House, Senate Prepared to Pass Tax Reform Legislation
Last Friday, the U.S. House of Representatives and Senate conferees reached agreement on the Tax Cuts and Jobs Act (H.R. 1) and released legislative text, explanations, and estimates of the effects on the federal budget. The bill lowers the corporate tax rate from 35 percent to 21 percent and makes numerous other changes to the tax code for individuals and businesses. As early as today, the House and Senate will pass the bill, which will then be sent to the President for signature by next week.
LeadingAge NY and LeadingAge National were most concerned that the tax overhaul would dramatically impact our members and the residents they serve. We were particularly concerned about the potential loss of the tax deduction for medical expenses and the proposed elimination of private activity bonds, which would have ended tax-exempt bond funding for all our not-for-profit members and effectively ended the 4 percent Low-Income Housing Tax Credit (LIHTC) program used to develop affordable senior housing. Thanks to member advocacy efforts, these provisions were not included in the final legislation.
However, a broader concern remains about how the cost of this tax overhaul will be paid for in future federal budgets. The most recent estimates put the estimated cost of the legislation at over $2 trillion over 10 years, before factoring in economic growth if the temporary tax cuts are made permanent. The Congressional Joint Committee on Taxation estimated that the bill would add $1.46 trillion to federal budget deficits over the 10-year period. We are concerned that future cuts to Medicare, Medicaid, and Social Security may be used as “pay fors.”
The final legislation most closely follows the Senate bill, with certain key differences. The provisions discussed below would generally apply to tax years beginning after Dec. 31, 2017. Nearly all the changes applicable to individual filers expire after 2025. While there are many provisions in the legislation that are of possible interest to LeadingAge NY members, the most notable ones are summarized below based on currently available information:
- Tax deduction for medical expenses: The current 10 percent adjusted gross income (“AGI”) floor for medical expense deductions will be lowered temporarily from 10 percent to 7.5 percent for tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, after which the medical expense deduction will be retained at the 10 percent AGI floor. This is good news for LeadingAge NY member retirement communities, nursing homes, and other providers of health services.
- Private activity bonds: The legislation does not repeal the exemption for interest earned on private activity bonds, as had been proposed in the House bill. This is good news for LeadingAge NY facility-based providers and senior housing facilities. However, the reduction in corporate tax rates may lower the value of LIHTCs by 15-20 percent, leading to added challenges for affordable housing development and preservation.
- Advanced refunding bonds: The final version of the bill repeals the tax exemption for interest earned on “advanced refunding bonds,” which under current law are used to refinance tax-exempt bonds issued by state and local governments and Section 501(c)(3) organizations. The repeal affects advanced refundings occurring after Dec. 31, 2017. This could adversely affect some LeadingAge NY members that have high interest rate bond financings they may seek to refinance.
- State and local taxes: The bill limits individual deductions to an overall cap of $10,000 for property taxes and state/local income or sales taxes. The House and Senate bills capped the deduction at $10,000, but would have limited it to property taxes only. The limited deduction for state and local income taxes will most greatly impact individuals living in high-tax states and localities, such as New York State, and could place added financial pressure on local and state governments.
- Charitable deductions: The legislation increases the deduction cap on cash contributions to public charities from 50 percent to 60 percent of the taxpayer’s AGI. It does not include any reductions to the charitable deduction available to taxpayers who itemize; however, increases in the standard deduction could adversely affect charitable contributions. Specifically, the 2018 standard deduction will increase from $6,500 to $12,000 for individuals, from $9,350 to $18,000 for heads of household, and from $13,000 to $24,000 for married couples, adjusted annually by the CPI-U after 2018.
- ACA individual mandate: As proposed by the Senate, the final bill provides that individuals lacking minimum health coverage mandated by the Affordable Care Act (ACA) will no longer be required to make shared responsibility contributions. This effectively repeals the individual mandate.
- Political activities of charities: The final legislation does not repeal or change the “Johnson Amendment,” which prohibits Section 501(c)(3) charities from engaging in certain political or campaign activities.
LeadingAge NY and LeadingAge are grateful to our members who advocated to retain critically important tax provisions by making calls, writing letters, and meeting with members of Congress. Your voice did have a significant impact on the outcome.
Contact: Dan Heim, firstname.lastname@example.org, 518-867-8866