The House of Representatives passed its Tax Reform 2.0 legislation on Friday, and it has the potential to make some pretty significant changes to the already-revised U.S. tax code. Among other things, it would make the individual tax cuts created by the Tax Cuts and Jobs Act permanent and also make significant changes that affect retirement savers.
With that in mind, here's an overview of what Tax Reform 2.0 would do and where the legislation goes from here.
What's in the Tax Reform 2.0 bill?
Technically, Tax Reform 2.0 is a collection of three bills, each with its own unique purpose. Here are the highlights of each:
- The Protecting Family and Small Business Tax Cuts Act of 2018 would make the individual tax changes that were passed in late 2017 permanent. Currently, the lower marginal tax rates, higher Child Tax Credit, and most of the other tax changes that affect individual taxpayers are set to expire after 2025. This bill also would extend the more generous medical deduction threshold of 7.5% of AGI, which is currently set to expire after the 2018 tax year, for another two years.
- The Family Savings Act of 2018 would make several changes affecting retirement, education, and general savings in the United States. It would remove the age limit of 70 1/2 for making traditional IRA contributions and also exempt Americans with less than $50,000 in their retirement accounts from required minimum distributions, or RMDs. The bill also would help families by allowing up to $7,500 in penalty-free withdrawals from retirement accounts for expenses related to a new child. Additionally, it would create a new type of savings account, known as a Universal Savings Account, which would have a similar tax structure to a Roth IRA but would allow $2,500 to be set aside on a tax-advantaged basis for any purpose, not just retirement. Finally, the bill would make some small tweaks to allowable expenses for 529 accounts and make it easier for smaller companies to join together to offer 401(k) plans.
- Finally, the American Innovation Act is the shortest bill of the three and is designed to encourage Americans to start their own businesses. It would do this by allowing qualified new businesses to deduct as much as $20,000 in start-up costs in the year they are incurred.
An uphill battle ahead
While the Tax Reform 2.0 bills have passed the house, they face a challenging road ahead of them in the Senate, to say the least. In fact, the Senate isn't expected to debate this legislation at all.
Simply put, there are a lot of changes in these bills that aren't popular among Democrats and even some moderate Republicans. Cost is one major issue -- these bills would cost an estimated $627 billion over the next 10 years on top of the $1.5 trillion estimated cost of the Tax Cuts and Jobs Act. It's not likely that any Democrats would go along with such a high cost, especially for legislation that's seen as a tax cut that disproportionally benefits the rich.
Having said that, some of the retirement-savings changes in the Family Savings Act could end up being considered by the Senate, as they do have some bipartisan appeal. For example, getting rid of the traditional IRA age limit for contributions is quite popular on both sides of the aisle. In fact, there's currently a Senate bill known as the Retirement Enhancement Security Act that contains many of the same provisions that could potentially be voted on later this year.
The bottom line is that we could see some of the retirement-specific changes proposed by Tax Reform 2.0 ultimately become law. On the other hand, the bills that would make the individual tax cuts permanent and allow for small businesses to deduct expenses immediately are likely to go no further.