U.S. House Passes Tax Reform 2.0
The U.S. House of Representatives passed Tax Reform 2.0, a series of tax bills that builds on the tax overhaul passed into law late last year. The legislation makes the individual tax regulations that are set to expire at the end of 2025 permanent, expands incentives for retirement savings, and adds tax breaks for entrepreneurs. Just when you thought you understood tax, it’s changing yet again. Although the tax bills have passed the House, Tax Reform 2.0 has less of a chance passing the Senate where it faces budgetary restrictions.
To prevent the budget from increasing in the long run, Congress made the individual tax changes enacted in 2017 temporary. The centerpiece of Tax Reform 2.0 is to extend the new tax rates, limitations on deductions, and various other rules. A few examples of what would be made permanent are shown below.
· Reduce most individual tax rates, with a top rate of 37%
· Increase the standard deduction to $24,000 for joint filers and $12,000 for individual filers
· Repeal the deduction for personal exemptions, which includes dependents
· Increase the child tax credit to $2,000
· Limit the deduction for state and local taxes to $10,000
· Limit the mortgage interest deduction to the amount of interest on debt up to $750,000
· A new deduction for 20% of qualified income from sole proprietorships, partnerships and other similar businesses
· Increase the limitation for charitable contributions to 60% of adjusted gross income
The bills expand retirement savings by offering more retirement account options, flexibility, and incentives. The retirement impacts include the following.
· Creating a new Universal Savings Account, which allows individuals to contribute up to $2,500 per year
· More flexibility for employers in offering and maintaining 401(k) plans
· Education savings accounts would be expanded by allowing them to be used for apprenticeship fees, homeschooling, and student debt
· Individuals would be able to access their retirement accounts to have a baby without a penalty
Finally, entrepreneurs would be allowed to fully deduct start-up costs. This would provide a tax break for new businesses getting off the ground.