Tax Deal Passes in Packed December

December 21, 2017

With only a few days to spare, Republicans in Congress achieved one of their primary objectives for 2017. The Tax Cuts and Jobs Act passed after months of backroom negotiations between key Republican leaders and White House officials and with the assistance of some political maneuvering to ensure only a simple majority was required.

The House passed its version of the legislation in mid-November, leaving the Senate to work out their kinks over the next few weeks. Final negotiations occurred rapidly in conference committee, providing precious little time for outside groups to influence the process or analyze the discussion outcomes 

Sens. Susan Collins (R-Maine), Bob Corker (R-Tenn.), Mike Lee (R-Utah), and Marco Rubio (R-Fla.) provided for some entertaining debate that threatened to throw the bill off course in the weeks leading up to the final vote. With Sen. John McCain (R-Ariz.) home recovering from cancer treatments, the bill would have failed if more than one Republican senator voted in opposition. After a few concessions and some adjustments to the bill in conference committee, the bill passed both chambers strictly along party lines.

Now that President Donald Trump signed the bill into law, it is time to take stock of what provisions in the legislation could affect your finances. MOAA is pleased to report our advocacy efforts, in tandem with a handful of other stakeholder groups ranging from The Military Coalition to law firms, resulted in a handful of legislative victories in the bill.

Exception to the repeal of the moving expense deduction: While the deduction is generally suspended through 2025, the provision retains the deduction for moving expenses and exclusions for in-kind moving and storage expenses (and reimbursements or allowances for these expenses) for members of the armed forces (or their spouse or dependents) on active duty moving pursuant to a military order and incident to a PCS.

Striking the change to the exclusion of gain of sale of a principal residence: This provision would have lengthened the time requirements for principal residency in a home such that servicemembers, who move more frequently than civilian counterparts, would not have any reasonable expectation of benefiting from tax-preferred gains on the sale of a home. The provision was dropped from the bill.

Striking the repeal of the Work Opportunity Tax Credit (WOTC):The WOTC has been a critically important tool assisting in solving the problem of veteran unemployment. Department of Labor statistics show 35,904 veterans were certified for WOTC during the three-year period before the Veterans Opportunity to Work Act of 2011. By contrast, 278,611 veterans were certified during FYs 2013-15, an increase of nearly 700 percent. The provision repealing WOTC was dropped from the bill.

Adjustments to and extension of the medical expense deduction: Contrary to the original proposal to completely eliminate the medical expense deduction, the deduction floor will be decreased from 10 percent of adjusted gross income to 7.5 percent for 2017 and 2018. After that, it will return to the 10-percent floor.

While MOAA is pleased with these adjustments and grateful for the support of some key people on Capitol Hill, concerns remain. Start with the big-picture view. MOAA is very concerned about the long-term budget implications of the legislation. We mentioned the significant increase to the deficit last week, and there were not substantial enough changes in conference committee to alleviate those concerns. A Joint Committee on Taxation (JCT) score of the legislation prior to conference committee suggested the deficit likely would increase by more than $1 trillion.

Years of overseas military operations and growing entitlement expenses continue to increase our nation's debt, leading to Congress to make shortsighted, irrational budget cuts that fail to take into account national security and nondefense priorities. The national debt is a significant threat to national security, which MOAA regularly reminds lawmakers as the budget moves through the process.

A couple of individual provisions ought to catch your eye, too. The removal or adjustment of certain tax benefits could uniquely impact servicemembers because of the nature of a career in service. Such an occupation commands regular moves, different health care scenarios, and a strain on families, which prior tax benefits acknowledged.

Supporters of the legislation suggest the increase of the standard deduction to $12,000 for individuals and $24,000 for those married filing jointly will more than cover the loss in benefit of itemizing some of the following deductions. That is a broad claim, and its veracity will be tested over the next couple of years.

The repeal of the deduction for alimony payments: The divorce rate of servicemembers, and ongoing debate over the fairness of the Uniformed Services Former Spouse Protection Act, warrants mention of this provision. Alimony payments no longer will be deductible for the payer spouse. The payments, however, will remain as tax-free income for the recipient. Note that this only applies to divorce or separation instruments executed after Dec. 31, 2018. 

Adjustment of mortgage interest rate deduction: The bill reduces limit on deductible mortgage debt to $750,000 for new purchases and refinancings (principal residence or otherwise) entered into after Dec. 15, 2017, and repeals deduction for interest paid on home equity debt, through 2025. The reduction might add just another reason for a current or former servicemember not to purchase a home. 

MOAA's tax agenda for 2018 will follow the outcomes of this legislation. The financial well-being of those who commit years of service to our national security is important and will remain a legislative priority.

Further, now that Congress has shown its capacity to pass significant and expensive legislation under Republican control, the coming year might bring some interesting reform proposals. The government will have even less revenue to use thanks to the tax bill, so you can expect to see funding debates become increasingly difficult. Financial constraints likely will be at the forefront of defense bill talks and, thus, be on the top of MOAA's agenda as well.

 

 

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