H.R. 1586 in (mostly) plain English

Yesterday, the House of Representatives passed HR 1586 - An act to impose an additional tax on bonuses received from certain TARP recipients. I’ve put the entire text of the act at the bottom of the post. Since I had to decipher the act to write about it and since I want to refer back to it in subsequent posts, I’m posting my understanding of it - in more or less plain English - here.

The act does definitions in the middle. I’m going to do them first:

Covered TARP Recipient is defined in (c) (1) and (2):
A. Any entity that got TARP money after December 31, 2007, of at least $5 Billion
B. Fannie Mae and Freddie Mac
C. “any person who is a member of the same affiliated group (as defined in section 1504 of the Internal Revenue Code of 1986, determined without regard to paragraphs (2) and (3) of subsection (b)) as a person described in subparagraph (A) or (B),” (don’t ask me to explain that one)
D. Any partnership more than 50% owned by an (A), (B), or (C).

In other words, any of the companies that got bailout money from the original $700 Billion Paulson plan and any of their subsidiaries or partnerships.

Once the Covered TARP Recipient has paid back enough of the bailout so the amount it still owes is less than $5 Billion, it’s no longer a Covered TARP Recipient and the additional tax no longer applies.

Disqualified Bonus Pay is defined in (b) (2) and (3):
Retention, incentive, or other bonuses over regular salary
But not commissions, welfare or fringe benefits, or expense reimbursement
It’s not Disqualified Bonus Pay if you give it all back to your employer - unless your employer somehow pays you off to do so.
Oh, and if your employer compensates you for some or all of the additional tax you have to pay based on this bill, that reimbursement itself becomes Disqualified Bonus Pay.

In other words, Disqualified Bonus Pay is everything most people think of as a bonus. It’s the $156 Million AIGFP just gave out.

TARP Bonus is defined in (b) (1):
Subtract $250,000 from the taxpayer’s adjusted gross income. (If the taxpayer is married but files singly (MFS), subtract $125,000.) I’m going to call this “excess income” for simplicity’s sake.
If the taxpayer got more in Disqualified Bonus Pay than his excess income, then set his TARP Bonus to his excess income.
Otherwise, set his TARP Bonus to his Disqualified Bonus Pay.

In other words:
If your base salary is more than $250,000 ($125,000 MFS) then the Feds are going to calculate your additional tax on your whole bonus.
If your base salary is $250,000 or less ($125,000 MFS) and your bonus puts you over $250,000, then the Feds are going to calculate your additional tax on your excess income.
If your base salary is $250,000 or less ($125,000 MFS) and your bonus does not put you over $250,000, then the Feds are going to pretend you didn’t get a bonus and you just pay regular tax on your entire income, base and bonus combined. No additional tax applies.

Short version: if you make $250,000 you’re making plenty and you shouldn’t have gotten a bonus.

Okay, now for the tax calculation itself:

Section 1:
(a) If you work at or used to work at a Covered TARP Recipient then your tax for 2009 (and every year from now on) will be calculated thus:

(1) subtract the amount of your TARP Bonus from your taxable income and do the usual tax calculation on the result; then add to that

(2) 90% of your TARP Bonus.

The sum of those two calculations is how much tax you owe the Feds for 2009.

And a few rules:

(d) If you’re not sure what some tax terms mean, they mean the same as they do in the tax code of 1986.

(e) “Coordination With Internal Revenue Code of 1986- Any increase in the tax imposed under chapter 1 of the Internal Revenue Code of 1986 by reason of subsection (a) shall not be treated as a tax imposed by such chapter for purposes of determining the amount of any credit under such chapter or for purposes of section 55 of such Code.”
I’m not going to go digging around in the tax code but I assume there are some calculations in there to determine some type of tax credit and the additional taxes imposed by this bill can’t be used in those calculations.

(f) The Secretary of the Treasury gets to figure out the pesky details of how this will work.

(g) This only applies to Disqualified Bonus Pay received by the taxpayer after December 31, 2008, and to tax years after that date.

That’s it. A couple of examples to go on with.

AIG is a Covered TARP Recipient. They got way over $5 Billion from the TARP act and certainly haven’t paid it down yet.

The $165 Million in retention bonuses that everyone has been screaming about constitute Disqualified Bonus Pay. They are over and above regular salary and they don’t fall into the excluded groups of commissions, welfare or fringe benefits, or expense reimbursement.

So let’s calculate taxes for some AIGFP workers:

John is single.
His adjusted gross income from salary is $300,000.
His retention bonus payment on March 15 was $400,000. This is his Disqualified Bonus Pay.
John’s total adjusted gross income is $700,000 ($300,000 salary plus $400,000 bonus).
His excess income (adjusted gross income minus $250,000) is $450,000.
His TARP Bonus is set to the lesser of his excess income and his Disqualified Bonus Pay: $400,000.
John will pay the usual income tax on his $300,000 base salary and an additional $360,000 in tax on his TARP Bonus of $400,000.

