Tax Reform – Part 2

Tax Cuts and Jobs Act

Tax Cuts and Jobs ActAs previously discussed, the Republicans in both the House and Senate have released their versions of the Tax Cuts and Jobs Act (TCJA).  Just as in the Estate Planning portion, each of their versions of the TCJA differ in both major and minor areas.  Now remember that neither version has been adopted yet, so these are both just proposals at this time. Here are some of the things that are being discussed:

FIRST: The Tax Rates are being discussed.  The House is suggesting that we REPLACE the current seven (7) tax brackets with Four (4).  These would be:
1 – A 12% tax rate on income up to $90,000 (for all amounts married, filing jointly)
2 – A 25% tax rate on income from $90,001 up to $260,000
3 – A 35% tax rate on income from $260,001 to $1,000,000
4 – A 39.6% tax rate on income over $1,000,000

The Senate proposal KEEPS the seven (7) brackets but adjusts the rates and when the Tax Rates change. Such as:
1 – A 10% tax rate on income from 0 to $19,050
2 – A 12% tax rate on income from $19,051 to $77,400
3 – A 22.5% tax rate on income from $77,400 to $120,000
4 – A 25% tax rate on income from $120,000 to $390,000
5 – A 32.5% tax rate on income from $390,000 to $450,000
6 – A 35% tax rate on income from $450,000 up to $1,000,000
7 – A35% tax rate would apply to income over $1,000,000

Currently, the top bracket is set at 39.6% which applies to all income over $480,050, thus, the proposed changes would be very BENEFICIAL forthose making $489,050 and over.

Business tax rates have also been discussed in both the House and the Senate versions of the TCJA. TCIA, under the House version, allows all Sole Proprietorships, Partnerships and S Corporations’ business owners to either allocate 70% of their pass-through incometo wages (which means it will be taxed at the individual’s tax rates) and 30% to business income which will be taxed at 25%, or, the Business owner may choose to calculate the proportion of their income to be counted as wages based on tier capital investment, with the balance to be allocated to business income.  This reduced tax calculation method would not be able to be used by professionals such as doctors, lawyers, accountants and consultants.

The proposal from the Senate does not include a separate rate for pass-through income, but rather provides for a 17.4% deduction for this type of income. The deduction does not apply to professional service providers income, which would be taxed, for taxpayers (married, filing jointly) with a total income less than $150,000, at a lower rate.

Both the House and the Senate proposals CUT the C Corporate and non-pass through entities tax rate to 20%, while the House version starts this tax rate starting in 2018 while the Senate version has this tax rate start in 2019.

SECOND:  Tax deductions are being discussed by both the House and the Senate. Many of these changes have to do with individual tax payersBoth versions of the TCJA eliminatemany personal tax exemptions, expand the standard deduction, and eliminate some itemized deductions.  These changes will most likely result in many taxpayers deciding to use the standard deductionrather thanitemizing their deductions.

One large change is the REPEAL of state and local income tax DEDUCTIONS.  Currently, all income taxes paid to any state or locality are deductible on federal income tax returns.   Both versions of the TCJA ELIMINATE this deduction, as well as either limiting or eliminating the deduction for real estate property taxesCharitable deductions, however, to be tax deductible, would need to now be itemized.   They also ELIMINATE the Alternative Minimum Tax (AMT), but, most of the deductions that are now disallowed under the AMT are eliminated under the proposed TCJA by both the House and the Senate.

Here are some of the current deductions and proposed changes.

Current for 2018House VersionSenate Version
Standard Deduction$6,500 single

$13,000 Married

$12,000 Single

$24,000 Married

$12,000 Single

$24,999 Married

Mortgage Interest DeductionCapped at $1,000,000 principal, 2 housesCapped at $500,000, 1 homeCapped at $1,000,000, 2 homes; no equity debt
State and Local Income TaxesNo limitationRepealedRepealed
Personal Real Estate TaxesNo limitationMaximum $10,000Repealed
Personal Exemptions$4,150 per personRepealedRepealed
Medical ExpensesDeductible in excess of 10% of AGIRepealedDeductible in excess of 10% of AGI

Have Children?  There are some possible changes in store for you also.  Personal exemptions for each child are delegated in both plans, supposedly replaced by the expanded standard deduction.  Currently the child tax credit is $1,000.  The House plan increases the credit to $1,600, plus an additional $300 credit for each parent.  The Senate plan proposes the credit be $1,650, but also increases the income phase out to $1,000,000 for joint returns.  The Student loan interest deduction for up to $2,500 is ELIMINATED in the House’s version of the TCJA, while the Senate leaves it as it is.

THIRD:  As it has to do with Retirement Accounts, the House makes no changes to current rules regarding 401(k), 403(b), 457(b) or IRA plans.  The Senate makes only some small potential changes, but eliminates Catch-Up Contributions for taxpayers over 50 who make more than $500,000 or more the year before.

LAST: The Senate version of the TCJA ELIMINATES the requirement for each taxpayer to have health insurance coverage.  The House version does not address this requirement at this time. This will have to be settled before either version is presented to the President.

We will have to keep an eye on this and see where they go from here. Check in later for an update on these proposals.