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Proposed Tax Reform Legislation: Tax Cuts and Jobs Act

By now most of you know that the proposed tax reform legislation is underway. On November 16 2017, 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.

Once both chambers of Congress have approved their versions, the bills will go to a joint committee for reconciliation. Then the bill goes back to the legislature for a vote. It may be the later part of December before we know for sure which details survive and which are modified. For now, I’ll only address what I think you need to know before year end.

Effective date

Any new law will not be retroactive. The changes will affect taxes next year, for 2018 and beyond.

Tax rates

Many taxpayers will experience lower marginal rates. The House bill calls for individual marginal rates of 12%, 25%, 35% and 39.6%. The Senate proposes seven brackets: 10% 12%, 22%, 24% 32% 35% and 38.5%. In both cases, the top bracket begins at $1 million taxable income for marrieds filing a joint return.

Deductions

The House bill doubles the standard deduction and eliminates most itemized deductions, except for charitable contributions, limited property taxes and mortgage interest.

The Senate bill also doubles the standard deduction and eliminates most itemized deductions. In addition to charitable contributions, it retains medical expenses and mortgage interest on up to $1 million dollars of home acquisition debt.

Personal exemptions

Both bills eliminate any deduction for personal exemptions.

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.

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 bill simply 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, 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 making your January state income tax estimated payment by December 31, 2017. For those you 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.

While the Senate keeps the $1 million limit, it restricts it to home acquisition debt only, eliminating it for 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 informed regarding the pending tax reform.  In the meantime, there may be strategies to your advantage if taken before December 31, 2017.  Also see our “Year-end Tax Tips for 2017“. Please fill out our contact form if you would like a review of your taxes.

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