On September 13, the House Ways and Means Committee passed three separate bills that will be the cornerstone of what is being referred to as Tax Reform 2.0.
The bills focus on making permanent certain provisions of the Tax Cuts and Jobs Act (TCJA) that affect individuals, families, and small businesses. They also promote family and retirement savings and new business innovation. For example, one proposal would allow new businesses to write off more of their initial start-up costs. Here’s a brief overview of the three bills.
Protecting Family and Small Business Tax Cuts Act
Many provisions of the TCJA currently are scheduled to expire after 2025. The proposed Protecting Family and Small Business Tax Cuts Act of 2018 would make the following individual and business-focused provisions, and others, permanent:
- Increase in the standard deduction,
- Increase in and modification of the child tax credit,
- Increased limitation for certain charitable contributions,
- Extension of the reduction in threshold for the medical expense deduction,
- Repeal of the deduction for personal exemptions,
- Limitation on the deduction for state and local taxes (the SALT deduction),
- Limitation on the deduction for qualified residence interest,
- Termination of miscellaneous itemized deductions,
- Repeal of the overall limitation on itemized deductions,
- Increase in the unified gift and estate tax exemption, and
- Increased alternative minimum tax exemption for individuals.
- Deduction for qualified business income, and
- Limitation on losses for taxpayers other than corporations.
Family Savings Act
The second bill, the Family Savings Act of 2018, provides for changes to retirement and education accounts and creates a new tax-deferred savings account. The proposed law changes would:
- Establish “Universal Savings Accounts,” described as a “flexible savings tool that families can use any time that’s right for them,”
- Expand Section 529 plans,
- Allow penalty-free withdrawals from retirement plans for individuals in the case of a birth of a child or adoption,
- Provide rules for multiple employer plans and pooled employer plans that would “allow small businesses to join together to create a 401(k) plan more affordably,”
- Provide rules relating to the election of safe harbor 401(k) plan status,
- Treat certain taxable nontuition fellowship and stipend payments as compensation for IRA purposes,
- Repeal the maximum age for traditional IRA contributions,
- Provide for portability of lifetime income investments,
- Exempt individuals with certain account balances from required minimum distribution rules, and
- Clarify the treatment of certain retirement plan contributions picked up by governmental employers for new or existing employees.
American Innovation Act
The third bill, called the American Innovation Act of 2018 would allow new businesses to deduct up to $20,000 in start-up expenses in the year incurred so long as these expenses meet certain qualifications. Specifically, this bill would:
- Simplify and expand deductions for start-up and organizational expenditures, and
- Preserve start-up net operating losses and tax credits after an ownership change.
A full House vote on the bills is expected to take place this month or next. If the bills pass the full House, it’s not expected that the legislation will be taken up in the Senate before the midterm November elections, though experts believe the provisions on retirement savings could eventually find bipartisan support. A major sticking point is the estimated price tag of the legislation: somewhere in the $600 billion + range over the next decade.
If you have any questions regarding how this bill could impact your tax situation, don’t hesitate to reach out.