Blog - 2018 Proposed Tax Reform


We previously shared with you details from the U.S. House of Representatives’ Tax Cut and Jobs Act regarding proposed tax reform. The U.S. Senate’s Joint Committee on Taxation has released its own version of tax reform under the same bill name, Tax Cut and Jobs Act, and there are a number of differences from the House’s proposed plan.

 

Individual Tax Brackets

The Senate bill would keep the current 7-bracket income tax system, lowering the rates by 1% to 4% in each bracket (e.g. the top tax rate, currently 39.6%, lowered to 38.5%). The Senate bill mirrors the House bill in that the top rate would apply to income over $1 million for married couples and $500,000 for individuals.

 

Changes to Itemizations and Other Credits

The House bill originally proposed either a limitation or repeal of the state and local tax deduction. The House bill was amended to preserve the deduction with a cap of $10,000 for the deduction. The Senate bill, however, proposed a repeal of the deduction

The House bill proposed a limit on mortgage interest deductibility to $500,000, but the Senate bill would retain the current $1 million limit.

The House bill proposed a repeal of the medical expense deduction while the Senate bill would preserve the deduction.

The House bill proposed a repeal of the student loan interest deduction while the Senate bill would preserve the deduction.

The House bill proposed an increase in the child tax credit to $1,600 per child and the Senate bill would increase that to $1,650.

 

Preferential Tax Rate for Business Income

The Senate’s bill would delay the corporate tax rate cut until 2019 whereas the House bill would make the cut effective in 2018, but both agree the top corporate rate would be 20% compared to today’s top corporate rate of 35%.

 

Gift and Estate Taxes

The Senate bill mirror’s the House’s proposal to double the estate tax exemption to $11 million per person, but it does not propose a repeal of estate taxes. Rather, the Senate proposes setting the estate tax rate at 40% for estates about the exemption amount.

 

Alimony Credit

The House bill would eliminate the tax deduction for alimony paid and no longer tax the alimony received, but the Senate bill leaves the current credit unchanged. 

 

 

There are a number of similarities between the bills worth noting.

 

Repeal of the Alternative Minimum Tax

Both bills propose a complete repeal of the Alternative Minimum Tax (AMT) system.

 

Changes to Exemptions and Standard Deduction

Both bills propose combining personal exemptions and the standard deduction into one single expanded increased standard deduction, $12,000 for individuals, $18,000 for head-of-household, and $24,000 for joint filers. The Senate bill also preserves the additional deduction for the elderly and blind.

 

Changes to Itemizations and Other Credits

  • The House bill originally proposed repeal of the adoption credit, but the bill was later amended to retain it. The Senate bill also retains the adoption credit.
  • The child and dependent care credit is retained under both bills.

 

The Senate’s version must be reviewed by the Senate Finance Committee, but both the Senate and the House are expected to pass their version of the Tax Cut and Jobs Act. At that point, the two legislative bodies must come together to resole their differences.

 

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The information below was posted on November 6th 2017 following the U.S. House of Representatives’ release of the Tax Cut and Jobs Act.  

Conversations around proposed reform of the U.S. Tax Code are commonplace during each and every election cycle. The 2016 election year was no exception, but now, with a Republican president and Republican controlled House and Senate, the likelihood of change appears certain. Couple that with the GOP’s use of a procedural tool called budget reconciliation in the Senate, which means only 51 votes instead of the usual 60 are needed to pass a bill, tax reform seems imminent.

 

On November 2, 2017, House Republicans unveiled the Tax Cut and Jobs Act (TCJA), giving us our first glimpse at just what is on the table. The information that follows is a synopsis of some, but not all, of the proposed changes. Clearly, compromise will be required to move the bill into enacted legislation, but here are some of the proposals that may survive into the Internal Revenue Code.

 

Individual Tax Brackets

The TCJA is proposing a reduction in the number of income tax brackets from seven to four brackets. The current system sets income tax brackets at 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The proposed system would set the brackets at 12%, 25%, 35%, and 39.6%.

 

Proposed Income Tax Brackets:

Brackets

Individuals

Married Filing Jointly

12%

Up to $45,000

Up to 90,000

25%

$45,001 - $200,000

$90,001 - $260,000

35%

$200,001 - $500,000

$260,001 - $1,000,000

39.6%

$500,001 +

$1,000,001 +

 

This would result in a mix of slight tax rate increases or decreases depending upon where you fall in the proposed bracket system. High income individuals earning more than $1,000,000 and those married filing jointly earning more than $1,200,000 in the tax year face the biggest change with an additional 6% surcharge on some income. Due to a proposed phaseout of the lower brackets, individual income over $1,000,000 and married filing jointly income over $1,200,000 would see an effective tax rate of 45.6% until it is phased out at $1,207,000 for individuals and $1,614,000 for married couples. Income above these phase-outs would revert back to the 39.6% tax rate.

 

Capital Gains and Dividend Rates

There had long been concern that the 0% capital gains and qualified dividends tax rate would be eliminated, but the TCJA would retain the three-bracket system of 0%, 15%, and 20%. Under the old system, taxpayers in the 10% and 15% income tax bracket had a 0% capital gains tax rate. With the newly-proposed four income tax bracket system, most taxpayers in the 12% income tax bracket would remain in the 0% capital gains bracket. Unfortunately, the 3.8% Medicare surtax on capital gains and qualified dividends still applies. This effectively turns this into a four tax brackets of 0%, 15%, 18.8%, and 23.8%.

