By now most of you know that pending tax reform legislation is underway. On November 16th, the House of Representatives’ passed its version – HR 1: The Tax Cuts and Jobs Act. Also on November 16, the Senate Finance Committee approved its amendments. Next week we should see the full Senate’s vote. As promised during this last tax season, we wouldn’t trouble you until we had actual pending legislation to dissect.
That time has come. As you may be aware, once both chambers of Congress have approved their versions, the bills will go to a joint committee for reconciliation, then on back to the legislature for a vote. With that said, it may be the latter part of December before we know for sure which details survive and which are modified. For now, we’ll only address what we think you need to know before year end.
1. Effective date. It seems pretty clear that any new law will not be retroactive. The changes will affect taxes next year, for 2018 and later.
2. Tax rates. Many taxpayers will experience lower marginal rates, but also a loss of deductible expenses. The House bill calls for individual marginal rates of 12%, 25%, 35% and 39.6%. The Senate proposes 7 brackets: 10% 12%, 22%, 24% 32% 35% and 38.5%. In both cases, the top bracket begins at $1 million taxable income for married couples filing a joint return.
3. Deductions. The House bill doubles the standard deduction and, except for charitable contributions and limited property taxes and mortgage interest, eliminates all other itemized deductions. The Senate also doubles the standard deduction, but, in addition to contributions, retains medical expenses and mortgage interest on up to $1 million of home acquisition debt, while completely eliminating any state and local tax deduction (including property taxes) and any home equity debt interest.
4. Personal exemptions. Both bills eliminate any deduction for personal exemptions.
5. Repeal of Alternative Minimum Tax. For those of you who have been subject to this “stealth” tax, this provision may not be as life-changing as it seems. With many deductions eliminated in the regular tax that were previously only disallowed under AMT, your tax bill might not change that much, if at all.
6. Estate taxes. The current House bill does not repeal the estate tax entirely until 2024. In the meantime, it does nearly double (to $10 million per person) the amount of an estate that can be transferred without tax. The Senate doubles the exemption without ever repealing the estate tax.
For 2017 Year End. With tax rates going down and deductions being eliminated, this is the year you should strictly adhere to the most traditional of tax planning concepts: where possible, defer income and accelerate expenses. For many of you, that will mean paying both halves of your property tax bill before year end and paying your January state income tax estimate by December 31, 2017. For those with businesses, you may want to delay invoicing your customers until January 2018.
Two other items that are sure to get a lot of press. The House bill restricts mortgage interest to a maximum of $500,000 debt, and while the Senate keeps the $1 million limit, it eliminates home equity debt. Debt already in existence as of November 1, 2017 will probably be grandfathered. That means it is already too late to try to increase your mortgage. In addition, the House bill reduces the amount of gain you can exclude on the sale of your principal residence, but both proposals require that you have owned and lived in the property for 5 out of the last 8 years. Here again, unless you were already thinking about selling your home, it is probably too late to take action here.
One final note. Nothing is final yet. Older taxpayers in particular may be most concerned about loss of medical expense deductions and reduced gain exclusion on the sale of your home. Know that while the legislation is under consideration, large lobbying groups will no doubt be working behind the scenes. In addition to voicing your concerns to your own legislators, you might contact AARP and the National Association of Realtors, two of the nation’s largest lobbying organizations.
We will do our best to keep you updated. And we look forward to strategizing with you regarding these changes going forward.