Written by Brandy Bruyere, Vice President of Regulatory Compliance
On December 15, 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). NAFCU advocated for credit unions' interests all year while tax reform was high on Congress' agenda, and the credit union tax exemption remained intact, even with the substantial reforms to the tax code. However, the TCJA did make some changes impacting credit unions. NAFCU put together a summary of these changes that may help folks in various areas of your credit union, but here's a few questions the NAFCU compliance team has been receiving from members.
What happened to the home equity interest deduction?
One of the changes in the TCJA that has caused confusion relates to the extent that interest paid on "home equity" loans is deductible. Some news outlets reported rather generally that home equity interest is no longer deductible under the TCJA, but it seems to be more complicated than that. The tax code distinguishes between "acquisition indebtedness" and other "home equity indebtedness." Of note, loans that a borrower takes out to "substantially improve" a property fall into the "acquisition" category, so it seems this home loan interest will remain deductible. However, a loan that accesses home equity for other purposes, such as to finance the purchase of a vehicle, would not be deductible through 2025.
Do we have to pay excise tax on certain compensation?
Another change is that credit unions will be subject to an excise tax on compensation in excess of $1 million. This will apply to an organization's top 5 highest paid employees – although that group can, over time, actually include more than five employees because that "club," so to speak, has permanent membership. If an employee is in the top five paid staff in 2018, but falls out of the top five in 2019, that person is still categorized as "top five" under the code. The rate for this excise tax is the corporate tax rate, which is 21% under the TCJA.
"Compensation" means pay that is reportable in box 1 of an employee's W-2 and for which there is not a "substantial risk of forfeiture" of that income. From talking to credit unions, it seems that some deferred compensation from 457(f) plans vests in one single year, which is where some credit unions may have staff that reach this $1 million threshold. Others have a different vesting dates which can help manage to what extent compensation may exceed that $1 million threshold, since the year the deferred compensation vests is the year it is counted as compensation for purposes of these rules. Also of note, distributions from 457(b) plans and 401(k) plans are excluded from this threshold.
The TCJA also removes an exemption from excise taxes for non-profit institutions relating to certain excess parachute payments to any employee that is "highly compensated" under the IRS definitions for qualified plans, which is a salary of $120,000 or more in 2018. Apparently these payments are those made when an employee leaves the organization, and equal or exceed three times the employee's annual salary.
NAFCU is reaching out to the IRS to discuss the need for guidance and clarification with the implementation of these provisions.
Related Note – Private Mortgage Insurance
The deduction for private mortgage insurance expired on December 31, 2016. Many credit unions are in the process of providing the data needed to produce 1098 forms for members by the end of the month in order to comply with IRS reporting requirements. The TCJA did not extend the PMI deduction, but a bill was introduced in Congress to extend some deductions, including the PMI deduction. If passed, PMI paid in 2017 could become deductible. While NAFCU's Legislative Affairs Team sees support for this bill on Capitol Hill, Congress is tackling some issues that are very politically charged, such as immigration and border security. The bill could pass, but perhaps not in time for credit unions to meet the January 31 deadline for 1098 reporting.
NAFCU called the IRS helpline for 1098 reporting and confirmed that so long as the law does not allow the deduction of PMI, this box should not be completed on the 1098. However, if Congress were to pass a bill making PMI deductible for 2017 at a later date, the IRS may issue guidance on how to proceed but helpline staff stated that one likely outcome is that 1098 reporters may need to file amended 1098 forms to reflect PMI paid in 2017. The IRS will update www.irs.gov/Form1098 as the situation develops.
Programming Note - Martin Luther King Jr. Day
NAFCU's offices will be closing at noon on Friday and all day on Monday in recognition of Martin Luther King Jr. Day on January 15th. We will be back to blogging on Wednesday, January 17th.
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