Monday February 6, 2023
Good News For Teachers
It has been a challenging two years for public and private school teachers. Many classrooms were locked down and students had to adjust to online learning. This was a difficult time for both teachers and students. Fortunately, nearly all students have now returned to the classroom.
In IR-2022-70, the Internal Revenue Service reminded teachers that there is an expanded above-the-line deduction for year 2022. The teacher out-of-pocket classroom expense deduction increases from $250 to $300 this year.
For years 2002 through 2021, the educator expense deduction limit was $250 per year. For educators who are filing their 2021 tax return prior to April 18 of this year, the deduction limit is $250.
However, the deduction will be $300 for 2022 and will increase in $50 increments in future years based on inflation. For two eligible educators who are married, the deduction limit is $600, but the maximum for each individual is $300.
The educator expense deduction is available for teachers, counselors, principals or aides in classes from kindergarten through grade 12. They must be involved in education activity for at least 900 hours each year.
The educator expense deduction is available for multiple purposes.
1. Books and Supplies - Materials used in the classroom such as books, writing instruments, tablets and other teaching items are generally deductible.
2. Equipment - Many teachers need desktop computers, laptops, software and related services.
3. COVID-19 Protection - Face masks, disinfectant, hand soap, hand sanitizer, disposable gloves, physical barriers and other items recommended by the Centers for Disease Control and Prevention (CDC) are deductible.
4. Professional Courses - If an educator requires additional training related to the curriculum he or she teaches, this is a qualified deduction.
5. Expense Limits - There are limitations on the deduction. Home schooling or nonathletic supplies for health or physical education courses do not qualify.
Editor's Note: The IRS reminds taxpayers who are completing their 2021 return that the limit is $250. Married eligible educators may qualify for a deduction up to $500, with a limit of $250 per teacher. The IRS urges all taxpayers to file electronically to receive a prompt tax refund.
Bipartisan SECURE 2.0 Act Passes House
By an overwhelming 414-5 vote on March 29, 2022, the House of Representatives passed a $35 billion retirement enhancement bill. The combined bill included the Retirement Security and Savings Act of 2021 (S. 1770), and the Retirement Improvements and Savings Enhancement (RISE) Act (H.R. 5891). It is often called the SECURE 2.0 Act.
The bipartisan bill was strongly supported by House Ways and Means Committee Chair Richard Neal (D-MA). He stated, "This bipartisan legislation will expand automatic enrollment in 401(k) plans by requiring 401(k), 403(b), and SIMPLE plans to automatically enroll participants upon becoming eligible, with the ability for employees to opt out of coverage. Expansion of automatic enrollment will significantly increase participation in retirement savings at work."
Neal also highlighted the new start-up credit and the change for the required minimum distribution age from 72 to age 75. This change takes place in steps over the next decade.
The bill was cosponsored by House Ways and Means Committee Ranking Member Kevin Brady (R-TX). Brady indicated, "With this bill, we build on the landmark provisions in the SECURE Act, enabling more workers - especially those of low income and modest income - to begin saving earlier and giving them peace of mind as they plan for the future."
There are four specific provisions designed to encourage saving for retirement:
1. Access to Workplace Retirement Plans - The Act creates incentives for small businesses to create plans or join together with other businesses to create plans at modest administration cost.
2. Business Tax Credit - Small businesses that create a new plan may receive a credit. The credit could match up to $1,000 in contributions for a worker.
3. Catch-Up Amounts - Individuals who are age 50 and above currently are permitted to make "catch-up" contributions. The amount of the contribution will generally be increased to $10,000 per year. This will enable those individuals to build larger retirement balances prior to their retirement date.
4. Required Minimum Distributions - The change over a decade for the RMD age will transition from age 72 to age 75. By allowing Americans to delay withdrawals for a period of time, their account balances and retirement security will be enhanced.
IRA Rollover to Life Income Gifts
The Securing a Strong Retirement Act includes Section 310 that permits rollovers from traditional IRAs into life income plans.
The Committee on Ways and Means staff have published a "Section by Section Summary" of the SECURE 2.0 bill. The IRA rollover provisions are a limited version of the Legacy IRA Act previously introduced in the House and Senate.
The SECURE 2.0 Act includes a provision that allows a one-time distribution of $50,000 to a life income plan. The plans that qualify include an immediate charitable gift annuity, a standard charitable remainder unitrust or a charitable remainder annuity trust.
The life-income rollover will become effective in "taxable years beginning after the date of enactment of this Act." If the Senate passes SECURE 2.0 prior to the end of this year, the IRA rollover will be permitted in 2023.
The other provision of Section 310 is an increase in the IRA charitable rollover (also known as qualified charitable distribution (QCD) by the IRS) each year. Previously, this has been limited to $100,000 for each IRA owner. The $100,000 amount will be indexed for inflation "for taxable years ending after the date of enactment of this Act." Because calendar year 2022 ends after the potential passage of this bill in the 3rd quarter of this year, it is possible that the indexed increase will apply to 2022. With the substantial inflation rate for the past 12 months, there could be a significant increase in the $100,000 QCD amount.
Editor's Note: The life income IRA rollover will be limited to 2023 and future years, but it is good news that an increase in the $100,000 QCD could be applicable for 2022. The bill now moves to the Senate. In election years, the House and Senate are favorably inclined to pass bipartisan legislation. Therefore, there is good potential for the SECURE 2.0 Act to be signed this year by the President. Sen. Kevin Cramer (R-ND) and Sen. Debbie Stabenow (D-MI) have both been supportive of the IRA rollover to life income plans. It is probable the SECURE 2.0 Act will have strong bipartisan support in the Senate.
Applicable Federal Rate of 2.2% for April -- Rev. Rul. 2022-8; 2022-14 IRB 1 (16 Mar 2022)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2022. The AFR under Section 7520 for the month of April is 2.2%. The rates for March of 2.0% or February of 1.6% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.
Published April 1, 2022
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