Congress Passes Tax Reform Bill – Implications for Individual Taxpayers
The Tax Cuts and Jobs Act, H.R. 1, was passed by both the House and Senate on Wednesday. The bill now moves on to President Trump, who has said that he plans to sign the bill before Christmas. This bill represents the most significant revision in the tax code in over 30 years, and will impact individuals, businesses, and nonprofit entities. This client alert outlines the changes in the bill affecting individuals. (Please see associated client alert on the impact to businesses). Barring further legislative action taken to extend the law, all provisions in the bill affecting individuals are set to expire on December 31, 2025.
The reform calls for completely restructured tax brackets. It will keep the same seven tax bracket structure but will lower the tax rates. The rates range from 10% to 37%. Net capital gains and qualified dividends will continue to be taxed at the current 0%/15%/20% rates, and the 3.8% net investment income tax will be retained.
The standard deduction is also set to increase to $24,000 for married individuals filing a joint return, $18,000 for heads of households, and $12,000 for all other individuals. This is nearly double the current standard deduction, and will greatly reduce the number of individuals who itemize deductions in future years. Personal exemptions are also being eliminated through 2025.
The bill introduces a new pass-through income deduction. Individuals will be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust dividends, qualified cooperative dividends, and qualified publicly traded partnership income. For taxpayers above certain income thresholds, this deduction will be limited by the business’s level of W-2 wages or by a combination of the business’s W-2 wages and basis in its tangible assets. The deduction will also be disallowed for specified service trades (including accounting, health, law consulting, financial services, brokerage services, or businesses where the principal asset is the reputation or skill of one or more of its employees) for business owners with income over certain thresholds.
The child tax credit will increase to $2,000 per qualifying child with a maximum refundable amount of $1,400. There will be an additional nonrefundable $500 credit for qualifying dependents who are not qualifying children. Additionally, parents will be able to use 529 savings plans to distribute up to $10,000 to cover expenses for tuition at private and religious k-12 schools.
The bill also contains significant modifications to itemized deductions:
- The mortgage interest deduction will be limited to the first $750,000 of mortgage debt for new mortgages.
- The home equity loan interest deduction will be repealed.
- Individuals will be allowed to deduct up to $10,000 ($5,000 for married filing separate) in state and local income or property taxes.
- The income-based percentage limit for cash contributions to public charities will increase to 60%. However, there will no longer be a deduction for payments made for college athletic event seating rights.
- All miscellaneous itemized deductions subject to the 2% floor will be disallowed.
- The medical expense threshold for deduction will be reduced to 7.5% of adjusted gross income for 2017 and 2018.
- The overall itemized deduction limitation for higher-income taxpayers will be eliminated.
Other changes include:
- The alternative minimum tax is retained, but the AMT exemption will increase to $109,400 for joint filers and $70,300 for all others. The exemptions phase out at $500,000 for singles and $1 million for joint filers.
- Alimony, for any separation agreement executed after Dec. 31, 2018, will no longer be a deduction by the payor spouse. At the same time, the payments will not be considered income to the receiving spouse.
- The moving expense deduction will not be allowed except for members of the armed forces on active duty who move pursuant to a military order.
- Estate and gift tax exemptions will double to roughly $11 million, and will be indexed for inflation occurring after 2011.
The tax bill contains significant changes for individuals, particularly as it relates to pass-through business income and itemized deductions. In light of these changes, here are some planning moves that you can consider for the remainder of 2017:
- Since individuals are generally cash-basis taxpayers, consider paying your full 2017 state income tax liability before 12-31-2017, especially if you’re not subject to the alternative minimum tax.
- Consider accelerating charitable giving, especially if 2017 is a high-tax year. This is especially true for contributions that grant the donor athletic-event seating rights (which have been 80% deductible but become non-deductible in 2018).
- Consider accelerating payment of 2018 local property taxes on personal-use property, if the county allows it. Congress will not allow deductions for prepayment of 2018 state income taxes in 2017, but it has not applied the same exclusion for 2018 property taxes.
- If you are about to convert a regular IRA to a Roth IRA, consider postponing your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
- If you have already converted a regular IRA to a Roth IRA but are reconsidering that move, as the tax on the conversion will be subject to a lower tax rate next year, you can unwind the conversion to the Roth IRA by doing a recharacterization—making a trustee-to-trustee transfer from the Roth to a regular IRA. After the recharacterization the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
In light of the impending changes, we encourage you to contact your WK Advisor to discuss the impact of the tax bill on your individual situation.