Senate Releases Draft of Tax Bill
The Senate Finance committee released bill text for inclusion in the Senate’s version of the budget reconciliation bill yesterday. Like the House passed bill, the Senate Finance draft would extend ABLE provisions that are set to expire. The bill also includes 529 education account proposals that were passed in the House, except that the Senate Finance version no longer includes homeschooling expenses as eligible qualified higher education expenses. A proposal to create a new child savings account, or “Trump account” has also been included in the Senate Finance draft. Noticeably absent from the text, however, are several provisions aimed at expanding and improving health savings accounts.
The bill is likely to undergo revisions prior to a vote in the Senate, and the House will either need to take up the bill or the two chambers will work to reconcile differences in the two bills before being voted on again. The President has indicated he would like the tax bill on his desk for signature by July 4th. Details of relevant provisions of the Senate Finance committee draft are below.
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 or secondary education.
• 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
A new kind of savings account (i.e., “Trump account”) would be available for children 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.