans can be for up to 10 years. Borrowers will be eligible for loan forgiveness for an amount equaling payroll (max $100k per employee) and operating costs for the first 8 weeks after the loan is issued. However, the loan forgiveness is subject to maintaining the same number of employee equivalents (FTEs) from 2/15/2020 to 6/30/2020 as it had in 2019 or from 1/1/2020 to 2/15/2020 and not cutting salaries/wages for those earning $100k or less by more than 25%. If you don’t maintain payroll, loan forgiveness is reduced / eliminated by a very complicated formula that isn’t clear to me. Please see this brochure produced by the Chamber of Commerce with more details on these loans. More great information is available in this Forbes article from 3/28, including some of the unanswered questions, specifically around how all of this works for businesses with no employees (like independent contractors). There are lots of open questions. If you own a small business, stay tuned for more info soon from the SBA, along with a list of eligible lenders that will facilitate the loan. These loans are going to be administered by the SBA which currently has nowhere near the manpower to handle what’s being asked of them (my opinion). The CARES Act recommends that SBA direct lenders to “prioritize small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals, women, and businesses in operation for less than 2 years.” I suspect there will be a lot of “first-come-first-served” prioritization as well, so getting to the front of the line once lenders are ready to accept applications could mean a lot if your business is dependent on this program for survival. You must apply by 6/30/2020 to be eligible for one of these loans. Keep in mind that there is an existing program via the SBA that has nothing to do with the CARES Act which is already available to provide loans up to $2M to small businesses impacted by covid-19. You can find more information at https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources, under the topic for Economic Injury Disaster Loan Program. The CARES Act also provides funding to lenders who agree to forbearance on existing SBA loans during the covid-19 emergency.

· Larger Business Loans – $500 billion authorized. Direct loans to corporations or via purchase in primary or secondary markets. Directed by Treasury with oversight from a bipartisan congressional oversight committee. A limited portion is made available for airlines, air cargo carriers and businesses critical to maintaining national security. Borrowers must be created, organized and have a significant presence in the United States. All loans are supposed to be secured and are intended for businesses that don’t have reasonable access to other credit. Borrowers can’t buy back their own stock, issue dividends, or reduce their workforce during the term of the loans. There are also compensation caps for highly-paid employees during the term of the loan. While the terms of the loan are at the discretion of Treasury, they must come along with a warrant (long-term term right to purchase stock at a fixed price), equity interest, or senior debt instrument. These are intended to compensate the government for the loan. Proceeds pay for the program, with any excess going to Social Security. Any company where a controlling interest (defined as over 20 percent of controlling stock) is held by president, the vice president, executive department head, or Member of Congress or their families is rendered ineligible for financial assistance in the form of loans or investments provided under the CARES Act.

· Employee Retention Tax Credit – Credit for businesses that were impacted by covid-19 (government stay-at-home orders, restrictions on operations, or at least a 50% decline in year-over-year revenue for at least one quarter). The credit is for 50% of the first $10k of qualified wages paid to employees between 3/12/2020 and 12/31/2020. For businesses with more than 100 employees, qualifying wages are those paid to employees while they’re unable to do their job. For those with 100 employees or less, qualifying wages are all wages paid. Employers who receive a loan under the “Paycheck Protection Program” are not eligible for this credit.

· Employer Payroll Tax Delay – employers can delay paying their half of payroll tax on wages for the remainder of 2020 to 2021 and 2022 (half each). Does not apply if the employer receives forgiveness of any loan made under the “Paycheck Protection Program” provisions described above.

· Retirement Plan Early Distributions – new hardship withdrawals up to $100k allowed for those with covid-19-related needs. The 10% penalty is waived. Tax is still due, but it can be spread over three years (it will be spread over three years by default, unless you elect out). You can also recontribute the amounts that were withdrawn within three years and face no additional tax. The re-contributions are not subject to the IRS contribution limits for any given year. To qualify, you have to get the virus, a spouse or dependent does, or you have to have virus-related financial difficulty which is pretty liberally defined (laid off, furloughed, hours reduced, income reduced, can’t work due to childcare needs, etc.).

· Retirement Plan Loans – increases the size of allowed loan to 100% or $100k, whichever is less from the current 50% or $50k, whichever is less. Loan payments due between 3/27/2020 and 12/31/2020 can be delayed for up to a year.

· Retirement Plan Required Minimum Distributions – these are suspended for all retirement plans and inherited retirement plans for 2020.

· Employer Payments For Student Loans – Up to $5250 of employer payments toward employee student loans would not be considered taxable to the employee.

