The Highlights of GOP Tax Bill
There is a tax bill, but there is no tax reform as it does not simplify the tax codes and will keep tax professionals very busy over the next 12 months to figure out a series of cuts and tweaks. These changes will not affect year 2017 tax returns. These are the highlights of GOP Tax Bill, a final reconciled version of the Tax Cuts and Jobs Act (TCJA) of 2017 that appears to be heading shortly to President Trump for signature:
- Seven individual tax rates: We will still have seven individual tax rates for year 2018, but the top rate is reduced from 39.6% to 37%. The top rate will kick in at taxable incomes of $500,000 for single and head-of household filers; $600,000 for married filing jointly taxpayers; and $300,000 for married filing separately. The new tax brackets will be 10%, 12%, 22%, 24%, 32%, 35% and 37%, and will remain in place until end of 2025, when they will sunset.
The good news for most people is that, relative to today’s tax brackets, the new tax brackets will produce at least a small reduction in marginal tax brackets for almost all taxpayers.
-
Bigger standard deductions: The standard deduction amounts will nearly double next year. In 2017, the standard deduction amounts are $6,350 for single filers; $9,350 for heads of households; and $12,700 for married filing jointly couples. In 2018, these amounts will go to $12,000 for single filers; $18,000 for heads of households; and $24,000 for married couples filing jointly.
-
Personal exemptions will be gone beginning in 2018: $4,050 per person in 2017. For a family of three, removal of personal exemption offsets the increase in the standard deduction mentioned above. For the families with two or more children, this loss is greater than the increase in standard deduction.
-
Fewer families will have to pay alternative minimum tax: The corporate AMT would be repealed, but the individual AMT would stay in the tax code. But the AMT exemption amount would increase to $109,400 for married taxpayers filing a joint return and $70,300 for all other individual taxpayers. The AMT exemption amount for year 2017 is $84,500 for married taxpayers filing a joint return and $54,300 for other individual taxpayers. The AMT kicks in now for individuals earning over $120,700 and married couples earning over $160,900. Under the final Senate bill, that threshold is lifted to $500,000 for individuals and $1 million for married couples.
-
The mortgage interest deduction gets smaller: Under the current tax code, taxpayers can deduct any interest they pay on up to $1 million worth of mortgage loans. In the final version of the bill, Republicans have settled on a $750,000. The conference bill suspends the deduction for the interest on home equity loans or lines of credit that under current law are allowed up to $100,000.
-
You can deduct up to $10,000 in state, local and property taxes: Under current law, the state and local tax deduction (SALT) is unlimited. In the final GOP plan, all filers (married or single) can deduct up to $10,000 including property taxes, state and local income or sales taxes.
-
Pease limitation repealed: The current Peace limitation phased out 3% of a taxpayer’s itemized deductions once income crossed a certain threshold (in 2017, those with more than $261,500 of AGI as individuals, or $313,800 as married couples). The Pease limitation was effectively a 1% to 1.2% surtax for upper income individuals. Accordingly, the removal of the Peace limitation effectively provides a further reduction in marginal tax rates for upper-income individuals.
-
Working-class families get a bigger child tax credit: The current child tax credit is $1,000 per child. The final bill offers the $2,000-per-child credit (families making up to about $400,000 get to take the credit), with up to $1,400 is refundable tax credit, meaning families that work don’t earn enough to actually owe federal income taxes will get a larger check back from the government.
-
The individual health insurance mandate goes away in 2019: This Obamacare mandate (must purchase health insurance or pay penalties) will not end until January 1, 2019, meaning some republicans hope to make other changes to health care to prevent insurance costs from rising dramatically. Until then, don’t try to skip buying health insurance. The IRS has said it will keep enforcing all ACA rules as long as they are still on the books. The Congressional Budget Office projected that eliminating the mandate will increase insurance premiums and lead to 13 million fewer Americans with insurance in a decade.
