Congressional leadership has reached an agreement on omnibus spending legislation to finance the government through the fiscal year ending September 30, 2023. The legislation has been approved by the Senate and is expected to be approved by the House without change. The agreement will then go to President Biden to be signed into law.
The omnibus agreement does not include tax changes other than retirement provisions. A compromise could not be reached to combine business tax relief with an expanded child credit, meaning the following items (among others) remain in effect:
- Research expenditures must be capitalized and amortized over five years (15 years if attributable to foreign research) using a half year convention, effective for expenditures paid or incurred in tax years beginning in 2022 or later.
- Deductions for business interest (other than floor plan financing) are limited to interest income plus 30% of adjusted taxable income without adding back the deduction for depreciation or amortization (EBIT), effective for tax years beginning in 2022 or later.
The expanded child credit provisions that applied in 2021 were not extended to 2022.
Although these and other provisions of interest were not included in the omnibus agreement, they may be revisited when Congress meets in 2023.
The omnibus agreement generally does not include tax increases or other revenue raisers, with one exception. The deduction for the charitable contribution of a conservation easement through a partnership will be disallowed if the deduction claimed by any partner exceeds two- and one-half times the partner’s basis in the partnership unless a three-year holding period is met, substantially all of the partners are members of a family, or the contribution relates to the preservation of a historic structure. The disallowance will be effective for contributions made after the date of enactment.
The omnibus agreement also includes retirement provisions that would affect both businesses and individuals. Keep in mind that these provisions are only effective once the legislation is signed into law.
For businesses, the agreement includes provisions that would:
- Require automatic enrollment in 401(k) and 403(b) plans at a rate between three and 10% , effective for plan years beginning after 2024. Thereafter, the percentage amounts increase by one point each year to a maximum of 10% and 15%. Employees may affirmatively elect out of enrollment.
- Provide additional incentives for small businesses (50 or fewer employees) to set up retirement plans, including a credit equal to 100% of startup costs and a credit for a portion of employer contributions, effective for tax years beginning after 2022.
- Allow employers to treat student loan payments as elective deferrals for the purpose of matching contributions, effective for plan years beginning after 2023.
- Require part-time employees that provide 500 hours of service for two consecutive years to be included in 401(k) plans, reduced from 3 years under present law.
For individuals, the omnibus agreement includes provisions that would:
- Increase the age for required minimum distributions (RMD) to age 75, phased in over 10 years. The Act would increase the RMD age to 73 starting January 1, 2023 (for individuals who attain age 72 after December 31, 2022, and age 73 before January 1, 2033). The RMD age would increase to 75 for individuals who attain age 74 after December 31, 2032.
- Beginning after 2023, index the $1,000 IRA catch-up contribution for individuals over the age of 50 for inflation
- Beginning after 2024, increase the limit on catch-up contributions to the greater of $10,000 or 50%more than the regular catch-up amount for 2025 for individuals ages 60-63 ($5,000 for SIMPLE plans). Both amounts would be indexed for inflation after 2025.
- Beginning in 2024, subject all catch-up contributions to Roth tax treatment, with an exception for employees with compensation of $145,000 or less (indexed).
- Allow SIMPLE IRAs to accept Roth contributions. Additionally, SEPs would have the option of treating employee and employer contributions as Roth (in whole or in part).
- Allow plan participants to elect to have employers make matching contributions to defined contribution plans on a Roth basis.
- Index qualified charitable distributions, currently limited to $100,000, for inflation.
- Permit a one-time, $50,000 qualified charitable distribution (QCD) to either a charitable remainder trust or a charity gift annuity.
- Reduce the excise tax penalty for failure to take RMDs from 50% to 25%. If the missed RMD was corrected in a timely manner, the penalty would be further reduced to 10% .
- Subject to limitations and for distributions after 2023, allow beneficiaries of 529 college savings accounts to rollover up to $35,000 of unused 529 funds into a Roth IRA account in their name over the course of a lifetime.
- Clarify that, for special needs trusts established for a beneficiary with a disability, a charity is allowed to be a remainder beneficiary of the trust.
- Enhance distribution provisions or early distribution penalty waivers for firefighters, public safety officers, individuals with a terminal illness, survivors of domestic abuse, premiums for specified long-term care insurance contracts.
There is a lot to consider in the new omnibus agreement. Ready to see how it will impact you and your organization?
This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.