· Individual Student Loan Payments – Federal student loan payments can be suspended, interest-free, through Sep 2020. Borrowers may need to take action though to stop any scheduled recurring payments (if desired). They may not be stopped automatically. No credit reporting impact.

· Mortgage Forbearance – individuals/families impacted by covid-19, with Federally-backed mortgages (FHA, Fannie, Freddie, VA, etc.) can request forbearance (no payments) for up to 180-days. If necessary, this can be extended by an additional 180-days. No penalties apply during forbearance, though interest continues to apply as scheduled.

· HSA/HRA/FSA Qualified Expenses – modified to allow over-the-counter drugs, not just prescription drugs, as qualified medical expenses. Also adds various feminine products to the allowed list of eligible expenses. I’m not sure that the broad inclusion of over-the-counter drugs was intended, but based on the changes made to the tax code by the CARES Act, it seems like that’s what happened. More to come on this as clarification emerges.

· Charitable Contributions – previously only allowed for those who itemize, a new, seemingly permanent tax deduction has been added for up to $300 of charitable contributions for those who don’t itemize. It’s what is known as an “above the line” deduction.

· Net Operating Loss (NOL) – losses in 2018, 2019, or 2020 can be carried back 5 years (have to elect out of that treatment if you don’t want it). TCJA previously eliminated carrybacks of two years so that all losses had to be carried forward. For individuals, losses can offset up to 100% of income vs. TCJA’s 80% limitation.

There are many other provisions providing funding for and modifying regulations dealing with health (including requiring that insurers cover all covid-19 treatments and vaccine and make all testing free to individuals, funding for hospitals, telehealth, drug development and access, the CDC, the VA and the building/rebuilding of the strategic national stockpile of medical supplies), education, state & local government, the arts, and banking.

Budget Deal Extends Some Expired Tax Provisions

The budget deal that was agreed upon in Congress and signed by the President early this morning includes “Tax Extenders”, which extend some previously expired tax provisions retroactively to 2017. These include the exclusion from gross income of discharge of qualified principal residence indebtedness, the ability to deduct mortgage insurance premiums, the deduction for college tuition and fees, and the credit for residential energy improvements (windows, etc.). See this summary (https://email.steptoecommunications.com/22/1412/uploads/summary-of-tax-extenders-agreement.pdf) for a full list. Make sure to consider these items when gathering inputs for your 2017 taxes.

Individual Income Tax Provisions of the TCJA – now updated w/ details of the final bill

The Conference Committee has now released their Conference Report which resolves the differences between the bills passed by the House and the Senate.  In a previous post, I noted those differences.  In this post, I’ll note the corresponding provisions in the conference report.  This final bill will need to be passed on both chambers and then signed by the president to become law.  Prediction markets currently give a ~90% chance of this happening prior to the end of 2017, a ~5% chance of it passing in the first half of 2018, and a ~5% chance of it not passing at all.  So this is pretty close to a done deal.

  • Income Tax Rates – lower rates for all, temporarily through 2025, but different from both the House and Senate plans.  See comparison of today’s rates vs. the rates in the final bill below, courtesy of The Tax Foundation.  All rates revert to 2017 law (indexed for inflation) after 2025 unless extended by another Congress.

