The 2017 tax reform bill has been a boon for American workers.
In addition to the average household’s $1,400 tax cut this year, there are now more jobs available than people looking for them. Just last month, average wages went up by 2.9 percent—the largest wage increase since the summer of 2009.
On Thursday, the House Ways and Means Committee plans to consider a series of three new bills that it is calling “Tax Reform 2.0.” The package would make much of last year’s tax reform permanent, introduce new simplifications for family saving, and provide a helping hand for new small businesses.
Here are three main highlights from the bills.
1. Protecting the individual and small business tax cuts.
The Protecting Family and Small Business Tax Cuts Act of 2018 would permanently extend the temporary provisions of the Tax Cuts and Jobs Act, which are currently slated to expire after 2025. The key provisions include:
- Permanently lower individual income tax rates and thresholds.
- Permanently larger standard deductions of $12,000 for single filers and $24,000 for married couples filing jointly.
- Permanently doubled child tax credit to $2,000 per child and higher phase-out threshold. Permanent repeal of personal and dependent exemptions and permanent $500 non-child dependent credit.
- Permanent $10,000 cap on the state and local deduction (SALT) and $750,000 cap on the mortgage interest deduction for new mortgages. Permanent repeal of the phase-out of itemized deductions and other smaller miscellaneous individual itemized deductions.
- Permanently increased estate and gift tax (“death tax”) and alternative minimum tax exemptions and phase-outs.
- Permanent 20 percent deduction for pass-through business income.
- Two-year extension of expanded deduction for medical expenses exceeding 7.5 percent of adjusted gross income, down from the pre-tax reform level of 10 percent, through 2020.
Congress should make the already-agreed upon provisions in the tax bill permanent. This would continue to grow the economy while protecting the American people from future tax increases.
2. Simplifying and expanding family savings.
The second component of Tax Reform 2.0 is the Family Savings Act of 2018. This bill includes four important reforms to simplify retirement savings, create a new universal savings account, expand the use of 529 education savings accounts, and allow families to access their own savings to support parental leave.
Personal retirement savings accounts, such as 401(k)s and IRAs, are crucial for personal retirement savings because they shield investments from being taxed twice and thus encourage people to save for their own retirement. Yet many Americans, especially those employed by small businesses, don’t take advantage of these plans due to their complexity and high compliance costs.
Tax reform 2.0 will work to allow small employers to pool together to offer retirement benefits, repeal the maximum age for new contributions, add new exemptions from minimum distribution rules, as well as other modifications. The reforms stop well short of the much needed complete overhaul of retirement taxation, but they are a small step in the right direction.
Universal savings accounts.
Tax Reform 2.0 includes new small universal savings accounts that would allow taxpayers to contribute up to $2,500 a year. Withdrawals would be tax-free and not reserved strictly for retirement.
These simplified accounts have proven successful in Canada and the United Kingdom and would help Americans protect more of their savings from taxation without all the retirement strings attached.
Regrettably, a contribution limit of $2,500 a year is much too low. People’s lives are full of ups and down, and they should be able to save if they have a good year—putting money away when times are good in order to provide in times of need. Under the currently proposed limit, a family could save every year for the first 18 years of their child’s life and still have saved less than one year’s tuition at many private colleges.
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