Tax Reform 2.0 passed the House in late September right before the midterm elections. Now that the midterms have passed, we’re looking to see where the bills tied to Tax Reform 2.0 stand.
As you may recall, the Tax Cut and Jobs Act passed last December. However, most of the individual and some small business changes are set to expire at the end of 2025 under the current law. Tax Reform 2.0 is the legislation led by the Republican Party to extend or make permanent most of these individual and small business changes. On September 24th, 2018, the House of Representatives passed a bundle of bills coined “Tax Reform 2.0,” which include:
1. American Innovation Act of 2018: This act aims to make permanent changes to start-up expenses and other small business-related expenditures.
2. Family Savings Act of 2018: This act brings about the Universal Savings Accounts and some key treatments to help streamline retirement accounts in the United States.
3. Protecting Family and Small Business Tax Cuts Act of 2018: This act was written to extend most of the individual and small business provisions including the doubling of the Child Tax Credit and standard deductions, changes to individual tax rates, and the 20% Qualified Business Deduction for certain pass-through entities.
Will Tax Reform 2.0 Advance to the Senate?
The positive and negative features of the above bills are somewhat irrelevant if the current Senate does not bring the bills to vote before the baton is passed to the 116th Congress in January. After the midterm elections, the Majority Senate Leader is now less likely to bring the package to the floor for consideration, since the Democrats have gained control of the House.
Though Republicans currently control both House and Senate, there is not enough bipartisan support to reach the required 60 votes in the Senate, as the two political parties remain polarized on their stances, and Republicans currently hold only 51 seats. “We expect no major tax legislation to become law under a divided Congress,” Alec Phillips, an economist at Goldman Sachs, said in a note. “Our projections of the growth impulse from fiscal policy assume no substantial tax changes will be enacted over the next few years, and the election result should not change this assumption.”
What Does This Mean for American Taxpayers?
If the Senate were to bring Tax Reform 2.0 to the floor and manages to achieve the necessary 60 votes, you may be wondering what major items will affect taxpayers. These include:
- Individual Tax Rates locked in permanently (otherwise, these will expire in 2025)
- Doubling of the Standard Deduction $12,000 to $24,000 for Married Filing Jointly taxpayers
- Doubling of the Child Tax Credit $1,000 to $2,000, with up to $1,400 in refundable credit
- 20% Qualified Business Credit locked in for qualified businesses and individuals
- Medical expenses once subject to 10% of Adjusted Gross Income, subject to only 7.5% of AGI
- Permanent elimination of the personal exemption
- Permanent SALT $10,000 annual deductible limitations
- Lock in the limitations to claiming mortgage interest deduction and the elimination of secondary Home Equity Loan Interest for most taxpayers
- Permanent elimination of miscellaneous expense deductions
- Permanent elimination of the moving expenses adjustment that will only be available to active duty service members and would – going forward – exclude expats.
The Majority Senate Leader and the Republican Party may face some opposition in securing the required nine Democratic or Independent votes. The SALT deduction alone is wildly controversial, leaving many states and taxpayers alike upset and doubly taxed. Further complicating its path to passage, Tax Reform 2.0 is not the only item on the GOP agenda. Other major legislation, including the budget and funding the Department of Homeland Security to build the border wall, is likely to receive the most attention moving forward.
What hasn’t changed? Corporate Tax Rates are still 21% until the foreseeable future.
What Does this Mean Specifically for Expats?
In short, there’s nothing in the Tax Reform 2.0 legislation that addresses changes specific to expats; most of the changes that concern expats were brought about by the original Tax Cuts and Jobs Act. Tax Reform 2.0 would make some of these changes permanent. However, some areas will affect expats in specific situations. The SALT cap could make expats who live in “sticky states” experience an increased tax burden. The tax rates introduced by the TCJA would be made permanent, which could be good news for Americans who live abroad in low to no tax countries, since their taxable income will be taxed at a lower rate. The doubling of the Child Tax Credit could help out expats with children since the refundable credit could be used to pay off tax liabilities. Expats who own small businesses could benefit from the 20% business income deduction. The elimination of the moving expense deduction would be a detriment to expats who choose to relocate.
In summary, expats weren’t part of the major changes in Tax Reform 2.0, but they will experience change if they fit into certain categories.
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