rates

  • Kiddie Tax – follows the Senate proposal, such that a child’s investment income is taxed with trust and estates rates (higher), vs. being taxed at the parent rate after a threshold.  Reverts to existing law after 2025.
  • Tax Rates for Dividends and Long-Term Capital Gains – remain as they are today.  0% applies if income puts you in the old 0%, 10%, or 15% tax bracket, 15% applies if in the prior 25%, 33%, or 35% bracket, and 20% applies if in the old 39.6% bracket.
  • Capital Gain / Loss Tax-Lot Accounting – the provision to force First In First Out (FIFO) treatment on sales was eliminated.  Current rules which allow LIFO, specific, ID, or FIFO remain in effect.
  • Alternative Minimum Tax (AMT) – follows the Senate proposal.  AMT is not repealed, but the exemptions amounts are increased and the phaseout income at which the exemption begins to be reduced is also increased.  When combined with the SALT limitations and the elimination of miscellaneous itemized deductions subject to the 2% of AGI floor (see below), AMT shouldn’t impact nearly as many taxpayers as it previously did.  Reverts to existing law after 2025.
  • Standard Deduction – increased to $12k single, $24k MFJ.  This increase, when combined with the SALT limitations and the elimination of miscellaneous itemized deductions subject to the 2% of AGI floor (see below) means fewer taxpayers will itemize their deductions.  Reverts to existing law after 2025.
  • Child Tax Credit – credit is increased to $2k per child ($500 for other dependents like parents), and begins to phase out at $200k single, $400k MFJ.  Reverts to existing law after 2025.
  • Adoption Credit / Credit for Plug-In Vehicles / Hope Scholarship Credit / Lifelong Learning Credit – no change to any of these.   Existing law remains in effect.
  • Itemized Deductions Limited – Keep in mind though that with the higher standard deductions, fewer people will need to itemize so loss of some of the below isn’t as bad as it seems.  All of these revert back to existing law after 2025.  These include:
    • State and Local Taxes (SALT) and / or Property Taxes will only be deductible up to a combined max of $10k.  Note that this is the same for Single and MFJ, thereby imposing a marriage penalty via this deduction.  Additionally a provision was added to disallow a 2017 deduction on 2018 state/local income taxes that are prepaid so that taxpayers can’t game the system by prepaying future year’s worth of state taxes in 2017.
    • Mortgage interest deduction would only be allowed on up to $750k of new mortgage debt (vs. $1M today), and there would be no more $100k of HELOC debt interest deduction allowed. Existing mortgages (closing prior to 12/15/2017 or with a binding contract prior to that date) would be grandfathered in the old rules.
    • Casualty loss deduction eliminated (unless specifically authorized by special disaster relief).
    • Medical expense deduction remains, with the AGI threshold reduced from 10% to 7.5% for 2017 and 2018 only (reverts to 10% thereafter).
    • Misc. Itemized Deductions that are subject to the 2% of AGI floor (see IRS Publication 529 for a list of these deductions) are all eliminated.
  • Other deductions / exclusions:
    • Moving expenses deduction eliminated.  Reverts after 2025.
    • Alimony deduction eliminated and alimony would no longer be taxable to the receiver.  Effective starting 2019 and does not revert after 2025.
    • Student loan interest deduction is NOT eliminated.  Existing rules are retained.
    • Tuition and fees deduction is NOT eliminated.  Existing rules are retained.
    • Sec 121 exclusion of gain on the sale of a principal residence is NOT changed.  The 2 of 5 year rule remains in effect with no income caps.
  • Retirement Accounts – generally unchanged except that 401k plan loan repayments get a little easier in the case of a termination. Rather than needing to repay the loan within 90 days of termination or treating the loan as a distribution, borrowers would have the ability to repay the loan to a new retirement plan or IRA by the due date of that year’s tax return (including extensions).
  • 529 College Savings Plans  enhanced to allow up to $10,000/year of tax-free distributions for private / homeschool K-12 expenses.  Edit 12/19/17 – after Senate amendments to conform to Reconciliation rules, the “homeschool” portion of this provision was dropped.  529 withdrawals cannot be used for homeschool expenses.
  • Estate Tax – is not repealed, but the exemption would be doubled (~$11M per person / $22M per couple).
  • ACA Individual Mandate – repeals the “Individual Mandate” (the provision that requires everyone to have health insurance, or pay a penalty on their taxes), by reducing the penalty for not having insurance to $0.
  • Employer Benefit Changes – No change to dependent care FSAs, adoption benefits, tuition reimbursement plans,  reduced / free tuition for employees of educational institutions, pre-tax transportation plans (parking / commuting). free gym memberships.  Tax-free moving expenses reimbursements would no longer be allowed though.   There would also no longer be deductions to the employer for (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items.

Over the next few days, I’ll post my thoughts on what, if anything, we can do before the end of 2017 to take advantage of (or limit the disadvantages of) the new tax laws going into effect.  Stay tuned!

Individual Income Tax Provisions of the Tax Cuts & Jobs Act – Updated w/ Senate Plan

The Senate has now released its version of the Tax Cuts & Jobs Act.  I thought it would be helpful to re-post the House plan points from my last blog post and update with how the Senate plan would treat each item.  Again, all of this is subject to change before a final bill is put together and voted upon.  Each chamber needs to pass its version of the bill (after votes on various amendments).  Then the two bills will be reconciled in Committee to produce a final bill.  Then both chambers need to pass that bill.  Then the President needs to sign it.  Long path ahead with many changes likely.

