Tax Strategy: The details on Tax Reform 2.0
The House Ways and Means Committee finally released the three tax bills that they hope the House will pass prior to the midterm elections, constituting what they are calling Tax Reform 2.0.
We have long known that one of the bills would focus on making permanent many of the temporary individual provisions of the Tax Cuts and Jobs Act of 2018. House Bill 6760 provides the details on making those provisions permanent.
We had very little detail on the other two areas of focus: retirement and education enhancements and promoting new business innovation. House Bill 6757, titled “The Family Savings Act of 2018,” provides the details on the retirement and education proposals. House Bill 6756, “The American Innovation Act of 2018,” provides the details on enhancing entrepreneurship.
While the bills may pass the House, chances of passage in the Senate look much less certain, with even Republican leadership casting doubt on a vote. The bill making Tax Cuts and Jobs Act provisions permanent has no support from Democrats, and even a few House Republicans have indicated that they would vote against the bill over the extension of the limit on the state and local tax deduction.
The other two bills could garner greater bipartisan support, but none of the bills are paid for and together they are likely to add to projected deficits, which will be of concern to some members of Congress.
Under the Tax Cuts and Jobs Act, many of the individual provisions expire after 2025, while the corporate and business provisions are generally permanent. This was done to come within the $1.5 trillion budget reconciliation debt limit under which the TCJA passed, and Democrats have focused on the fact that Republicans favored corporations over individuals in the bill. H.R. 6760 is designed to blunt that criticism prior to the midterm elections, while also adding an additional hundreds of billions of dollars to the national debt over a 10-year period.
The bill would make permanent the individual ordinary income rates, the increase in the standard deduction, the increase in the Child Tax Credit, and the elimination of the personal exemption.
It would also make permanent the changes to itemized deductions, including the increased limitation on charitable contributions; the reduction in the threshold for the medical expense deduction; the limitation on the deduction for qualified residence interest; the restrictions on the deduction for personal casualty losses; the termination of miscellaneous itemized deductions with a 2 percent of adjusted gross income floor; the repeal of the Pease overall limitation on itemized deductions; and, most controversially for some Republicans in high-tax states, the limitation on the deduction for state and local taxes.
The legislation would also make permanent the increased contributions to ABLE accounts and the rollovers to ABLE accounts from Code Section 529 programs. It would make permanent the favorable tax treatment for individuals serving in the Sinai Peninsula, the treatment of student loans discharged on account of death or disability, the moving expense provisions of the TCJA, the termination of the exclusion for qualified bicycle commuting reimbursements, and the limitation on wagering losses.
For small businesses, the bill would make permanent the 20 percent deduction for pass-through businesses and the limitation on losses for taxpayers other than corporations.
For estates and gifts, it would make permanent the increased exemption amounts. It would also make permanent the increased Alternative Minimum Tax exemption amount for individuals.
H.R. 6757: Family Savings Act of 2018
A number of provisions in H.R. 6757 are more likely to receive some bipartisan support and be taken up in the Senate in some form. These include changes to the tax provisions relating to retirement savings to repeal the maximum age for traditional IRA contributions, make lifetime income investments more portable, exempt retirement account holders with less than $50,000 in tax-favored retirement accounts from required minimum distribution rules, permit penalty-free withdrawals up to $7,500 for birth/adoption expenses, and allow small businesses to join together to offer 401(k) plans.
The legislation would expand 529 college savings plans with respect to registered apprenticeship programs, homeschooling expenses, qualified education loan repayments, and more coverage of elementary and secondary school expenses.
The legislation would create Universal Savings Accounts, with after-tax contributions of up to $2,500 per year and tax-free withdrawals for any purpose.
Other provisions address election of 401(k) safe harbor status; treating non-tuition fellowship and stipend payments as compensation for IRA contributions; prohibiting making plan loans through credit cards or similar arrangements; clarification of rules for church-controlled organizations; treatment of custodial accounts on termination of Code Sec. 403(b) plans; treatment of retirement plan contributions by governmental employers for employees; elective deferrals by members of the Ready Reserve; plan adoption rules; nondiscrimination rules for older and longer service participants; and studying PBGC premiums.
H.R. 6756: American Innovation Act of 2018
Also more likely to receive some bipartisan support are the provisions of H.R. 6756, focused on an expanded election to deduct start-up and organizational expenditures of an active trade or business for up to an inflation-adjusted $20,000.
The provision also addresses what happens upon liquidation or disposition of the business.
These three bills representing Tax Reform 2.0 in the House appear likely to pass the House before the midterm elections. However, they appear unlikely to be even taken up by the Senate in their present form, although provisions of H.R. 6756 and H.R. 6757 may be considered for inclusion in some Senate legislation, but probably not until after the midterm elections.