Last fall, Congress and the Administration enacted significant tax reform – the Tax Cuts and Jobs Act (“TCJA”). This was the first comprehensive tax bill in over 30 years. It was a major political challenge overcoming many legislative hurdles along the way. Now, less than a year later, Congress is looking at moving additional tax legislation again this year. Congressional leaders unveiled their new plan, referred to now as “Tax Reform 2.0” (or “TR2.0”), on July 24, 2018. The TCJA made significant changes in many areas and offered over $1.5 trillion in tax reductions, but TR2.0 is expected to be much smaller in scope and make less of an overall budget impact.
Tax Provisions in TR2.0
There have been some comments and hints at what TR2.0 would include, but this was settled with the recent release of the framework of TR2.0 by House Ways and Committee Chairman Kevin Brady (please click here for the summary provided by the House Ways & Means Committee on TR2.0). The overall focus of this year’s bill will be more on individual tax changes and less on businesses measures; it will be packaged as a middle-class tax proposal. Here are some of the items included in this next round of tax reform:
- Individual Tax Rates. You may recall that the TCJA reduced individual tax rates and expanded income ranges resulting in lower taxes for most taxpayers. Due to the Senate budget rules, however, these individual tax reductions were not made permanent—they expire after 2025. If nothing is done, the tax rates will revert to the older higher rates in effect in 2017. As part of TR2.0, Congress would make these individual tax rates permanent, and may also further reduce tax rates.
In addition, one of the major provisions in last year’s TCJA was the new 20% deduction for pass-through businesses. For businesses that qualify for this new deduction, the top tax rate drops from 37% to 29.6%. This new deduction starts in 2018, however, as with the individual tax rates noted above, it goes away after 2025. The TR2.0 would make permanent the “small business tax cut” from TCJA, and this presumably relates to making the 20% deduction permanent and removing the uncertainty as 2025 approaches.
- Retirement Plans. Retirement plans were left out of most of the changes made by the TCJA. As part of TR2.0, Congress will consider making various changes to retirement plans to help workers save for retirement. There is some bi-partisan support for enhanced retirement plan provisions and this could be a key component of TR2.0.
- New Savings Tool – USA Account. TR2.0 would create a new family savings tool labeled the “Universal Savings Account” (or “USA” account). These accounts will offer flexibility for families to save, however, the details of these USA accounts have not yet been provided. In addition, TR2.0 would offer expanded use of Section 529 education plans to cover apprenticeship fees for a new trade, and also allow these plans to pay off student loans. Further, existing retirement accounts could be used without incurring any penalty to pay for costs associated with the birth of a child or to adopt a child.
- Health Savings Accounts (HSAs). Congress is now looking at enhancements to HSAs. In fact, the House passed several separate bills in the week of July 23, 2018 dealing with expansions to HSAs and several other health care items, including elimination of the excise tax on medical devices. These HSA and health care provisions may be moved as separate legislation, or perhaps contained in TR2.0.
- Corporate Tax Measures. The TCJA cut the corporate tax rate down to 21% from 35%, although the original House proposal last year sought a 20% corporate rate. TR2.0 could look to drop this tax rate from 21% to 20%, however, this was not included in the overall plan released on July 24, 2018.One other business change that will be part of TR2.0 is to enhance the tax treatment for deducting start-up costs and to “remove barriers to growth.” It is uncertain what these barriers to growth are and what Congress has in store, as specifics were not announced. Keep in mind, the focus of TR2.0 will be more on individual tax changes, and less on business provisions.
- Technical Corrections. The TCJA was a comprehensive and complex piece of legislation, and there are a number of items that need to be addressed by Congress to fix certain measures so these reflect what Congress intended. These technical corrections, however, will likely not be part of TR2.0, but instead be part of separate year-end legislation after the November 2018 elections.
We will provide another update as more details are provided on TR2.0.
Prospects for TR2.0
The release of the TR2.0 proposal by House tax leader Brady is the first step in this year’s tax reform process. When Congress returns in September, they have a short window of time to move this legislation. Leaders hope to have TR2.0 enacted by early October before they break for November elections. While there is support for another tax bill in the House, the key is whether there is sufficient backing in the Senate to pass tax legislation again this year. It is also unlikely that TR2.0 will move under the “reconciliation” rules in Congress as the TCJA did last year. If it is done under reconciliation, TR2.0 would only need a simple majority in each Chamber of Congress (and, thus only 51 votes in the Senate). It is most likely not to be designated as a reconciliation bill, and thus it will need 60 votes in the Senate, and this could be a challenge in an election year.
So, 2018 could be another year for tax changes. Many did not expect tax reform to pass last year, and there is uncertainty this year as well, but it is still early in the process. We will keep you posted as TR2.0 moves forward. Stay tuned.