  • Income tax rates fall for everyone. The current 7 tax brackets would be compressed into 5: 0%, 12%, 25%, 35% and 39.6% (the 0% rate applies due to deductions and exemptions which subtract from income causing the first $x of income to be subject to no tax).. For singles, the 12% rate would run to $45,000, the 25% rate would top out at $200,000, the 35% one would end at $500,000, and the 39.6% rate would kick in for taxable incomes that exceed $500,000. For marrieds, 12% rate up to $90,000, 25% would max out at $260,000, 35% would end at $1 million, and the 39.6% rate would apply above $1 million. The 12% on the first $45k or 90k of income wouldn’t apply for those in the top tax bracket. Note that this schema reduces the marriage penalty that exists in the current tax brackets since the married brackets (with the exception of the 25% bracket) are double the single brackets.

Senate Plan: 8 brackets, like today, but with different rates and caps.  Those rates are 0%, 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.6%, with the top bracket at $500k single, $1M married, like the House plan.  Would also change the “kiddie tax” such that a child’s investment income is taxed with trust and estates rates (higher), vs. being taxed at the parent rate after a threshold.

  • No change in tax rates for dividends and long-term capital gains. 0% applies if income puts you in the old 0%, 10%, or 15% tax bracket, 15% applies if in the prior 25%, 33%, or 35% bracket, and 20% applies if in the old 39.6% bracket.

Senate Plan is the same and specifically calls out that only the FIFO (first in first out) method of tax lot reporting will be allowed for the determination of gain (or average cost in the case of funds).

  • AMT is completely repealed.

Senate Plan is the same.

  • The standard deduction is increased for everyone, but the personal exemption no longer applies. The standard deduction would be $24k for married filers (vs $13k now) and $12k for singles (vs. $6500 now). The $4150 per person personal exemption (which was phased out for upper incomers and treated differently for those in AMT) is eliminated.

Senate Plan is the same, thought the house plan eliminated the extra standard deduction for those age 65 and over and those who are blind while the Senate retains those additional standard deduction amounts.

  • The child tax credit is increased. It would be $1600 per dependent age 16 and under (vs $1000 today). The income phaseouts are increased as well ($75k single / $115k married now to $115k single / $230k married).

Senate Plan would increase the credit to $1650 per dependent, raise the age to age 17 and under, and raise the income phaseouts to $500k single, $1M married.

  • A new, temporary $300 tax credit for each adult taxpayer and each dependent over age 16. This applies for 5 years only and essentially offsets part of the loss of the personal exemption. It also phases out at higher incomes.

Senate Plan does not include this new temporary credit.

  • Several credits go away. These include:
    • Adoption Credit
    • Credit for purchase of Plug-In Vehicles
    • Hope Scholarship Credit & Lifetime Learning Credit, though the larger American Opportunity Credit remains.

Senate Plan retains these credits

  • Several itemized deductions go away or are reduced. Keep in mind though that with the higher standard deductions, fewer people will need to itemize so loss of some of the below isn’t as bad as it seems.  These include:
    • State and local tax deduction eliminated.  Senate Plan is the same.
    • Property tax deduction limited to $10k per year and only applies to real estate (no more auto registration deduction).  Senate Plan completely eliminates the property tax deduction.
    • Mortgage interest deduction would only be allowed on up to $500k of new mortgage debt (vs. $1M today), only for primary residences (vs. first and second homes today), and there would be no more $100k of HELOC debt interest deduction allowed. Existing mortgages (closing prior to 11/2/2017 or with a binding contract prior to that date) would be grandfathered in the old rules.  Senate Plan retains the $1M cap, but still eliminates the $100k of HELOC debt interest deduction.
    • Casualty loss deduction eliminated (unless specifically authorized by special disaster relief).  Senate Plan is the same.
    • Medical expenses > 10% of AGI deduction eliminated.  Senate plan retains this deduction.
    • Tax prep fees, and unreimbursed employee expenses (including mileage) would be eliminated.  Senate plan also eliminates these deductions, but goes a step further by eliminating all Misc. Itemized Deductions that are subject to the 2% of AGI floor (see IRS Publication 529 for a list of these deductions)
  • Other deductions / exclusions go away or are reduced.  These include:
    • Moving expenses deduction eliminated.  Senate Plan is the same.
    • Alimony deduction eliminated and alimony would no longer be taxable to the receiver.  Senate plan does not modify alimony rules.
    • The student loan interest deduction is eliminated.  Senate plan retains this deduction.
    • The tuition and fees deduction is eliminated.  Senate plan retains this deduction.
    • Sec 121 exclusion of gain on the sale of a principal residence is significantly changed. Instead of the exclusion applying regardless of income as long as the seller owned and lived in the residence for 2 of the last 5 years, the exemption would now be phased out for upper incomers (starts at $250k individual and $500k married) and the own/live requirement would be 5 of the last 8 years.  Senate Plan also includes the 5 of the last 8 condition, but excludes the income caps.
  • Retirement accounts are unchanged (401ks, Traditional IRAs, Roth IRAs, SEPS, SIMPLES, etc. Note that there are strong rumors that the Senate plan will change this, removing or reducing the ability to save pre-tax for retirement.

