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Sunday October 22, 2017

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IRS Highlights Education Benefits

With America's children back in school this fall, the Service highlighted education benefits for teachers and students in IR-2017-163 and 166.

Teachers have three potential benefits. An educator may deduct "above the line" amounts up to $250 so long as they are unreimbursed business expenses. This deduction is available for kindergarten, elementary or secondary school staff who teach at least 900 hours per year.

A second benefit for teachers who itemize deductions is to claim "out-of-pocket items such as class supplies, training and travel." This is a miscellaneous deduction.

The third option is for teachers who are continuing their education. They may qualify for the Lifetime Learning Credit or American Opportunity Tax Credit.

Students may also benefit from the Lifetime Learning Credit or American Opportunity Tax Credit. In addition, they may have a Qualified Student Loan used to pay higher education expenses for themselves or a spouse. If so, they may qualify for a special deduction for paying interest on a student loan. To qualify, their modified adjusted gross income (MAGI) in 2017 must be under $80,000 for a single taxpayer or $165,000 for a joint return.

Work-related education may also qualify for an itemized deduction. Applicable education that is used to improve work skills may be deductible for both employees and the self-employed. Self-employed persons may reduce their self-employment tax and their income tax.

Another excellent benefit for funding education is a Sec. 529 plan. Section 529 plans are administered by each state. They permit contributions of cash up to five annual exclusions ($70,000 total transfer in 2017). The contributions of cash will be invested and grow tax free. You can withdraw tax free any payments of tuition, fees and other qualified expenses. The expenses must be at a postsecondary institution.

Editor's Note: Additional information for teachers and students is available on www.irs.gov. Another helpful website to learn about Sec. 529 plans is www.savingforcollege.com.

Big Six Tax Reform Plan


On September 27, the "Big Six" tax reform plan was released. The six leaders are Treasury Secretary Steven Mcuchin, White House Economic Council Director Gary Cohn, Senate Majority Leader Mitch McConnell, Senate Finance Committee Chair Orrin Hatch, Speaker of the House Paul Ryan and House Ways and Means Committee Chair Kevin Brady.

The tax reform plan has nine goals or sections.

1. Individual Rates - The current seven tax brackets are reduced to three brackets for individuals. The bracket percentages are 12%, 25% and 35%. However, there may be an additional higher bracket to ensure that upper-income taxpayers pay about the same amount that they are paying under the current system.
2. Standard Deduction - The standard deduction will be doubled for both single and married taxpayers. This will eliminate the need to itemize deductions for approximately 90% of Americans and will simplify their tax returns.
3. Itemized Deductions - Most of the itemized deductions are eliminated. There will still be deductions for home mortgage interest and charitable contributions. Retirement plans and higher education benefits will continue, but may be modified.
4. Estate Tax and Alternative Minimum Tax - Both the estate tax and the alternative minimum tax are eliminated in order to simplify the tax system.
5. Small Business Taxes - The tax rate for small businesses and other "pass-through" entities will be reduced to 25%.
6. Corporate Tax Rates - To promote competitiveness and increase employment, the corporate rate is reduced to 20%.
7. Capital Investments - There will be expanded opportunities to "expense" or deduct capital investments.
8. Competitive Corporations - To enhance the competitive nature of American businesses, there will be an elimination of the incentive to keep profits overseas.
9. Repatriation - American businesses will be encouraged to return most of the $3 trillion in wealth currently held in overseas accounts.

Washington Tax Debate Heats Up


With the release of the "Big Six" tax reform plan, leaders from the White House, Senate and House flooded Washington media with their comments.

Treasury Secretary Steven Mnuchin spoke to national media and at a Washington forum. He promised increased economic growth to cover part of the tax reform cost. Mnuchin stated, "We think there will be $2 trillion of growth, so we think this tax plan will cut down the deficit by a trillion dollars."

A strident debate is already occurring over the proposed elimination of state and local tax deductions. Senators and Representatives from New York, California, New Jersey, Illinois and other high-tax states are strongly opposing the repeal of this deduction. In response to these statements, Mnuchin continued, "I think longer-term, getting the Federal government out of subsidizing states is the right thing to do. It is just not fair."

House Ways and Means Committee Chair Kevin Brady (R-TX) responded similarly with a defense of the repeal of state and local tax deductions. Brady noted he had received "very good suggestions on how to address that issue in a very positive way forward."

Minority Leader of the House Nancy Pelosi (D-CA) expressed concern about the plan. She noted, "We know the cost of the Republican tax plan will be catastrophic for our budget and for the future of the working people in our country. It will explode the deficit, adding trillions of dollars to the deficit. It will be a back door attempt to devastate the bedrock initiatives that families rely on, like Medicare, Medicaid and Social Security."

Senate Finance Committee Chair Orrin Hatch (R-UT) supported the plan. He noted, "For too long, Americans have been bogged down by an outdated tax code that runs counter to the goal of growth and fails to promote jobs and investment here at home. Principals in the Senate, House and Administration recognize this challenge and worked with members to find consensus and produce a unified framework that marks a significant shift away from America's broken tax system."

The Ranking Member of the House Ways and Means Committee is Richard Neal (D-MA). He agreed with Minority Leader Pelosi that there are serious issues with the plan. Neal stated, "A key component to this 'middle-class first' test is that any tax reform plan must place workers first. The benefits should not skew towards the wealthy. In fact, we believe that the wealthy should not receive any tax cuts in these efforts. Instead, tax reform should be primarily focused on raising the living standards of the middle-class."

Editor's Note: The next step in the tax reform process is for the House and Senate to pass a budget. The proposed Senate budget envisions $1.5 trillion in expenditure reductions over the next decade. This would permit a tax bill to be passed with cuts of that amount for American taxpayers. Rep. Peter Roskam (R-IL) is Chairman of the Ways and Means Tax Policy Subcommittee. He indicated it is probable the House bill for tax reform could be marked up by the Ways and Means Committee by the end of October. If this does occur, then it may still be possible for the House and Senate to pass a tax bill prior to the end of 2017.

Applicable Federal Rate of 2.2% for October -- Rev. Rul. 2017-20; 2017-41 IRB 1 (19 Sep 2017)


The IRS has announced the Applicable Federal Rate (AFR) for October of 2017. The AFR under Section 7520 for the month of October will be 2.2%. The rates for September of 2.4% or August of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published September 29, 2017

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