The Big Picture
The first overhaul of the tax code in thirty years passed the US House of Representatives a second time after being modified and was approved by the US Senate this last week. This occurred as a result of Senate Democrats identifying several provisions that the Parliamentarian said violated the “Byrd rule.” If that wasn’t enough, the conference report was also found to violate the “PAYGO” rule. For a while, it was thought that the President would need to sign the bill after the first of the year in order not to trigger cuts in mandatory spending programs like Medicaid. As described below, a waiver was added to the stopgap spending measures that enabled the President to sign the bill on December 22nd before he left for Florida.
Congress also passed a stop-gap spending bill this past week, averting a partial government shutdown, at midnight Friday, but pushing into January final decisions on spending, immigration, health care and national security. Among the issues still to be resolved is federal aid for victims of recent hurricanes and wildfires. The House passed a separate $81 billion disaster relief bill, but the Senate did not immediately take it up amid Democratic objections.
The stopgap extends federal funding through January 19 and provides temporary extensions of the Children’s Health Insurance Program, which has languished politically since it expired in October; a Veterans health-care program; and a warrantless surveillance program set to expire January 1. The stopgap spending measure passed the House 231 to 188 and cleared the Senate 66 to 32. These votes are the last in 2017. The votes came after House GOP leaders scrambled Wednesday and Thursday to gather votes to keep the government open.
Another controversial provision was also added to the House stopgap: a measure waiving mandatory cuts to entitlement programs forced by the passage of the tax bill. Without the waiver, the President was going to have to wait until 2018 to sign the tax bill. In the Senate, Sen. Rand Paul (R-KY), a fierce advocate for lower federal spending, accused his fellow Republicans of reneging on calls to cut spending and forced a separate vote on the waiver. The waiver passed 91 to 8, averting the mandatory cuts. This made it possible for the President to sign the tax reform legislation on December 22, 2017.
Just in case you missed it, here are a few key items:
1. The links to the bill and the summary are below.
2. Property taxes can be prepaid, but not income taxes
· Linked is a copy of the Conference Report language that describes the provision preventing state income taxes from being prepaid. However, property taxes can be prepaid. Some municipal jurisdictions have announced that they are "open for business" and have put extra personnel on board to accept pre-paid property taxes.
Tax-Writers Hone in on Higher Education Taxation
Higher education was a big issue in tax reform, with damaging provisions passed in the House version of the bill purportedly increasing the cost of attending college by $65 billion over the next 10 years, according to the American Council on Education. This continues to be a major partisan issue. 58% of Republicans said colleges and universities have a negative impact on society in a recent Pew survey, while 72% of Democrats said higher education had a positive impact. Even though the tax cut and jobs act final legislation was modified significantly in the final bill, it still contains a number of provisions that negatively impact higher education. Furthermore, the House Ways and Means Committee Chairman Kevin Brady insists he will continue to pursue more reforms in a separate bill next year.
529 College Savings Account--These tax-free college investment accounts were expanded to K-12 private school expenses. This could impact savings for college as taxpayers take advantage of it for private schools at the K-12 level.
American Opportunity Credit–This tax credit remains at $2,500 per child per year with qualified college expenses. There are income limits based on the tax filing status.
College Tuition Benefit not taxed –House bill made it taxable. It is still considered an outside resource for need-based financial aid determination.
Tuition Reimbursement by Employers--House bill eliminated it, but was added back in so still tax-free up to $5,250.
Coverdell Saving Plans–House bill listed to be eliminated especially after the 529 expansion. The Coverdell Plan will remain the same as current law.
Graduate School Scholarships–There is no change in the final bill. This too was listed as a change in the House bill but will remain the same as current law.
Hope Scholarship and Lifetime Learning Credit –House bill eliminated both of these income tax credits but they remain unchanged.
Student Loan Deduction–The House bill eliminated this deduction, but will remain same as current law. There are limitations based on how you file your taxes.
Student Loan Discharge due to Death and Disability are tax exempted-- Present law was these types of student loans forgiveness were taxable. This will remain in place but will be sunset in 2025. Other Income Drive Repayment Loan forgiveness such as IBR, PAYE, REPAY are still taxable forgiveness. Public Service Loan Forgiveness is tax-free. Changes in these plans may be addressed in the Higher Education Act being reviewed now.
Work-Related Education--Employees may not deduct work related education expenses. This provision is part of the larger removal of deductions subject to the 2 percent floor. There is no protection for currently enrolled education programs.
Tax on Endowments--The bill imposes a 1.4 percent excise tax on the net investment income of colleges and universities with at least 500 students, with more than 50 percent of their student body in the United States, and whose assets not used to carry out the educational mission are $500,000 per student. There are only about 20 schools that this will still apply. The tax does not apply to state colleges and universities. It was a significant improvement over the House bill, which had a cap of $250,000.
Charitable Contribution Limit--The contribution limit increases to 60 percent of adjusted gross income for the amount of cash that can be deducted annually as charitable contributions to public charities, including colleges and universities.
Charitable Deduction for Rights to Seating at Athletic Events-- Donors may no longer deduct 80 percent of the amount paid for the right to purchase tickets for college athletic events.
UBIT Computations for Not for Profit Institutions--The bill requires Unrelated Business Income Tax (“UBIT”) computations, including the use of Net Operating Losses (“NOLs”), to be made on a line-of-business basis. Pre-2018 NOL carryovers may be used to offset income from any unrelated activity. No definition is provided for a separate business activity. The final bill did not subject royalty income from the sale of names and logos to UBIT or the research exception as proposed by the House.
501(c)(3), Advance Refunding and Tax Credit Bonds--While the benefits for many tax-exempt bonds survive including 501 (c)(3), the interest exclusion for advance refunding bonds is repealed. The bill also repeals the authority to issue tax-credit and direct pay bonds after 2017.
Highly Paid Employees of Not for Profits Taxed--Public and private institutions will pay a 21 percent excise tax on any amount above $1 million in compensation paid to the five highest-paid employees. This continues for these employees even if their status as one of the highly paid employee changed. In addition, severance payments to highly compensated employees that exceed three times base compensation are subject to a 21 percent excise tax paid by the institution. It excludes compensation paid to medical professionals related to providing medical (but not to other) services. Medical professionals include doctors, nurses, and veterinarians.
Employee Fringe Benefits of Not for Profit Institutions--Institutions will pay taxes on the value of providing specified nontaxable fringe benefits to employees for certain transportation fringe benefits and on-premises gyms and other athletic facilities.
Moving Expenses--Employer paid or reimbursed moving expenses are taxable to the employee and employees may no longer deduct moving expenses. Neither provision applies to military personnel or their families.