Senate Plan makes some changes to 457, 403b, and 401k plans so that they all use the limits of today’s 401k plans (no additional catch-up for 403b and governmental 457 plans going forward).  It also clarifies that the aggregate contribution rules apply across all retirement plans, not just retirement plans of the same type.  Finally, it eliminates “catch-up” contributions for individuals whose wages exceeded $500k in the prior year.

  • 529 College Savings Plans would be enhanced. Specifically:
    • $10,000/year of tax-free distributions would be allowed from 529 college savings plans for (private) elementary and high school expenses
    • 529s could be created for unborn children

Senate Plan does not include these changes.

  • The estate tax would be reduced and then eliminated. The exemption would be doubled for 2018 and eliminated completely in 2024. The gift tax system would be kept in place to prevent gaming the income tax system by shifting assets to those in lower tax brackets.

Senate Plan doubles current exemptions, but keeps the estate tax in place.

  • ACA (“Obamacare”) provisions remain unchanged. The Individual Mandate (requiring health insurance or paying a penalty) remains, as do the other ACA-imposed Medicare surtaxes on wages and investment income.

Senate Plan also leaves the ACA unchanged.  

  • Some employee benefits changes. These include:
    • No more dependent care FSAs
    • No more adoption benefits
    • No more tuition reimbursement plans and no more reduced / free tuition for employees of educational institutions.
    • No more moving expense reimbursements.
    • No more pre-tax transportation plans (parking / commuting).
    • No more free gym memberships or similar amenities without including their value in taxable income.
    • 401k hardship withdrawals would still be subject to tax and penalties, but could now include employer contributions and employees would no longer be prevented from making new contributions to the plan for 6 months.
    • 401k plan loan repayments get a little easier in the case of a termination. Rather than needing to repay the loan within 90 days of termination or treating the loan as a distribution, borrowers would have the ability to repay the loan to a new retirement plan or IRA by the due date of that year’s tax return (including extensions).

Senate Plan does not contain this language except for the moving expense reimbursements.  Those would not be allowed in the Senate plan either.  There would also no longer be deductions to the employer for (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items.

Individual Income Tax Provisions of the Tax Cuts & Jobs Act

The House of Representatives recently released the first draft of the long-anticipated tax overhaul bill, now called the “Tax Cuts & Jobs Act”. The bill itself is 429 pages of text, addressing both Corporate and Individual tax laws. I’m 100% confident that the final bill, after reconciliation with the Senate’s still-unreleased-version, will look remarkably different than this first version. As such, we don’t recommend any action at this time. But, I still thought it would be helpful for you to understand what’s being proposed. Some quick highlights on the Individual side of the bill are below:

