On Friday, December 15, the House-Senate Conference Committee report for H.R. 1, the proposed Tax Cuts and Jobs Act (TCJA), was filed. Both chambers are expected to vote on the legislation this week, with the House poised to vote on Tuesday, December 19.
The Joint Committee on Taxation’s preliminary budget estimate of the Conference Committee bill for H.R. 1 indicates that the measure would add $1.456 trillion to the federal deficit over Fiscal Years 2018-2027. H.R. 1 would expand education savings accounts to accommodate tax credits for private elementary and secondary education tuition payments up to $10,000.
The legislation would limit deductibility up to $10,000 for state and local tax payments (property, income and sales taxes). H.R. 1 would retain the current teacher tax deduction; and, would limit the ability of school districts and other units of state and local government to finance capital improvements and other operations through changes to municipal bond programs.
The National School Boards Association (NSBA) and other groups representing public education and state and local governments have expressed opposition to the legislation because of its impact on our public school districts and related governmental services. As noted by The Washington Post, the “measure curtails the federal deduction for state and local taxes.
Advocates worry that states, counties and cities will have a tougher time raising money for schools — which get nearly all of their money from state and local tax revenues — because those taxes will no longer be fully deductible.”
Along with NSBA, the Association of School Business Officials International has dissented to the bill’s provision to end cost-effective, tax-free “advance refund bonds” that allow districts to refinance school bond debt at lower interest rates.
The following excerpts from the Conference Committee Report on H.R. 1 are applicable to the priorities NSBA has outlined.
Tuition Tax Credits for Non-Public Schools
Consolidation and modification of education savings rules — the conference agreement follows the Senate amendment.
The Senate amendment modifies section 529 plans to allow such plans to distribute not more than $10,000 in expenses for tuition incurred during the taxable year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. Thus, under the provision, although an individual may be the designated beneficiary of multiple accounts, that individual may receive a maximum of $10,000 in distributions free of tax, 64 regardless of whether the funds are distributed from multiple accounts. Any excess distributions received by the individual would be treated as a distribution subject to tax under the general rules of section 529.
The provision also modifies the definition of higher education expenses to include certain expenses incurred in connection with a homeschool. Those expenses are (1) curriculum and curricular materials; (2) books or other instructional materials; (3) online educational materials; (4) tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not related to the student); (5) dual enrollment in an institution of higher education; and (6) educational therapies for students with disabilities.
Effective date: The provision applies to distributions made after December 31, 2017.
State and Local Tax Deductibility (SALT)
Modification of deduction for taxes not paid or accrued in a trade or business — Conference Agreement.
Present law Individuals are permitted a deduction for certain taxes paid or accrued, whether or not incurred in a taxpayer’s trade or business. These taxes are: … property taxes; (ii) State and local personal property taxes; … At the election of the taxpayer, an itemized deduction may be taken for State and local general sales taxes in lieu of the itemized deduction for State and local income taxes.
Under the provision a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for the aggregate of (i) State and local property taxes not paid or accrued in carrying on a trade or business, or an activity described in section 212, and (ii) State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the taxable year. Foreign real property taxes may not be deducted under this exception. The above rules apply to taxable years beginning after December 31, 2017, and beginning before January 1, 2026. … Thus, under the provision, an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.
Effective date: The provision is effective for taxable years beginning after December 31, 2016.
School (Municipal) Bonds
- Repeal of advance refunding bonds (that allow districts to refinance debt service payments for school buildings and other purposes at a lower interest rates) — A refunding bond is defined as any bond used to pay principal, interest, or redemption price on a prior bond issue (the refunded bond). Generally, governmental bonds and qualified 501(c)(3) bonds may be advance refunded one time (under current law).
- Repeal of tax credit bonds — Present law in general tax-credit bonds provide tax credits to investors to replace a prescribed portion of the interest cost. The borrowing subsidy generally is measured by reference to the credit rate set by the Treasury Department. Current tax-credit bonds include qualified tax credit bonds, which have certain common general requirements, and include new clean renewable energy bonds, qualified energy conservation bonds, qualified zone academy bonds (that have been used for school repairs and modernization as well as professional and curriculum development), and qualified school construction bonds (that were authorized for calendar years 2009 and 2010).
Teacher Tax Deduction
Modification of deduction for educator expenses — the conference agreement retains the present-law above-the-line ($250) deduction and limit for certain expenses of eligible educators.
Present law in general, unreimbursed business expenses incurred by an employee are deductible, but only as an itemized deduction and only to the extent the expenses exceed two percent of adjusted gross income. However, in the case of certain employees and certain expenses, a deduction may be taken in determining adjusted gross income (referred to as an “above-the-line” deduction), including expenses of … eligible educators. Eligible educators are elementary or secondary school teachers, instructors, counselors, principals, or aides in a school for at least 900 hours during a school year. An eligible educator may take an “above-the-line” deduction for ordinary and necessary expenses incurred (1) by reason of participation in professional development courses related to the curriculum or students the educator teaches, or (2) in connection with books, supplies, computer and other equipment, and supplementary materials to be used in the classroom. The deduction may not exceed $250 (for 2017) in expenses, and is indexed for inflation.
Effective date: The provision is effective for taxable years beginning after December 31, 2017. Conference Agreement