While corporate tax rates were made permanent in the Tax Cuts and Jobs Act, tax code changes for individuals and small businesses are set to expire after 2025.
New legislation on Capitol Hill seeks to change that. There are many provisions of the recently introduced “Tax Reform 2.0,” including one that would make the TCJA tax reductions permanent. The tax package has already been passed by the House.
About Tax Reform 2.0
The legislative package is made up of three separate bills. These include:
Protecting Family and Small Business Tax Cuts Act of 2018 (H.R. 6760)
- Makes tax cuts and other related provisions permanent. (For example, increased standard deduction, repeal or limitation of certain deductions, increased exemption for the alternative minimum tax (AMT))
- Maintains the increased unified exclusion for estates and gifts ($11.18 million per individual, indexed for inflation)
Family Savings Act of 2018 (H.R. 6757)
- Eliminates certain restrictions for establishing Multi-Employer Retirement Plans (MEPs)
- Repeals the age limitation for contributing to a traditional IRA
- Provides that required minimum distributions (RMDs) are not mandatory for certain retirees (individuals with less than $50,000 across all eligible retirement plans are exempt)
- Establishes Universal Savings Accounts (USAs), to which individuals can contribute $2,500 after tax each year, and from which they can withdraw tax free for any purpose
- Expands 529 plans to allow for tax-free distributions to cover expenses from apprenticeship programs, homeschooling, elementary or secondary school tutoring or supplies, or payments on a qualified education loan
American Innovation Act of 2018 (H.R. 6756)
Increases the deduction for business start-up costs. (The deduction would rise to $20,000 in start-up and organizational costs from $5,000 currently.)
What’s next for Tax Reform 2.0?
The legislative package is unlikely to proceed in its current scope — certainly not before the mid-term elections and unlikely after — given it would require 60 votes to pass in the Senate and there is only a slight Republican majority. The mid-term elections also create additional uncertainty considering the Democrats are generally favored to regain control of the House.
If Tax Reform 2.0 does not advance, taxpayers may see a scaled-back legislative package introduced in the lame duck session from mid-November through mid-December. Still, it is unlikely that this version would include a provision to make all of the tax cuts permanent. Some of the provisions of the Family Savings Act of 2018, however, could survive in a new, scaled-back version. Some proposals have bipartisan support such as the expansion of 529 college savings plans, repeal of the age limit on traditional IRA contributions, and removing regulatory obstacles for groups of businesses to create a multi-employer retirement savings plan.
Additional provisions that may be considered include modifying taxation for capital gains by indexing for inflation, and certain changes to the Affordable Care Act (ACA), such as a repeal of the medical device tax, the tax on “Cadillac” health plans, or the employer mandate.
Proposals in Tax Reform 2.0 may have an impact on an individual’s retirement and financial planning goals. As a result, it will be important to monitor the legislation’s progress and review any potential updates to a financial plan with a financial advisor.