Tax reform

In 2017 the Tax Cuts and Jobs Act (TCJA) was passed as an effort to offer tax relief to middle-class families and small businesses, and to stimulate the economy. Though the new tax laws were just implemented at the beginning of this year, there are already more tax changes underway.  

“We are providing certainty. The Protecting Family and Small Business Tax Cuts Act locks in the tax relief from the Tax Cuts and Jobs Act — which included a nearly doubled standard deduction, a doubled Child Tax Credit, lower rates across the board and a historic 20-percent pass-through deduction for Main Street businesses. This will create over 1.5 million new jobs, continue to raise wages and boost long-run GDP.” said Kevin Brady (R-Texas), chairman of the House Ways and Means Committee.

This new wave of changes is an effort to make the tax cuts enacted by the TCJA permanent. Tax Reform 2.0 introduced three bills to modify and build on the TCJA. Standing on three principles: Protecting the Middle Class and Small Business Tax Cuts, Protecting Family Savings and Spurring New Business Innovation.  

Protecting the Middle Class and Small Business Tax Cuts — The Protecting Family and Small Business Tax Cuts Act of 2018 

Due to the TCJA, most Americans will see a change in their taxes when they file their 2018 taxes this upcoming tax season but many cuts were implemented but most are temporary and set to expire in 2025. This bill will make some key changes: 

The bill would make the tax rate changes from the Tax Cuts and Jobs Act permanent. It would make permanent the $10,000 cap to the state and local taxes paid deduction and the lower mortgage interest deduction permanent. Elimination of the personal exemption and changes to the Standard deduction and Child Tax Credit will be made permanent along with the temporary expansion of the Medical Expense Deduction, which under this bill will expire in 2020. 

The Section 199A deduction for pass-through businesses would also be made permanent.

Promoting Family Savings — Family Savings Act of 2018

Through putting more money in the pockets of business owners and employees with cuts from the TCJA, lawmakers believe that it’s a good time to introduce and expand ways to save for retirement. Almost half of working-age citizens say that they will not be able to retire comfortably, 2.0 offers a number of ways to help businesses help their workers participate in such plans.

Family-Friendly Savings Plans are being introduced as a way to help families start saving more money sooner than before.  Changes would be made to the Retirement Enhancement and Savings Act of 2018 and a new Universal Savings Account, also known as USA Account, would be a flexible savings plan for families. The account would not require someone to be over retirement age before they can withdraw from the account. Taxpayers can contribute up to $2,500 a year and ideally use cash for expenses such as emergencies, mortgage down payments, or any of the other large one-time expenses for which they might need to save.

Expanded 529 Education accounts would allow families to cover the cost of homeschooling, pay off student debt or pay apprenticeship fees to learn a trade. 

Spurring New Business Innovation — American Innovation Act of 2018

“Boosting business confidence was a goal of Republicans’ work to transform our tax code last year,” Brady said. “The Tax Cuts and Jobs Act took bold steps to create an environment where our Main Street businesses could finally compete and win after being dragged down by the Obama economy for far too long. With a new historic 20 percent deduction for pass-through business income —which our Committee will soon vote to make permanent — as well as many other pro-growth provisions designed for our small businesses, these local job creators now have a tax code that works for them.” 

Under current law taxpayers can claim up to $5,000 for start-up and $5,000 for operational cost. Under Reform 2.0 up to $20,000 deduction would be allowed for these same costs.

With many of our countries competitors rising above us in Innovation, The United States is no longer on Bloomberg’s top 10 list of most innovative countries in the world.

Start-ups are an asset to productivity and innovation. Many start-ups fail within their first few years and a lot of those are due to financial issues. Republicans say that optimism is high amongst business owners right now and with this same optimism and tax roadblocks removed they hope that more businesses will succeed. It is hoped that more people will become inspired to start a new business as well as new businesses can be seen as a way to put America back on top. 

The bill has just been officially introduced and isn’t law yet but the bills go for mark-up this month and we’ll see where things go from there.

For more information regarding the bills and upcoming legislation related to Tax Reform 2.0 visit waysandmeans.house.gov

Brittany Sabalza, enrolled agent, is director of tax education at Pro Tax Solutions, Indianapolis and a tax columnist. Contact her at britt.sabalza@gmail.com.

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