Congress Considers Making New Tax Laws Permanent and Other Changes

If several members of Congress get their way, the sun won’t stop shining on a slew of tax breaks passed last year as part of the Tax Cuts and Jobs Act (TCJA).

Many provisions in the new TCJA, including tax rate cuts for individuals, take effect in 2018 and are scheduled to “sunset” after 2025. In other words, unless further legislation is enacted, these provisions will be resurrected in 2026 in their previous incarnations. But various legislative proposals surfacing in Congress this spring would make certain new tax law changes permanent as well as adding a few other tweaks to the tax code.

Of course, nothing in the tax law is truly “permanent,” since a new legislative body could revise or even completely wipe out all the tax law changes before we enter the next decade. Nevertheless, it is noteworthy that momentum is building towards removing the temporary nature of most of the TCJA provisions for individuals. This includes the following:

Tax rates: The new law reduces tax rates for individuals and adjusts the bracket amounts. Currently, the tax rates for 2018 through 2025 are 10%; 12%, 22%; 24%; 32%; 35% and 37%.

Standard deduction: The standard deduction has effectively been doubled by the TCJA to $12,000 for single filers and $24,000 for joint filers. This increase is coordinated with other rules for itemized deductions and personal exemptions.

Alternative minimum tax: The exemption amounts for the alternative minimum tax (AMT), plus the thresholds for phasing out exemptions, are significantly increased. These AMT figures are scheduled to be indexed for inflation in future years.

Child tax credit: The child tax credit (CTC) for qualified taxpayers is doubled from $1,000 to $2,000, of which $1,400 is refundable. One proposed bill would make the credit entirely refundable. Note that the CTC is phased out for high-income taxpayers.
Medical expenses: Under the TCJA, the threshold for deducting medical expenses has been roiled back from 10% of adjusted gross income (AGI) to 7.5% of AGI, but only for 2017 and 2018. Under one bill, the change would be effective for 2019 and beyond.

Section 529 plans: The list of qualified expenses for Section 529 plans has been expanded to include tuition at an elementary or secondary public, private or religious school, for up to $10,000 per year.

Charitable deductions: The annual deduction threshold for cash contribution is generally increased from 50% of AGI to 60%.

Estate tax: The federal estate tax exemption is doubled from $5 million to $10 million, resulting in an inflation-indexed exemption of $11.18 million in 2018. Thus, a married couple can now easily shield up to $22.36 million from estate tax.

What’s more, the list of provisions that would be made permanent isn’t limited to tax breaks for individuals. For example, 100% bonus depreciation, which is currently subject to a phase-out that would end after 2026, would be made permanent, thereby allowing immediate write-offs for qualified business property. In addition, the deduction for pass-through business entities would not sunset after 2025, as it is currently scheduled to do.

On the flip side, certain restrictions and cutbacks included in the TCJA, such as more limited deductions for state and local taxes (SALT), revisions for mortgage interest deductions and elimination of personal exemptions and miscellaneous expense deductions, would not vanish after 2025 either.

Finally, other changes proposed in conjunction with making TCJA provisions permanent would provide inflation indexing of certain assets in determining capital gain or loss and create an employer-provided worker training credit. We will keep a close watch on proposed legislation as it wends it way through Congress in this mid-term election year.