-
Charitable donations will still be deductible. This deduction was improved for the very generous. Starting in 2018, you can give cash up to 60% of your annual income to a 501(c)(3) public charity, increased from current cap of 50%.
-
“Pass-through” companies gets a 20% deduction: Most American businesses are organized as “pass through” companies (as S Corporations and LLCs) in which the profit from the business is “pass through” to the business owner’s individual tax return. Services businesses such as law firms, doctor’s offices and investment firms can take only 20% deduction if they make up to $315,000 (for married couples).
-
You can pass your heirs up to $22.4 million tax-free: Estate tax is not repealed but far fewer families will pay it. Under current law, Americans can pass on up to $5.49 million tax-free (that threshold is $10.98 million for married couples). The House wanted to do away with the estate tax entirely, but some senators felt that was too much of a giveaway to the mega-rich. The financial compromise was to double the threshold, so now the each person can pass on $11.2 million to the heirs in property, stocks and other assets without paying estate taxes.
-
The final bill costs $1.46 trillion: Republicans decided it would be all right to go into debt to $1.5 trillion to fund the tax cut. The official estimate - released Friday evening alongside the bill came in at $1.46 trillion.
-
Alimony deductions will end for people who sign divorce and separation agreement after 2018: Currently alimony payments are deductible by the payer and count as income to the recipient.
-
529 plans can be used for K-12 and for post-secondary education. Currently the distributions from such tax-free accounts can be used for post-secondary education.
-
What are not changed: Student loan deduction, medical expense deduction, the graduate student tuition waivers and retirement accounts such as 401(k) plans and IRAs remain unchanged. Home sellers can continue to exclude from taxes $250,000 of profit on a primary home ($500,000 for married couples) if the seller has lived there for two of the previous five years.
-
No change to investors’ ability to choose which shares to sell to calculate capital gains/losses: The Senate had proposed raising taxes on certain stock sales and taking away investors’ ability to choose which shares to sell. Instead would have had to unload their oldest shares first, a process known as “first-in, first-out” method of accounting. The decision to omit this proposal was a relief for investors. I was concerned about this change as it would take away an important tool for us to help clients manage taxes.
-
Capital gains and qualified dividends retain old thresholds: While the new TCJA rules introduce new tax brackets, preferential rates for long-term capital gains and qualified dividends will continue to use the old thresholds. In addition, the 3.8% Medicare surtax on net investment income will continue to apply thresholds of $200,000 of AGI for individuals ($250,000 for married couples).
-
Investment advisory fee & other miscellaneous itemized deductions repealed: All miscellaneous itemized deductions that are otherwise subject to the 2%-of-AGI floor are repealed. This includes all tax preparation expenses, various unreimbursed employee business expenses (including the home office deduction), losses on a variable annuity, safety deposit box fees, and the deduction of investment advisory fees.
-
Recharacterizations of Roth conversions are repealed. Currently if the converted Roth IRA has losses, you can revert it back to IRA by October 15th of the following year so you do not pay taxes on this Roth IRA conversion. This tax bill will not allow you to change your mind after you have converted any amount to Roth IRA. However, you can still contribute to your IRA if you have earned income and convert the balance to Roth IRA regardless of your income level.
The bill makes the corporate tax rate cut permanent from 35% to 21% starting in 2018. However, individual tax provisions for the most part will expire at the end of 2025. It seems unfair, but the method by which the Senate has chosen to consider H.R. 1, known as reconciliation (so that it only needs a majority to pass) and specifically the Byrd rule, means that the upper chamber cannot approve tax measures that increase the deficit over the coming decade. So individual tax provisions were sacrificed to corporate (and political action committee) interests to meet that deficit requirement.
If you are not in AMT in 2017 based on your tax projection, consider paying your state and local income taxes due this month instead of April 2018 when you file your 2017 tax returns because you can deduct them fully on federal tax returns for year 2017.
There are more to come as we digest the changes when the bill becomes laws and continue to think about tax planning opportunities for our clients.