Edward is single.
His adjusted gross income from salary is $200,000.
His retention bonus payment on March 15 was $100,000. This is his Disqualified Bonus Pay.
Edward’s total adjusted gross income is $300,000 ($200,000 salary plus $100,000 bonus).
His excess income (adjusted gross income minus $250,000) is $50,000.
His TARP Bonus is set to the lesser of his excess income and his Disqualified Bonus Pay: $50,000.
Edward will pay the usual income tax on his $200,000 base salary and an additional $4,500 in tax on his TARP Bonus of $50,000.

Mark is single.
His adjusted gross income from salary is $150,000.
His retention bonus payment on March 15 was $100,000. This is his Disqualified Bonus Pay.
John’s total adjusted gross income is $250,000 ($150,000 salary plus $100,000 bonus).
His excess income (adjusted gross income minus $250,000) is $0.
His TARP Bonus is set to the lesser of his excess income and his Disqualified Bonus Pay: $0.
This means Mark has no TARP Bonus under the terms of this bill.
Therefore Mark will pay the usual income tax on his combined income of $250,000. No additional tax applies.

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The following is the text of HR 1586:

HR 1586 EH

111th CONGRESS

1st Session

H. R. 1586

AN ACT

To impose an additional tax on bonuses received from certain TARP recipients.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. BONUSES RECEIVED FROM CERTAIN TARP RECIPIENTS.

(a) In General- In the case of an employee or former employee of a covered TARP recipient, the tax imposed by chapter 1 of the Internal Revenue Code of 1986 for any taxable year shall not be less than the sum of--

(1) the tax that would be determined under such chapter if the taxable income of the taxpayer for such taxable year were reduced (but not below zero) by the TARP bonus received by the taxpayer during such taxable year, plus

(2) 90 percent of the TARP bonus received by the taxpayer during such taxable year.

(b) TARP Bonus- For purposes of this section--

(1) IN GENERAL- The term `TARP bonus' means, with respect to any individual for any taxable year, the lesser of--

(A) the aggregate disqualified bonus payments received from covered TARP recipients during such taxable year, or

(B) the excess of--

(i) the adjusted gross income of the taxpayer for such taxable year, over

(ii) $250,000 ($125,000 in the case of a married individual filing a separate return).

(2) DISQUALIFIED BONUS PAYMENT-

(A) IN GENERAL- The term `disqualified bonus payment' means any retention payment, incentive payment, or other bonus which is in addition to any amount payable to such individual for service performed by such individual at a regular hourly, daily, weekly, monthly, or similar periodic rate.

(B) EXCEPTIONS- Such term shall not include commissions, welfare or fringe benefits, or expense reimbursements.

(C) WAIVER OR RETURN OF PAYMENTS- Such term shall not include any amount if the employee irrevocably waives the employee's entitlement to such payment, or the employee returns such payment to the employer, before the close of the taxable year in which such payment is due. The preceding sentence shall not apply if the employee receives any benefit from the employer in connection with the waiver or return of such payment.

(3) REIMBURSEMENT OF TAX TREATED AS TARP BONUS- Any reimbursement by a covered TARP recipient of the tax imposed under subsection (a) shall be treated as a disqualified bonus payment to the taxpayer liable for such tax.

(c) Covered TARP Recipient- For purposes of this section--

(1) IN GENERAL- The term `covered TARP recipient' means--

(A) any person who receives after December 31, 2007, capital infusions under the Emergency Economic Stabilization Act of 2008 which, in the aggregate, exceed $5,000,000,000,

(B) the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation,

(C) any person who is a member of the same affiliated group (as defined in section 1504 of the Internal Revenue Code of 1986, determined without regard to paragraphs (2) and (3) of subsection (b)) as a person described in subparagraph (A) or (B), and

(D) any partnership if more than 50 percent of the capital or profits interests of such partnership are owned directly or indirectly by one or more persons described in subparagraph (A), (B), or (C).

(2) EXCEPTION FOR TARP RECIPIENTS WHO REPAY ASSISTANCE- A person shall be treated as described in paragraph (1)(A) for any period only if--

(A) the excess of the aggregate amount of capital infusions described in paragraph (1)(A) with respect to such person over the amounts repaid by such person to the Federal Government with respect to such capital infusions, exceeds

(B) $5,000,000,000.

(d) Other Definitions- Terms used in this section which are also used in the Internal Revenue Code of 1986 shall have the same meaning when used in this section as when used in such Code.

(e) Coordination With Internal Revenue Code of 1986- Any increase in the tax imposed under chapter 1 of the Internal Revenue Code of 1986 by reason of subsection (a) shall not be treated as a tax imposed by such chapter for purposes of determining the amount of any credit under such chapter or for purposes of section 55 of such Code.

(f) Regulations- The Secretary of the Treasury, or the Secretary's delegate, shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section.

(g) Effective Date- This section shall apply to disqualified bonus payments received after December 31, 2008, in taxable years ending after such date.