President Trump signed the tax reform bill into law on December 22, 2017. It is the first comprehensive overhaul of the nation's tax laws since 1986.
According to the Joint Committee on Taxation and Congressional Budget Office, the package will reduce revenues by $1.46 trillion over the next 10 years. The bill largely maintains the previous incentive structure for retirement savings and employer-provided health care. The final package also significantly scales back the House-passed bill's measures negatively affecting the higher-education and nonprofit sectors.
- The package makes no significant changes to retirement savings. Early calls to require contributions on an after-tax (Roth) basis did not materialize. Nor did less dramatic proposals, such as to coordinate 403(b) and 457(b) contribution limits or to subject Nonqualified Deferred Compensation (NQDC) to taxation upon vesting.
- The package also maintains the tax-free treatment of municipal bonds, including private activity bonds.
- Families will be allowed to use 529 savings plans, originally intended for college savings, for K-12 education (including private schools and home-schooling).
- Several provisions will negatively affect nonprofits, including the largest higher-education endowments (on a per-student basis). But the final package retains the tax-free treatment of graduate tuition waivers and employer-provided tuition.
After more than a decade of hearings in the House and Senate – and considerable attention from advocacy groups and think tanks – passage represents the most fundamental rewriting of the Tax Code since 1986.
Individual provisions (generally). The most significant changes for individuals and families in the final tax-reform package include:
- repealing the Affordable Care Act's mandate to carry health insurance.
- maintaining the current seven individual brackets, but through 2025 lowering the rates and changing the income levels to which they apply, as follows:
Rate Joint Returns Individuals 10% $0-$19,050 $0-$9,525 12 $19,051-$77,400 $9,526-$38,700 22 $77,401-$165,000 $38,701-$82,500 24 $165,001-$315,000 $82,501-$157,500 32 $315,001-$400,000 $157,501-$200,000 35 $400,001-$600,000 $200,001-$500,000 37 >$600,000 >$500,000
- nearly doubling the standard deduction (which is expected to reduce from about 30% to an estimated 4-8% the proportion of taxpayers who itemize their taxes), while suspending the personal exemption through 2025;
- retaining the Alternative Minimum Tax (AMT) for individuals, but increasing the exemption amount and phase-out thresholds so fewer individuals will be subject to the AMT; and
- allowing individuals to deduct only an aggregate of $10,000 of state and local income, sales, and property taxes.
Retirement plans. During the yearlong process of developing tax-reform legislation, retirement incentives were under scrutiny – and appeared vulnerable. Ultimately, however, retirement incentives were generally preserved and the final package does not include proposals:
- requiring "Rothification" of retirement plan contributions and catch up contributions;
- "simplifying" 403(b) and 457(b) plan rules (to bring them into conformity with 401(k) rules);
- changing retirement plan loan and hardship distributions rules;
- requiring inclusion of NQDC in income upon vesting; and
- changing the 59½ in-service distribution ages for 457(b) or defined benefit plans.
The package does, however, include modest changes that will extend the period during which a participant with a plan loan may avoid taxes by rolling over some types of unpaid loan amounts—only otherwise taxable distributions that occur solely because a loan is accelerated on account of severance from employment of plan termination. Specifically, the package permits employees to roll over the unpaid loan balance to an IRA or plan by the due date for filing their tax return for the year of the acceleration (including extensions). The provision applies to loans from qualified, 403(b), and governmental 457(b) plans.
Universities and other nonprofits. The higher-education and nonprofit sectors fare better in the final package than they would have under the House-passed bill. The final package includes provisions:
- imposing a 1.4% excise tax on the net investment income of endowments of private colleges and universities with a value of at least $500,000 per tuition-paying student (a tax that at current levels is anticipated to impact about 30 colleges and universities);
- imposing a 21% excise tax on compensation greater than $1 million paid to any of the five highest-paid employees of tax-exempt organizations;
- increasing the limit on charitable cash contributions a taxpayer can deduct to 60% of adjusted gross income (from 50%) (though the higher standard deduction could dampen the incentive for many taxpayers);
- retaining the tax exemption for tuition waivers and the ability to deduct up to $2,500 in interest on student loans (all of which the House-passed bill would have ended); and
- dramatically reducing the share of taxpayers who itemize their returns and doubling the estate-tax deduction, both of which will dampen tax incentives for charitable giving.