Senate Passes Its Version of Tax Bill
The Senate has passed by a vote of 51-50 its version of the tax reconciliation bill. The bill substantially modified the terms to create a new early wealth building account, known as a “Trump account” from an earlier Senate draft. Like the House-passed bill and consistent with an earlier draft, the Senate bill would extend Achieving a Better Life Experience (ABLE) provisions that are set to expire—but with a slight increase to the Savers Credit. The bill also includes 529 education account proposals that were passed in the House, with modifications. Homeschooling expenses have been removed and the annual expense limitation for qualified higher education expenses has been doubled to $20,000. Select health savings account provisions were also added to the Senate passed bill.
The legislation will now move to the House as the President’s self-imposed July 4 deadline quickly approaches. An overview of relevant provisions follows.
New Savings Account Proposed
A new kind of savings account (i.e., “Trump account”) would be available for children to promote financial security. A starter individual retirement account (IRA) could be established for children under the age of 18, with nondeductible contributions limited to $5,000 per year, indexed for inflation. Employer contributions of up to $2,500, indexed for inflation would be allowed, as well as general funding contributions from states and nonprofit organizations. Distributions would not be allowed before age 18. At that time, the account could be accessed for any purpose, similar to a traditional IRA. Amounts that are not basis would be taxable as ordinary income. The 10% additional tax would apply to distributions before age 59½, unless an exception applies. The bill proposes a pilot program for certain newborns whereby the Treasury would contribute $1,000 to her account. No contributions would be allowed until 12 months after the date of enactment.
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.
HSA Expansion
Two proposals that were part of the House bill were added to the Senate-passed bill. Individuals with high-deductible health plans (HDHPs) could enroll in direct primary care arrangements and remain HSA eligible, with certain limits on distributions for those services. The definition of an HDHP would also be expanded to allow bronze and catastrophic health insurance plans purchased through exchanges. Another proposal would allow permanent HDHP waiver for telehealth services, and would apply to plan years beginning after December 31, 2024.
