House Releases Proposed Tax Bill
The House Committee on Ways and Means has released draft text of a budget bill and a section by section summary ahead of a full committee markup of the bill scheduled today. While the proposal represents an early marker of what is expected to be a rigorous process through reconciliation, the following provisions are highlighted.
ABLE Provisions Extended
The bill would make permanent the following provisions affecting Achieving a Better Life Experience (ABLE) accounts that are set to expire at the end of 2025. The annual contribution limit is based on the federal annual gift tax exclusion limit. A change in the base year from 1997 to 1996 would effectively increase this limit. The bill would also allow the following.
• Disabled individuals who are employed could contribute an additional amount to their ABLE account. This additional contribution could not exceed either the prior year’s federal poverty level for a one-person household, or the beneficiary’s yearly compensation.
• Disabled individuals who make qualified contributions to their ABLE account would qualify for a nonrefundable Saver’s Credit of up to $1,000.
• Disabled individuals could roll over assets from a 529 education savings account to an ABLE account. Amounts less than or equal to the annual ABLE contribution limit would not be subject to income taxation.
529 Account Usage Expanded
The proposal would clarify and expand the term “qualified higher education expense” to include the following for elementary, secondary, or home schooling.
• Tuition
• Curriculum and curricular materials
• Books or other instructional materials
• Online education materials
• Tuition for tutoring or educational classes outside of the home
• Fees for a nationally standardized achievement test or placement examination or fees for a college admission
• Fees for dual enrollment in an institution of higher education
• Educational therapies for students with disabilities provided by an accredited practitioner
In addition, post-secondary credentialling expenses (including tuition, fees, books, supplies, and equipment required for enrollment or attendance in a recognized postsecondary credentialing program) would be treated as qualified higher education expenses. Distributions from 529 college savings plans for qualified higher education expenses are tax-exempt distributions.
New Savings Account Proposed
Similar to the 401kids, Universal Savings Account, and Baby Bonds proposals that preceded it, new money accounts for growth and advancement, or “MAGA accounts” would establish a new kind of savings account for children in order to promote financial security. Parents of eligible children under the age of eight could open an account at a bank or similar financial institution, with contributions limited to $5,000 per year, indexed for inflation. Distributions would not be allowed before age 18 and allowed on a limited basis until age 25. Account holders could access funds for qualified purposes for higher education, training programs, small business loans, or a first-time home purchase. The earnings portion of a distribution taken for qualified purposes would be taxed at long-term capital gain rates, while distributions for other purposes would be taxed as ordinary income.
The bill proposes a pilot program for certain newborns whereby a parent or guardian could open an account on behalf of the eligible child and the Treasury would contribute $1,000 to her account.
HSA Usage Expanded
Proposals that would expand coverage and use of health savings accounts (HSAs) in a variety of ways are noted below.
• Individuals with high deductible health plans (HDHPs) could enroll in direct primary care arrangements and remain HSA eligible, with certain limits on distributions for these services.
• The definition of an HDHP would be expanded to allow bronze and catastrophic health insurance plans purchased on the Exchange to be eligible plans for HSA purposes.
• Discounted or free health care offered at an employer’s worksite would not disqualify an individual from HSA coverage.
• The definition of qualified medical expenses would be expanded to include certain amounts paid for physical activity and fitness, up to $500 per taxable year for single filers and $1,000 for joint return or head of household filers.
• Spouses would be allowed to make catch-up contributions to the same HSA when both individuals attained age 55 or older.
• Employers could allow the rollover of a health reimbursement arrangement or flexible spending account to an HSA as a qualified HSA distribution upon establishing coverage under the HDHP.
• Certain medical expenses incurred within 60 days of establishing the HSA could be treated as qualified medical expenses.
• Coverage would be expanded to provide that an individual is HSA eligible even if the individual’s spouse is enrolled in an FSA.
• Increased HSA contributions of up to $4,300 would be allowed for individuals with single coverage if their modified adjusted gross income (MAGI) is less than $75,000, or $8,550 for family coverage if their MAGI is less than $150,000. These amounts would be indexed for inflation and phased out at $100,000 MAGI for single coverage and $200,000 MAGI for family coverage.
IRC Sec. 162(m) Aggregation Rule Added
Under current law, certain companies cannot take a tax deduction for compensation that exceeds $1 million per year for certain individuals.
The proposal adds aggregation rules under IRC Sec. 162(m) for purposes of the deduction limit related to compensation to specified covered employees of a publicly held corporation that is a member of a controlled group.
There were no retirement specific proposals in this draft bill text. The legislation will be reviewed further for any additional items of significance. FuturePlan will continue to monitor developments and provide details.