How will proposed federal income tax changes impact you?

Posted on 11.14.17

How will proposed federal income tax changes impact you?

By Stephanie M. Casey, Tax Senior Manager | Family, Executive & Entrepreneur Advisory Services Team

On November 2, 2017 the House Ways and Means Committee released the Tax Cuts and Jobs Act bill. One week later on November 9th the Senate Finance Committee released their version of a tax bill.  There are numerous provisions in both bills that will impact both corporate and individual taxes. This analysis focuses just on those provisions that directly impact 1040 filers. Keep in mind that tax simplification is a goal, not just tax reduction.  As such, many taxpayers may actually see a tax increase

House Proposal

Tax Brackets
Currently there are seven federal tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.  Proposed change is to three brackets plus one for higher income taxpayers:  12%, 25%, 35%, and 39.6%. 

Standard Deduction
Currently $6,350 for single and $12,700 for married filing joint.  Proposed change is nearly double that to $12,000 single and $24,000 married filing joint.

Personal Exemption Deductions: Currently receive a deduction of $4,050 per taxpayer and dependent.  This deduction does currently phases out at higher income levels. Proposed change is $0 personal exemptions for everyone.

State, Local and Property Taxes Paid
Currently receive a Schedule A deduction for any state, local and property taxes paid.  Original House bill eliminated all three. House later made a concession to restore an itemized deduction up to $10,000 for property taxes only.

Mortgage Interest Paid
Currently receive a Schedule A deduction on interest paid on loans up to $1,000,000 (plus home equity loan of $100,000). House bill limits deduction to amount of interest paid on debt up to $500,000.

Alternative Minimum Tax (AMT)
Currently applies to taxpayers earning typically between $200,000 and $1,000,000. Proposed change eliminates AMT.

Estate Tax
Currently pay estate tax on estates valued over $5.5 million in assets. The House bill proposes eliminating the estate tax effective in 2024 and, in the meantime, doubles the exemption level such that only estates valued at over $11 million would be subject to tax.

Senate Proposal

Tax Brackets
Keeps the seven-bracket structure, but changes some of the rates. The seven marginal tax rates would become 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%

Standard Deduction
Increases Standard Deduction to $12,000 single and $24,000 married filing joint – same as the House bill.

Personal Exemption Deductions
Proposed change is $0 Personal Exemptions for everyone—same as the House bill.

State, Local and Property Taxes Paid
Deduction is eliminated.

Mortgage Interest Paid
Deduction for Mortgage Interest for debt up to $1 million, but no deduction for home equity.

Alternative Minimum Tax (AMT)
Proposed change eliminates AMT – same as the House bill.

Estate Tax
Senate proposes increasing the exemption amount to $10 million. There would be no repeal.

Summary

There are many other provisions in both bills that will impact the tax you pay. There are proposed changes to adoption credits, student loan interest, medical expense deductions, alimony and child tax credits. There are major changes in regards to non-qualified deferred compensation plans. Tax rates on pass through income from LLCs and S Corporations appear to be reduced, but the implementation of those savings is unclear and rather complex as currently written. Interestingly, there are no proposed changes to the Long Term Capital Gain tax rate (or holding period) or the tax rate on Qualified Dividends.

Some of the proposals seem like a “sure thing” as both the House and Senate bills have the same provisions, and some will likely get “tossed out” as concessions are made in order to pass the final bill.  As written, the Senate bill does not comply with what is known as “the Byrd Rule,” which prevents the Senate from passing tax and spending measures on simple majority votes if they increase budget deficits beyond 10 years. President Trump has tweeted his displeasure at the still high individual tax rates and his desire to see health care reform included in the tax bill. 

The Senate is not scheduled to vote on their version of a bill until after the Thanksgiving break.  This means that passing a bill by the end of the year remains highly questionable.  If not passed this year, it is yet to seen as to whether this bill will be effective retroactively to January 1, 2018 or begin at a later date. Keiter is monitoring any changes and will keep you informed of how the final bill will impact you.


It’s important to remember that this framework is proposed — any tax reform legislation that is passed by Congress will likely look very different in its final form.  We will continue to monitor changes and keep you informed.

Questions on the proposed changes or need advice on tax planning for 2018? Contact your Keiter representative or Email | Phone: 804.747.0000

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

Posted by: Stephanie M. Casey, CPA

Stephanie is a Tax Senior Manager at Keiter. Her areas of expertise include tax consulting, compliance and research for high net worth individuals, partnerships, and closely held multi-state corporations. Stephanie also has experience with a wide variety of industries including transportation services, real estate development, and construction. She is a member of the Firm's Family & Executive Advisory Services team.