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Tax Reform 2.0 Would Make Some Cuts Permanent

If some members of Congress get their way, the sun will never set on a slew of temporary changes featured in the new Tax Cuts and Jobs Act (TCJA).

If some members of Congress get their way, the sun will never set on a slew of temporary changes featured in the new Tax Cuts and Jobs Act (TCJA).

Under the heading “Tax Reform 2.0,” the House Ways and Means Committee has introduced new proposed legislation piggybacking on top of the TCJA enacted late last year. Prominently, the “Protecting Family and Small Business Tax Cuts Act” (H.R. 6760) would permanently preserve a number of provisions that went into effect in 2018 and are currently scheduled to “sunset” after 2025. The list of provisions, most of which are aimed at individual taxpayers, includes the following:

  • Standard deduction: The standard deduction is increased to $12,000 for single filers and $24,000 for joint filers. As a result of this provision and other changes, more taxpayers will claim the standard deduction instead of itemizing.
  • Personal exemptions: All personal exemptions including dependency exemptions for qualifying children and relatives, are eliminated.
  • Itemized deductions: The reduction of itemized deductions is eliminated in conjunction with numerous other changes affecting those write-offs.
  • Qualified business income deduction: A new deduction of up to-20% of qualified business income (QBI) is created for pass-through entities, including sole proprietorships.
  • Child Tax Credit: The Child Tax Credit (CTC) is increased from $1,000 to $2,000, of which $1,400 is refundable.
  • Alternative minimum tax: The TCJA increases the exemption amounts for individual taxpayers for purposes of calculating the alternative minimum tax (AMT).
  • State and local taxes: The deduction for state and local tax (SALT) payments is limited to $10,000 annually. This includes any combination of (1) property taxes and (2) income or sales taxes.
  • Medical deductions: The threshold for deducting medical expenses is lowered from 10% of adjusted gross income (AGI) to 7.5% of AGI, retroactive to 2017, but only though 2018.
  • Charitable deductions: The TCJA increases the annual limit for deductible charitable donations from 50% of AGI to 60% of AGI.
  • Mortgage interest: The TCJA modifies the rule for deducting mortgage interest, including a repeal of deductions for new home equity debt.
  • Miscellaneous expenses: The deduction for miscellaneous expenses, including certain income production expenses (e.g., tax advisory fees) and unreimbursed employee business expenses, is eliminated.
  • Casualty and theft losses: The TCJA eliminates the deduction for casualty and theft losses, except for losses sustained in federally-declared disaster areas.
  • Moving expenses: The deduction for moving expenses is eliminated, except for military personnel. Also, moving expense reimbursements paid to employees, except for military personnel, are now taxable.
  • Gambling losses: Certain restrictions are imposed on losses claimed for gambling activities:
  • ABLE accounts: The TCJA provides enhancements for ABLE accounts, including the ability to roll over funds from Section 529 plans to ABLE
  • Student loans: An exclusion from taxable income is allowed for student loans discharged due to death or disability

But Tax Reform 2.0 is far from a done deal. Notably, there has been push-back from legislators in “blue states” where many residents will be hurt by the annual limit on SALT deductions. In those states, some lawmakers are advocating an outright repeal of the SALT deduction limit for individual taxpayers, instead of a permanent extension. For states — Connecticut, Maryland, New Jersey and New York – have sued the federal government over the TCJA, claiming it is unconstitutional.

Nothing is likely to happen until the mid-term elections. At that point, the “weather forecast” for sunsetting provisions will become clearer.