President Trump and Republican lawmakers are considering a second round of tax reform legislation as a follow-up to last year’s massive Tax Cuts and Jobs Act (TCJA). At this point there’s no actual bill, and the odds are slim that any significant legislation could get through Congress before the November 6 midterm elections. So talk of Tax Reform 2.0 may primarily be intended to energize the Republican base in advance of the midterms. To that end, the Republicans would like to schedule a House vote for September.
Here’s what is being discussed for the possible Tax Reform 2.0 package along with other potential near-term tax legislation.
Tax reform 2.0 basicsThe main idea of Tax Reform 2.0 would be to make permanent the TCJA’s temporary federal income tax rate cuts for individual taxpayers; the doubled child tax credit; and the deduction for up to 20% of qualified business income from sole proprietorships, partnerships, LLCs, and S corporations. These taxpayer-friendly changes are scheduled to expire at the end of 2025 along with a number of other changes, some of which are not taxpayer-friendly. (Check out the list at the end of this story for examples.)
President Trump has separately suggested lowering the corporate federal income tax rate from 21% to 20%. The TCJA permanently reduced the corporate rate from a maximum of 35% under prior law to a flat 21% for 2018 and beyond.
Republicans have called the TCJA changes critical to boosting the U.S. economy. Democrats have called the changes giveaways to wealthy individuals and corporations that will only increase federal budget deficits for years to come. Almost everyone agrees that Tax Reform 2.0 would probably further expand those deficits.
Savings incentivesTax Reform 2.0 could also include changes to encourage folks to save more for college and retirement:
• The rules for Section 529 college savings plans could be modified to allow tax-free withdrawals to pay for apprenticeships to learn a trade, cover the cost of home schooling, and pay off student loans.
• A new Universal Savings Account would allow tax-free withdrawals for a variety of needs. Contributions to Universal Savings Accounts would be made with after-tax dollars, like contributions to Roth IRAs.
• Individuals could take penalty-free retirement account withdrawals after a birth or adoption.
• Other changes could make it easier for small companies to offer retirement plans and permit individuals to continue making traditional IRA contributions after age 70½.
Capital gains indexingIndexing capital gains for inflation is also under consideration for Tax Reform 2.0. Indexing would allow investors to increase the tax basis of capital gain assets — such as stocks, mutual fund shares, and real estate — to account for inflation. Indexing would result in lower taxable gains when affected assets are sold for a profit. Some observers have argued that indexing could be achieved without the need for legislation, by simply issuing IRS regulations that allow indexing.
No ‘extenders’ in tax reform 2.0Any Tax Reform 2.0 package will probably not include extensions of a number of tax breaks that Congress habitually allows to expire and then retroactively extends. These so-called “extenders” will probably be addressed by separate legislation. For individual taxpayers, the two most-important extenders are: (1) the deduction for up to $4,000 of qualified higher-education tuition and fees and (2) tax-free treatment for up to $2 million of forgiven home mortgage debt. Both of these breaks expired at the end of 2017. Other extenders that expired at the end of 2017 include a number of business depreciation and expensing breaks and a number of energy-related breaks for businesses.
Technical corrections legislationLike most major legislation, the Tax Cuts and Jobs Act included some errors, oversights, and omissions that were not intended by Congress. Such glitches are usually fixed retroactively by so-called technical corrections legislation. We can expect to see a technical corrections bill introduced after the midterm elections, when it would hopefully garner some support from balky Congressional Democrats.
The last wordAs I said at the beginning, we almost certainly won’t see any significant tax legislation enacted before the November midterm elections. After that, we shall see. Depending on how the elections turn, out there could be a flurry of tax bills, or we could have total gridlock on the tax front until after the 2020 presidential election. Stay tuned. I will keep you informed.
Here are the temporary pro-taxpayer TCJA changes scheduled to expire at the end of 2025, unless otherwise noted:
* Reduced rates for individual taxpayers.
* Much more favorable alternative minimum tax rules.
* Greatly expanded standard deductions.
* Doubled child tax credit (up to $2,000 per qualifying child) and much higher income thresholds for phase-out rule.
* Credit of up to $500 for dependents who are not qualifying children.
* Lower income threshold for itemized medical expense deductions (scheduled to expire at the end of 2018).
* Elimination of phase-out rule that can reduce itemized deductions for higher-income individuals.
* Bigger percent-of-adjusted-gross-income limit for itemized deductions for cash donations to public charities.
* Hugely increased federal gift and estate tax exemptions ($11.18 million for 2018; effectively $22.36 million for married couples).
* Deduction for up to 20% of qualified business income from pass-through entities.
* 100% bonus depreciation for qualified business assets (scheduled to expire at the end of 2022).
The TCJA also included a number of temporary unfavorable changes for individual taxpayers, which could also be made permanent by Tax Reform 2.0. These changes are scheduled to expire at the end of 2025.
* Elimination of personal and dependent exemption deductions.
* Limitations on itemized deductions for home mortgage interest.
* Limitation on itemized deductions for state and local income and property taxes.
* Elimination of itemized deductions for miscellaneous expenses.
* Elimination of itemized deductions for moving expenses (except for certain military personnel).
* Elimination of tax-free employer reimbursements for moving expenses (except for certain military personnel).
* Elimination of itemized deductions for personal casualty and theft losses (except for losses incurred in federally-declared disasters).
* Elimination of itemized deductions for hobby activities.
* Unfavorable Kiddie Tax rate structure.
* Stricter deduction rule for professional gamblers.
* Limitation on deducting large business losses recognized by individual taxpayers.
