The de­tails on Tax Re­form 2.0

Accounting Today - - Taxpractice - Mark A. Luscombe

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.

H.R. 6760

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

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.

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.

Sum­mary

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.

AT

Mark A. Luscombe, JD, LL.M, CPA, is prin­ci­pal an­a­lyst at CCH Tax and Ac­count­ing, a Wolters Kluwer busi­ness.

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