A second round of tax reform – dubbed Tax Reform 2.0 – debuted in Congress last week.
As part of the debut, Republicans on the House Ways and Means Committee introduced three bills:
- The Protecting Family and Small Business Tax Cuts Act of 2018. This bill would make certain temporary provisions of the Tax Cuts and Jobs Act of 2017 permanent, specifically those that apply to individual taxpayers and small businesses.
- The Family Savings Act of 2018. This bill would change some rules that govern retirement savings plans and 529 college savings plans. It would also create a universal savings account and waive penalties when you make early withdrawals from your retirement plan in certain cases, such as the birth or adoption of a child.
- The American Innovation Act of 2018. This bill would increase the amount of startup and organizational costs that new businesses could deduct on their federal income tax returns.
What this could mean for you
Like the Tax Cuts and Jobs Act, Tax Reform 2.0 promises a mixed bag of give and take.
For example, the first bill would make permanent the higher standard deductions for individuals and the elimination of personal exemptions. Both provisions were set to expire at the end of 2025.
Similarly, the universal savings account proposed under the Family Savings Act would allow qualified taxpayers to save and invest up to $2,500 per year without being taxed on the growth in the account. But only withdrawals would be tax free — contributions to the accounts would not be tax deductible.
The Family Savings Act would also permit 529 account-holders to use the funds in their 529s to repay student loans — but would cap distributions for this purpose at $10,000 per year.
Why should you care?
The Tax Cuts and Jobs Act affected nearly everyone who pays taxes to the federal government. Although many of the provisions of Tax Reform 2.0 may seem narrower — for example, deductions for startup businesses — others, like standard deductions and personal exemptions, would have far-reaching impact.
The nonpartisan Joint Committee on Taxation projects that the bills, in their current form, would significantly reduce revenue for the federal government by 2028. According to the group …
- The Protecting Family and Small Business Tax Cuts Act of 2018 would lower revenue by nearly $631 billion.
- The Family Savings Act would reduce revenue by nearly $21 billion.
- The American Innovation Act of 2018 would cost the federal government about $5.4 billion in revenue.
All in all, the Congressional Budget Office has predicted the Tax Cuts and Jobs Act would increase the federal deficit by $1.9 trillion by 2028.
Uncle Sam can deal with budget shortfalls in a few ways: increasing revenue through higher taxes, reducing spending or increasing debt. Some government actions could be better than others for your personal financial situation, but it’s virtually certain that no solution would please everyone affected by tax reform.
Bottom line
The bills that make up Tax Reform 2.0 have a long way to go before becoming law. Both chambers of Congress would need to review, revise, vote on and agree to the bills before they could go to the president’s desk for signature (or veto).
For context: The Tax Cuts and Jobs Act moved through Congress quickly. The House Ways and Means Committee introduced the House version of the bill on Nov. 2, 2017, and the final, revised bill became law on Dec. 22, 2017.
It’s unlikely the new tax reform bills would be able to move through the House and Senate, and become law, before the midterm elections in November. So for now, the Tax Cuts and Jobs Act remains the legislation that will likely have the biggest effect on your federal income tax bill for the 2018-2025 tax years.
But if you want to have a say on whether the proposals included in Tax Reform 2.0 make it through the House and Senate (or on what changes you think should be made to the bills), contact your local representative and make your voice heard.