  • Income tax rates fall for everyone. The current 7 tax brackets would be compressed into 5: 0%, 12%, 25%, 35% and 39.6% (the 0% rate applies due to deductions and exemptions which subtract from income causing the first $x of income to be subject to no tax).. For singles, the 12% rate would run to $45,000, the 25% rate would top out at $200,000, the 35% one would end at $500,000, and the 39.6% rate would kick in for taxable incomes that exceed $500,000. For marrieds, 12% rate up to $90,000, 25% would max out at $260,000, 35% would end at $1 million, and the 39.6% rate would apply above $1 million. The 12% on the first $45k or 90k of income wouldn’t apply for those in the top tax bracket. Note that this schema reduces the marriage penalty that exists in the current tax brackets since the married brackets (with the exception of the 25% bracket) are double the single brackets.
  • No change in tax rates for dividends and long-term capital gains. 0% applies if income puts you in the old 0%, 10%, or 15% tax bracket, 15% applies if in the prior 25%, 33%, or 35% bracket, and 20% applies if in the old 39.6% bracket.
  • AMT is completely repealed.
  • The standard deduction is increased for everyone, but the personal exemption no longer applies. The standard deduction would be $24k for married filers (vs $13k now) and $12k for singles (vs. $6500 now). The $4150 per person personal exemption (which was phased out for upper incomers and treated differently for those in AMT) is eliminated.
  • The child tax credit is increased. It would be $1600 per dependent age 16 and under (vs $1000 today). The income phaseouts are increased as well ($75k single / $115k married now to $115k single / $230k married).
  • A new, temporary $300 tax credit for each adult taxpayer and each dependent over age 16. This applies for 5 years only and essentially offsets part of the loss of the personal exemption. It also phases out at higher incomes.
  • Several credits go away. These include:
    • Adoption Credit
    • Credit for purchase of Plug-In Vehicles
    • Hope Scholarship Credit & Lifetime Learning Credit, though the larger American Opportunity Credit remains.
  • Several itemized deductions go away or are reduced. Keep in mind though that with the higher standard deductions, fewer people will need to itemize so loss of some of the below isn’t as bad as it seems.  These include:
    • State and local tax deduction eliminated
    • Property tax deduction limited to $10k per year and only applies to real estate (no more auto registration deduction).
    • Mortgage interest deduction would only be allowed on up to $500k of new mortgage debt (vs. $1M today), only for primary residences (vs. first and second homes today), and there would be no more $100k of HELOC debt interest deduction allowed. Existing mortgages (closing prior to 11/2/2017 or with a binding contract prior to that date) would be grandfathered in the old rules.
    • Casualty loss deduction eliminated (unless specifically authorized by special disaster relief).
    • Medical expenses > 10% of AGI deduction eliminated.
    • Tax prep fees, and unreimbursed employee expenses (including mileage) would be eliminated.
  • Other deductions / exclusions go away or are reduced.  These include:
    • Moving expenses deduction eliminated.
    • Alimony deduction eliminated and alimony would no longer be taxable to the receiver.
    • The student loan interest deduction is eliminated.
    • The tuition and fees deduction is eliminated.
    • Sec 121 exclusion of gain on the sale of a principal residence is significantly changed. Instead of the exclusion applying regardless of income as long as the seller owned and lived in the residence for 2 of the last 5 years, the exemption would now be phased out for upper incomers (starts at $250k individual and $500k married) and the own/live requirement would be 5 of the last 8 years.
  • Retirement accounts are unchanged (401ks, Traditional IRAs, Roth IRAs, SEPS, SIMPLES, etc. Note that there are strong rumors that the Senate plan will change this, removing or reducing the ability to save pre-tax for retirement.
  • 529 College Savings Plans would be enhanced. Specifically:
    • $10,000/year of tax-free distributions would be allowed from 529 college savings plans for (private) elementary and high school expenses
    • 529s could be created for unborn children
  • The estate tax would be reduced and then eliminated. The exemption would be doubled for 2018 and eliminated completely in 2024. The gift tax system would be kept in place to prevent gaming the income tax system by shifting assets to those in lower tax brackets.
  • ACA (“Obamacare”) provisions remain unchanged. The Individual Mandate (requiring health insurance or paying a penalty) remains, as do the other ACA-imposed Medicare surtaxes on wages and investment income.
  • Some employee benefits changes. These include:
    • No more dependent care FSAs
    • No more adoption benefits
    • No more tuition reimbursement plans and no more reduced / free tuition for employees of educational institutions.
    • No more moving expense reimbursements
    • No more pre-tax transportation plans (parking / commuting).
    • No more free gym memberships or similar amenities without including their value in taxable income.
    • 401k hardship withdrawals would still be subject to tax and penalties, but could now include employer contributions and employees would no longer be prevented from making new contributions to the plan for 6 months.
    • 401k plan loan repayments get a little easier in the case of a termination. Rather than needing to repay the loan within 90 days of termination or treating the loan as a distribution, borrowers would have the ability to repay the loan to a new retirement plan or IRA by the due date of that year’s tax return (including extensions).

There are many other (and mostly more complicated) changes on the corporate and small business side of things. I suspect even more of those proposed changes will be substantially modified before the final bill. In an effort to keep the length of this post manageable, I’ll refrain from getting into the Corporate changes at this time.

The effective date for most of the changes, on both the Individual and Corporate side, would be the start of 2018, though that could also change. Current prediction markets (via PredictIt) imply an 86% chance of the House voting on the Tax Cuts & Jobs Act in 2017, an 81% chance of passing it (including any changes between now and the final bill) in 2017, a 47% chance of a Senate vote on their version of the bill in 2017 and a 27% chance of the Senate passing their version in 2017. There is also a market on a Corporate tax cut by 3/31/2018, giving a 65% chance of success. If those are correct, it would mean progress by end of year, but likely not passage until sometime in early 2018 (if at all).