Washington News

As teachers return to the classroom, the Internal Revenue Service (IRS) reminds educators they should consider the deduction for classroom expenses. During the next few weeks, both parents and teachers face back-to-school expenses. Many parents will spend over $500 on clothes, books, computers and other supplies. Similarly, teachers who teach kindergarten through 12th grade will be purchasing many classroom materials for their students. A survey indicated most teachers spend over $600 per year to support their students with educational supplies.

An important benefit for teachers is the above-the-line deduction for classroom expenses. The deduction for 2024 and 2023 is $300, an increase from $250 in earlier tax years.

A benefit of the deduction is that teachers are permitted to take the standard deduction and still deduct educator expenses. If a teacher is married to another qualified educator and they file jointly, they may deduct up to $600 of classroom expenses. Each educator individually, however, is limited to the $300 amount.

1. Who Is an Educator? - The IRS defines an "eligible educator" as a teacher, instructor, counselor, principal or aide at a school with students from kindergarten through 12th grade. This could be a public school or a private school. A teacher must work at least 900 hours per year to qualify.

2. What Expenses Are Qualified? - There are many classroom expenses that qualify. These could include books, teaching supplies, computers and software. Because there are still COVID-19 cases, the expense also may include masks, disinfectant, sanitizer and disposable gloves.

3. What is Not a Qualified Expense? - There are some types of expenses that do not qualify. Expenses for home schooling or expenses by athletic instructors that are not related to their class are not qualified.

4. Are Professional Development Expenses Qualified? - If the teacher is qualified and spends funds on professional development courses that are related to his or her teaching area, those expenses can be counted. However, they are still subject to the $300 limit. There may be other deductions or credits (such as the lifetime learning credit) that provide greater benefits.

Editor's Note: As millions of students return to school, it is helpful for both students and teachers that the $300 deduction is above-the-line. Most teachers take the standard deduction and still qualify for this additional tax-saving benefit.

Employer Retirement Plan Matching for Student Loan Payments

In Notice 2024-63; 2024-36 IRB 1, the Internal Revenue Service (IRS) published guidance for employers who plan to make matching contributions for employee payments on student loans. The SECURE 2.0 Act was passed in 2023 as part of the Consolidated Appropriations Act (P.L. 117–328) and created this new option. If employees make qualified student loan payments (QSLPs), the employer may make a matching contribution to a qualified retirement plan.

Andy Banducci is a representative of the ERISA Industry Committee. In an August 19 statement he noted, "We applaud the IRS for issuing interim guidance implementing this change and look forward to providing technical comments to the IRS in the coming weeks." The ERISA Industry Committee supported the QSLP match in the SECURE 2.0 Act.

The Qualified Student Loan Payment (QSLP) is generally the payment made by an employee on a qualified education loan that does not exceed the retirement plan limit for the year and is certified by the employee. An employer may require a separate certification each year. There are also tests to ensure the matching contributions do not primarily benefit highly compensated employees. The actual deferral percentage (ADP) for highly compensated employees is subject to nondiscrimination limits.

The SECURE 2.0 Act added Section 401(m)(4)(D) to define the QSLP. The total qualified education loan payments generally are limited to the employee elective deferral amount under the plan for that year. If the employee certifies to the employer that the payment has been made, the employer may make a matching contribution to the qualified retirement plan.

Section 401(m)(13) states the QSLP matches may be made by qualified plans on behalf of employees eligible to receive elective deferral matches. All employees who are eligible to receive elective deferrals are also eligible for the QSLP match.

The IRS provided detailed guidance that provides specifics on QSLP contributions, such as:

- The QSLP is permitted in an amount equal to the elective deferral under the plan year. The employee must make a student loan payment, that is a legal obligation.

- The match is permitted for Section 401(k), Section 403(b), Section 408(p) or Section 457 plans.

- The maximum is limited to the employee elective contribution to the plan and may not exceed the employee compensation for the year.

- The matching plan must be open to all employees and may cover any student loan payment for a qualified education loan.

- The QSLP benefit may not exclude employees. Any employee eligible to receive an elective deferral match must qualify.

- The match must be for loan payments that were made during one plan year and may not be for a loan payment made in another plan year.

- The employee must comply with the Section 401(m)(4)(D)(iii) certification requirement. This employee statement must include the payment amount, the date of the payment and that the payment was made by the employee for a qualified loan, used to pay for qualified higher education expenses. Additionally, the loan must have been incurred by the employee.

- The employer may create reasonable administrative procedures to monitor the QSLP match amounts. The reasonable procedures may include an annual deadline that is three months after the end of the plan year.

Proposed Amendments to QDOT Regulations

In REG-119683-22; 89 F.R. 67580-67586, the IRS published proposed amendments to the regulations for the establishment of trusts for the benefit of a noncitizen spouse.

Section 2056(d)(2)(A) permits a marital deduction for property that passes to a noncitizen spouse in a qualified domestic trust (QDOT). Sections 2056 and 2056A define a QDOT as a trust that meets the applicable requirements with respect to the identity and powers of the trustee and complies with the regulations.

Because Congress has modified the QDOT rules through multiple bills, the IRS issued proposed and final regulations. These current amendments are intended to conform the final and proposed regulations with current statutes.

The requirement for a QDOT is now based on fair market value as "finally determined" for federal estate tax purposes. The previous definition referred to an estate tax closing letter that, after June 1, 2015, is no longer a routine practice for the IRS. Reg. 20.2056A-2(d)(1)(i) will now conform to current IRS procedures.

The Estate Tax Advisory Group, part of the IRS, monitors various aspects of QDOTs. The regulations are now updated, and trustees are directed to IRS Publication 4235, Collection Advisory Offices Contact Information or IRS.gov to determine correct addresses and offices.

Reg. 20.2056A-4(a) and (c) requirements specify how marital trusts and non-trust marital transfers can be conformed under QDOT rules. The amended proposed regulations update the consequences of failing to comply with applicable requirements.

Finally, the filing requirements and Section 2056A estate tax references and titles of officials are updated. The new amended proposed regulations are applicable as of the date of publication in the Federal Register.

Applicable Federal Rate of 4.8% for September: Rev. Rul. 2024-17; 2024-36 IRB 1 (15 August 2024)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2024. The AFR under Sec. 7520 for the month of September is 4.8%. The rates for August of 5.2% or July of 5.4% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”