Understanding the Tax Relief for American Families and Workers Act of 2024

On January 19, 2024, there was a notable display of bipartisan cooperation as the Ways and Means Committee gave its nod of approval to the Tax Relief for American Families and Workers Act of 2024, with an overwhelmingly favorable vote of 40-3. ” The bill is now awaiting a vote in Congress, tentatively scheduled for the end of January. 

The legislation was unveiled on January 17, and supporters are eager to expedite its passage through Congress. They aim to have the bill signed into law promptly to ensure that its time-sensitive provisions can be implemented for the current tax-filing season. This may be overly optimistic as most of the IRS forms have been finalized for the 2023 tax year and pending changes may not be able to be accommodated so late in the cycle. 

This tax act saves taxpayers over $70 billion by ending the often-abused COVID-era Employee Retention Tax Credit sooner and extending tax provisions from the 2017 Tax Cuts and Jobs Act.  

Business Tax Relief: 

The act contains several measures intended to help businesses thrive and stimulate economic growth, including: 

• Businesses can immediately deduct research and experimentation costs, encouraging innovation. 
• 100% bonus depreciation is extended until 2025, allowing businesses to fully write off qualified property expenses. 
• The deduction limit for eligible property is raised, giving businesses more flexibility in deducting investment expenses. 
• Businesses can deduct interest expenses, aiding in meeting payroll obligations and expanding operations. 

Small Business Support: 

• The act aims to grant financial flexibility through a raised limit for instant investment expenses. 
• Additionally, there will be an improvement in operational efficiency as the reporting threshold for businesses employing subcontract labor is adjusted, thereby reducing administrative burdens. 

Alterations to Information Reporting 

• Changes to the reporting threshold for the 1099-NEC form, increasing the requirement to file forms when payments exceed $1000 for the tax year (up from $600). 
• Making the same change in threshold to the 1099-MISC form, from $600 to $1000. 
• Indexing the threshold for the 1099-NEC and 1099-MISC form to inflation going forward, resulting in a different reporting threshold every year. 
• Interestingly, not changing the threshold or indexing to inflation any other information return of any type, resulting in a more complex compliance environment for taxpayers. 

Child Tax Credits  

• The refundable portion of the child tax credit will gradually increase between 2023 and 2025, providing greater financial assistance to families. 
• Adjustments will be implemented to ensure fairness for families with multiple children. 
• Taxpayers will have the flexibility to use either current or prior-year income to calculate the child tax credit in 2024 and 2025, enhancing eligibility options. 
• Starting in 2024, the child tax credit will be adjusted for inflation to accommodate the rising cost of living. 

Additional provisions outlined in the framework agreement include: 

• Improvements to the child tax credit applicable for tax years 2023, 2024, and 2025, including adjustments to the calculation of the refundable child tax credit. 
• A temporary raise in Section 179 small business expensing. 
• Provisions for US-Taiwan double-taxation relief. 
• Tax assistance for communities affected by disasters. 
• Amendments to the low-income housing tax credit. 

Tax Provision	Current Law	Proposed Change
Business Interest Limitation	Large businesses have interest deductions limited to Taxable Income + Interest Expenses, multiplied by 30%.  Any interest in excess of this amount is disallowed and carried to the next tax year for taxpayers with average gross receipts that exceed $27MM (adjusted for inflation).	Congress aims to include Depreciation & Amortization in the limitation calculation (Taxable Income + Interest Expenses + Depreciation + Amortization multiplied by 30%), resulting in a higher allowable interest deduction.  These provisions would expire on Dec 31, 2025.
Research & Experimental Expenses	Taxpayers must capitalize and amortize their R&D costs over 5 or 15 years, depending on whether the research is domestic or foreign.	Congress plans to delay the capitalization of domestic R&E expenses until taxable years beginning after December 31, 2025, allowing immediate deduction. No immediate deduction would be allowed for foreign R&D expenses. Taxpayers who capitalized expenses in 2022 would not need to amend their returns, and they could deduct the expenses in TY 2023 and 2024.
Bonus Depreciation	Taxpayers can claim 80% bonus depreciation on qualified property placed in service after 12/31/22 and before 1/1/24.	Congress seeks to delay the reduction in bonus depreciation until 2026, allowing taxpayers to deduct 100% bonus depreciation on qualified property until then.
Section 179 Expensing	Taxpayers can expense up to $1.22M of qualified property for tax year 2024, with phaseouts starting when total acquisitions exceed $3.05M.	Congress aims to increase the maximum eligible amount to $1.29M and raise the phaseout threshold to $3.22M for tax year 2024. These amounts would be adjusted for inflation in future tax years.
Child Tax Credit	The Child Tax Credit (CTC) is $2,000 for qualified taxpayers, potentially reverting to $1,000 after 1/1/2026.	Congress plans to index the CTC for inflation for tax years 2024 and 2025. Taxpayers can elect to use their prior year earned income for the calculation of their CTC. The refundable portion of the CTC will increase to $1,800 in 2024 and $1,900 in 2025, ultimately reaching $2,000 in 2025.

Senator Wyden emphasized the significance of the plan in a statement accompanying the tax framework summary, noting that around 15 million children from low-income families would benefit from these policies. 

Although Congress plans to move swiftly to pass the bill into law in time for the 2023 tax filing season, there are many hurdles yet to overcome, as well as the potential for changes to the current draft. If approved, the proposed Tax Relief for American Families and Workers Act of 2024 would reduce tax burdens for US families and businesses through changes to the child tax credit (CTC), low-income housing credit, and R&D expensing. Additionally, pending Congress’s agreement, the funding compromise would effectively end the criticized employee retention tax credit (ERC) and offer increased disaster relief for certain taxpayers, though its effectiveness will largely depend on the IRS’s administrative capacity.