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Wednesday, 29 November 2017 17:11

How Tax Reform Impacts your Benefits

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Republicans have promised to get a tax bill on President Trump’s desk by the end of the year. In response, the House and Senate have created separate versions of the Tax Cuts and Jobs Act (TCJA) in the last several weeks, leaving little time for them to be debated. 
These bills represent the largest proposed tax code overhaul in 30 years, and it would affect nearly every American family and business. The House passed their bill on 11/16/17, and the Senate passed their bill out of committee on 11/28/17. The full Senate is expected to vote as soon as this week.
The TCJA also would affect what benefits you can offer your employees, repealing some provisions effective 1/1/2018, even though you may have already enrolled employees for those very programs. Please note all of these provisions are changing rapidly and this blog post may already be out of date by the time you read it!

Specific to Benefits:
  • The Individual Mandate: One of the most striking differences between the bills is that the Senate bill proposes to eliminate the requirement that most Americans have insurance or else pay a penalty, while the House bill makes no healthcare changes. This provision will please those who don’t want to carry coverage, but will raise individual market premiums by an estimated 10% due to up to 13 million dropping out of the pool, per the CBO. This could cause some employees to drop your employer plan if they’re no longer required to have coverage, likely worsening your risk profile a bit. The White House recently stated that they would support the removal of the individual mandate, unless it becomes an impediment to passing the tax bill as a whole.
  • Moving Reimbursements: The ability to deduct qualified moving expenses for a relocating employee would be eliminated for both the employer and the employee. This would be permanent in the House bill, and temporary for eight years in the Senate bill.
  • Education Benefits: The House plan eliminates the $5,250 tax free reimbursement employers can provide for education-related expenses (although not for those directly related to the employer’s business). The Senate bill is silent on educational programs.
  • DCAP: The House plan eliminates the Dependent Care Assistance Programs from 2018 to 2023, though employees could instead take the dependent care credit on their returns. The Senate has not proposed any changes in this area. 
  • Commuter Benefits: Employer-provided transportation benefits may now be non-deductible to employers under both bills.
  • Stricter Meals and Entertainment Definitions: Most business entertainment and even some employer-provided meals to employees may become non-deductible to employers, which will impact your employee recognition, client functions, and other company events.
For Businesses:
  • Lower Corporate Tax Rate: A key focus of the Senate tax bill is to lower the tax rate for businesses, to encourage them to keep their money in America rather than storing it overseas to avoid heavy taxation in the U.S. The House bill cuts the top corporate tax rate from 35% to 20%, a permanent change that would not expire and begins in 2018. The Senate bill reduces the top tax rate to 20% as well, but not until 2019. Businesses have wanted this change for years, as they feel the current 35% tax makes them less competitive compared to foreign companies, and therefore encourages them to move their money abroad.
  • “Pass Throughs”: Companies such as LLCs, S-Corps, and partnerships, whose income is passed through and taxed at each owner’s individual tax rate, represent about 95% of American businesses, according to the Brookings Institution. These businesses get a tax break as the House plan lowers the top tax rate from 39.6% to 25% for certain income, whereas the Senate plan keeps the ordinary income tax rates but offers a 17.4% deduction before taxing that income (with a possible amendment to a 20% deduction being discussed). 
For Individual Americans:
  • Changing Brackets: The Senate bill keeps seven tax brackets, while the House plan cuts it down to four (12%, 25%, 35%, and 39.6%). The Senate bill also lowers the top bracket from 39.6% to 38.5%. It’s estimated that most Americans would pay the same or lower taxes until 2023. At that time a lower measure of inflation would be used, meaning that more people would move from the 12% tax bracket to the 25% (which in 2016 started at $75,300 of income for a married couple filing jointly). It’s estimated that under that new thresholds, 40% of Americans would pay less, and 22% would pay more in taxes.
  • Bigger Standard Deduction; Fewer Write-offs: The House bill gets rid of many of the smaller deductions and replaces them with a larger standard deduction, a slightly larger child tax credit of $1600 per child vs $1,000 now, and a new temporary Family Flexibility Credit ($300 a year for individuals and $600 for couples). This Family Flexibility Credit would be eliminated starting in 2023. The larger standard deductions mean the first $12,000 for individuals and $24,000 for couples would be tax-free, nearly double today’s deductions. Under the Senate plan, all state and local income and property tax (SALT) deductions are gone, typically affecting taxpayers earning more than $100,000 per year and living in high tax states like CT, NJ, NY, and CA, whereas the House would allow a deduction of up to $10,000 of SALT taxes. The House bill eliminates almost all itemized deductions, such as those for plug-in motor vehicles, the costs of a tax preparer, moving expenses, college tuition, and theft or loss of valuables. Deductions for charitable donations, property taxes up to $10,000 a year and mortgage interest would still be available. The Senate includes the interest you pay on the first $1 million of mortgage debt as a deduction, while the House plan reduces that threshold to $500,000.
  • Medical Expense Deduction: Americans can still deduct large medical expenses under the Senate plan, but the House bill eliminates this deduction entirely. 
  • Educational Deductions: The House plan would combine some education tax credits, and eliminate the ability to contribute new funds to Coverdell education savings accounts, while liberalizing 529 college plans a bit.
  • Impact on Students: Graduate students will be adversely affected as their waived tuition would no longer be tax free under the House plan, potentially resulting in a tax bill that exceeds their income.  For students at all levels, the ability to deduct some student loan interest may be eliminated.
  • Estate Tax/AMT: The threshold of the amount of assets taxable upon death under the House bill would increase from $5.5 million to $11 million, meaning that fewer people have to pay the estate tax, and it disappears entirely in 2024.The Senate Bill also doubles the limit, but does not eliminate the estate tax altogether. Both the House and the Senate bills would abolish the Alternative Minimum Tax, a complex calculation used since 1969 to ensure that even individuals with many legitimate deductions still pay some income tax. This AMT mostly affects wealthy taxpayers today.
In total about ¾ of the benefits go to businesses and the ¼ goes to individuals, with a large percentage of the benefits ultimately accruing to the top 5% of income earners. The price tag for these bills is estimated at just over $1.4 trillion according to the Joint Committee on Taxation. Economists believe that tax cuts would generate some additional fiscal growth at first, but not enough to cover the costs of these bills.
The Senate still must pass its version of the legislation, and then either the House will need to pass the Senate bill, or both chambers will attempt to reconcile the differences between the two bills. There’s not much time for analysis or debate since Republicans are pushing for a decision by the end of the year.
Be sure to join our webinar on either December 6th and 12th that will review the latest details of the bills at that time, and help you plan for your 2018 benefits year.
For more reading, check out some of our source articles:
Read 2266 times Last modified on Monday, 14 September 2020 16:16
Tonya Young

Tonya is our Senior Account Manager and brings eleven years of prior insurance company expertise to Fall River, having worked at Anthem Blue Cross and Great-West Healthcare (now part of CIGNA). Tonya holds a Bachelor of Science in Psychology from Texas A&M University. Originally from Minnesota, she loves the Colorado outdoors and enjoys family time with her young daughter.