Personally (and this is just my opinion and is independent of my political acumen), I don’t have much faith that the deadline will be met. Based upon what has occurred since President Trump was elected, the vast majority of all of the House and Senate Democrats, if not all of them, have been against any agenda proposed by the Trump Administration. We’ve also observed that the Senate Republicans are in disarray and there are a few Senate Republicans who go out of the way in disagreeing with their colleagues. However, I do believe that there will be changes in tax law at some point in 2018. Only time will tell if my suspicions are correct.
Having said that, it behooves us to keep abreast of the continuing develops. Whenever the tax law changes we will all be affected. On November 2nd, the House Republicans released their vision of tax overhaul. Bear in mind, this is the first of many steps. We have not yet seen a detailed proposal from the Senate Republicans. And, who knows if the Democrats will decide to participate.
According to The Kiplinger Washington Editors, Inc., “the journey has just begun, however. There will certainly be changes made by Brady’s committee and then by the full House. And, then the U.S. Senate will weigh in with its must-haves and absolutely-nots. Still, every taxpayer needs to pay attention. Here are 11 provisions in the House bill that could affect your pocketbook”.
- Bigger Standard Deduction, Goodbye Exemptions
Oh, but there is a catch: In exchange for the bigger standard deduction, the proposal gets rid of the $4,050 for each exemption claimed on the return. So, a married couple with four kids would lose $24,300 in exemptions in exchange for the $11,300 boost in their standard deduction. (For some families, part of that would be made up via larger child credits. Also, single filers with one child or more would get an even bigger standard deduction: $18,000.)
The House plan estimates that increasing the standard deduction will cost the government about $1 trillion over 10 years; eliminating the personal exemptions would cost taxpayers about $1.5 trillion over the same period.
2. Tax Bracket Bingo – Will You Win or Will You Lose?The plan calls for squeezing the current system of seven income tax brackets down to just four brackets. Proponents say it simplifies the law, but few taxpayers actually use the brackets to figure their bill (they use software or, for thos e with taxable income under $100,000, pick a number off a table). But where the new tax brackets start and end will have a lot to do with what you owe.
The plan calls to replace the current 10% bracket with a 12% bracket. That might sound like a punishment for lower-income earners, but proponents say they’ll be okay because more of their income will be tax-free. At the other end of the scale, after much debate, House tax writers decided to leave the top rate at 39.6%, but that rate would kick in at a much higher taxable income level: $1 million versus $470,700 on a joint return under today’s rules. On the joint return, taxing the $529,300 difference at 35% instead of at 39.6% would save the couple nearly $25,000.
Here are the current tax brackets and those proposed in the House plan.
Single Return
Current Law House Proposal
Taxable Income Tax Rate Taxable Income Tax Rate
Up to $9,325 10% Up to $45,000 12%
$9,325 to $37,950 15% $45,000 to $200,000 25%
$37,950 to $91,900 25% $200,000 to $500,000 35%
$91,900 to $191,650 28% Over $500,000 39.6%
$191,650 to $416,700 33%
$416,700 to $418,400 35%
Over $418,400 39.60%
Joint Return
Current Law House Proposal
Taxable Income Tax Rate Taxable Income Tax Rate
Up to $18,650 10% Up to $90,000 12%
$18.650 to $75,900 15% $90,000 to $260,000 25%
$75,900 to $153,100 25% $260,000 to $1 million 35%
$153,100 to $233,350 28% Over $1 million 39.6%
$233,350 to $416,700 33%
$416,700 to $470,000 35%
Over $470,000 39.6%
These numbers are not set in stone. As part of President Bill Clinton’s tax legislation in 1993, lawmakers proposed imposing what was called a “millionaire’s surtax” with a 39.6% rate on taxable income over $1 million. In the end, that rate kicked in at $250,000.
3. Tax Credits on the Chopping Block
To simplify the law, the House plan would do away with several tax credits, including:
• The credit for the elderly and the disabled, which can be worth up to $1,125 to qualifying low-income taxpayers.