 

Repeal of the Alternative Minimum Tax

You read that right. The House Republicans are proposing a complete repeal of the Alternative Minimum Tax (AMT) system. This difficult-to-understand supplemental income tax system dating back to 1969 was originally designed to ensure wealthy taxpayers paid their fair share of taxes. Yet, over the years, the AMT began affecting more and more middle-income taxpayers.

If you have carried forward the tax credit for AMT payments from prior years, don’t worry. Those with a minimum tax credit carryforward would be allowed to claim 50% of any excess carryforward over three years (2019-2021), with any remaining credit being refundable in 2022.

 

Changes to Exemptions and Standard Deduction

One of the most notable pieces of the TCJA is the elimination of personal exemptions. The proposed legislation instead combines personal exemptions and the standard deduction into one single expanded increased standard deduction amount. The proposed standard deduction amount is $12,000 for individuals and $24,000 for married filing jointly.

For larger families, this will mean an overall decrease in the combined amount over the current combination of exemptions and standard deduction. However, the TCJA would allow for an increase and expansion in the Child Tax Credit, and it would create a Family Flexibility Credit that could help to offset the decrease. The availability of these credits is based on adjusted gross income.

 

Changes to Itemizations and Other Credits

Another notable piece of the TCJA is the proposed change to itemizations and credits. In their quest to simplify the Tax Code, the limitation or repeal of a number of itemized deductions and credits is in their crosshairs. Changes include the following:

  • Repeal of the medical expenses deduction
  • Limitation or repeal of the State and Local Taxes paid deduction
  • Limitation on real estate property tax deduction to a maximum of $10,000/year.
  • Limitation on mortgage interest deduction (limited to $500K of purchase debt for one primary mortgage)
  • Limitation on charitable deductions for certain types of items, such as seats for college athletic events. Most charitable deductions would not be affected, but there would be a new requirement that all charitable donations (not just those over $250) would be required to have a written acknowledgement from the charity in order to be claimed.
  • Limitation on miscellaneous itemized deductions – Deductions for tax preparer fees would be eliminated, but deductions for investment management fees would not.
  • Limitation on casualty losses
  • Limitation of gambling losses
  • Repeal of the electric vehicle credit
  • Repeal of the adoption credit

 

Changes to Primary Residence Capital Gains Exclusion

Concern over the abuse of the rule allowing for the exclusion of up to $500,000 in capital gains on a primary residence will likely result in a big change for the rule. Instead of the rule applying to primary residences used in 2 of the last 5 years, it’s likely to apply only to homes used in 5 of the past 8 years. Additionally, further limitations are likely to include a threshold on the exclusion amount for high income earners.

 

Alimony Credit

TCJA would eliminate the tax deduction for alimony paid and no longer tax the alimony received. This change would only apply to the treatment of alimony agreements created in 2018 and beyond.

 

Educational Tax Breaks

There are currently several educational deductions and credits available to students and their families. All of these are going away, except for the American Opportunity Tax Credit, which allows for up to a $2500 tax credit. TCJA expands the American Opportunity Tax Credit to include five years of college, not just four, with the fifth year available at half the credit.

In addition, TCJA would allow for up to $10,000/year in tax-free distributions from 529 plans for costs associated with private elementary and secondary education expenses. This is a major change from current policy, which only allows tax-free distributions from 529 plans for post-secondary education. Because of this change, future Coverdell ESAs will be eliminated.

 

Preferential Tax Rate for Business Income from LLCs, Partnerships. and S-Corps

Some pass-through entities, such as rental real estate investments, would benefit from a preferential tax rate of 25% on business income. Other pass-through entities will need to split the income into different categories with some portion falling under the preferential 25% tax rate and some under the normal tax rates.

 

Gift and Estate Taxes

One of the biggest changes in policy would be around gift and estate tax, which most recently changed in 2013.

Beginning in 2018, the estate and gift tax exemption would double to $11.2 million per individual, increasing each year thereafter for inflation adjustments. The estate exemption would then be repealed in 2024; however, the gift tax exemption would continue to inflate from the base created in 2018.

 

Employee Fringe Benefits

 In addition to all of the personal taxation changes, there are changes in credits and deductions on the business side that may affect employee benefits, which include:

  • Dependent Care Assistance Programs are repealed.
  • Qualified Moving Expense Reimbursements are repealed.
  • Adoption Assistance Programs are repealed.
  • Employer-Provided Child Care Credit is repealed.
  • Employer-Provided Educational Assistance is repealed.
  • Qualified Tuition Reductions for Employees of Educational Institutions is repealed.
  • Employer-Provider Housing Exclusions would be limited.
  • Meals and Entertainment Expenses would be limited.

 

As you can see, the proposed changes are widespread and sweeping. There are likely to be additional changes proposed as the bill continues along the path to the President’s desk.

 

Longview will continue to monitor tax reform legislation as we close out the 2017 year. If you have any questions, please do not hesitate to contact us.


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