• The adoption credit, which can offset up to $13,570 of the cost of adopting a child.
• The credit for plug-in electric vehicles, which is worth of up $7,500 to subsidize the cost of qualifying vehicles.
4. Divorce May Become More Contentious
Currently, the law allows ex-spouses who pay alimony under a divorce decree to deduct the amount they pay. And, the ex-spouse who receives the money has to report it as taxable income. The House plan would get the tax law out of such financial arrangements. For any divorce decree executed (or altered) after the end of this year, alimony payment would be tax-free to the recipient…and the paying spouse would not get a deduction.
5. No More Tax Break for Your Lake House
The bill slashes some tax breaks for homeowners, starting with the deduction for mortgage interest. Homeowners would be permitted to deduct mortgage interest on loans of up to $500,000, down from the current cap of $1 million. Existing loans would be grandfathered. Homeowners would no longer be allowed to deduct mortgage interest on second homes and home equity lines of credit.
The bill would retain the exclusion from capital gains taxes on the sale of your primary home, which allows you to shelter up to $250,000, or $500,000 if you’re married. However, it would phase out the exclusion for single taxpayers with income of more than $250,000, or $500,000 for married couples. In addition, you’d have to live in your home for five out of the past eight years to qualify for the full exclusion. Currently, you must live in your home for two out of the last five years to claim the tax break.
6. Higher Costs for Job Changers
Planning to relocate to another state for a new job? The bill would eliminate a popular deduction for moving expenses. The deduction, which is available to itemizers and non-itemizers, allows you to deduct the cost of moving yourself and your household goods to a new area as long as it’s at least 50 miles from your old home.
7. New Uses for 529 Plans
The bill would allow parents to use up to $10,000 a year from state-sponsored 529 savings plans to pay for private elementary and high school tuition. Currently, tax-free withdrawals from 529 plans are limited to college costs. Coverdell education savings accounts, which allow parents to save up to $2,000 a year for private elementary, high school or college tuition, would be eliminated, but owners would be allowed to roll them into a 529 plan.
8. No Second Chance for Roth Conversions
Lawmakers shelved a proposal to limit tax-deferred contributions to 401(k) plans to as low as $2,400 a year in response to strong opposition from the financial services industry and lots of other groups. (For 2018, workers can save up to $18,500, or $24,500 if you’re 50 or older). But the bill would make it more difficult to convert a traditional individual retirement account to a Roth. Currently, you can reverse a conversion—and eliminate the tax bill—as long as you recharacterize the conversion by the tax-filing date, including extensions, in the year in which you convert. The tax bill would repeal this provision.
9. New Breaks for High-Income Taxpayers
The bill would increase the exemption from estate taxes—$5.49 million in 2017—to $10 million and phase the tax out entirely by 2023. It would also repeal the alternative minimum tax, a parallel tax system developed more than 40 years ago to ensure that the very wealthy paid some tax. Currently, taxpayers who may fall into the AMT zone have to calculate their taxes twice to determine which system applies to them.
10. Health Care Deduction Axed
The bill would eliminate the itemized deduction for unreimbursed medical expenses. Currently, the deduction is limited to expenses that exceed 10% of a taxpayer’s adjusted gross income.
12. Child-Care Would Get More ExpensiveThe House plan calls for the repeal of the popular break that lets parents set aside up to $5,000 of pre-tax salary to pay for child care while they work. The break applies to the care of children under age 13 and, currently, the money can even be used to pay for summer day camp. By killing the break after this year, congressional analysts say the change will raise $3 billion over the next ten years.
Update: One of the first changes made to the proposal in committee was to grant this tax break a five-year reprieve. As the plan stands now, child-care flex plans would be allowed to continue saving parents money through 2022. The savings would end starting in 2023.
Source: The Kiplinger Washington Editors, Inc.
1100 13th Street NW, Suite 750
Washington, D.C. 20005
Michael A. Raimondi
Registered Tax Return Preparer