Republicans released the final details of their tax legislation on December 15, and appear ready to sign the bill into law before Christmas.
The House of Representatives is expected to approve the bill on Dec. 19, and the Senate looks set to do so by Dec. 20. Both the House and Senate must pass the bill in exactly the same form. The bill appears on track to pass the Senate, likely with the support of all 52 Republicans.
The only Republican to vote against the previous version of the bill, Senator Bob Corker, R-Tenn., announced on Dec. 15 that he would support the final version.
President Donald Trump has indicated that he would sign the bill into law immediately.
Most of the bill’s provisions are due to take effect Jan. 1, 2018. This would not affect 2017 filings, but could still pose a significant challenge to the IRS, corporations and individuals, who will have to get up to speed on the sweeping changes very quickly.
Here are some highlights of the legislation as we understand them:
- New individual tax rates: The bill sets seven individual brackets at 10%, 12%, 22%, 24%, 32%, 35% and 37%. The new 37% top rate would apply to taxable income in excess of $500,000 for single filers and $600,000 for joint filers.
- Increased standard deduction: The standard deduction would nearly double, to $12,000 for single filers and $24,000 for joint filers.
- No changes to capital gains and dividends: Capital gains and qualified dividends would continue to be taxed at the current 0%, 15% and 20% rates, depending on income. Wealthier filers would continue to pay an additional 3.8% tax on investment income, known as the Net Investment Income Tax.
- Increased child tax credit: The per-child tax credit would double from $1,000 to $2,000.
- Increased exemption for Alternative Minimum Tax (AMT): The AMT would be retained for individuals, but the exemption and phase-out amounts have sharply increased.
- Mortgage interest deduction: Individuals would be allowed to deduct interest paid on new mortgages (after Jan. 1, 2018) of up to $750,000. That’s down from the current cap of $1 million. The deduction would also apply to second homes, but not for home equity lines of credit.
- State and local tax deduction: Taxpayers would be allowed to deduct up to $10,000 in a combination of property tax and income tax (or sales tax).
- Estate tax exemption doubled: Estates of up to $11 million (or $22 million for couples) would be exempt from taxation.
- Numerous other deductions and tax credits repealed: The bill repeals deductions for tax preparation, moving expenses and alimony payments, among others.
- Expiration of most individual tax provisions: Virtually all of the provisions that apply to individuals are set to expire at the end of 2025. A future Congress would have to vote to extend them, otherwise they would revert to 2017 levels.
- Repeal of the individual mandate: The bill repeals, beginning in 2019, the requirement set by the Affordable Care Act that individuals purchase health insurance or pay a penalty.
- Preserves deduction for medical expenses: Medical expenses above 7.5% of adjusted gross income would be deductible in 2018 and 2019.
- Reduction in the corporate tax rate: Corporations would be taxed at 21% beginning in 2018, down from today’s top corporate rate of 35%.
- Reduction in taxes for “pass-through” businesses: Most so-called “pass-through” businesses, such as S corporations, limited liability corporations, partnerships and sole proprietors, would be allowed to deduct 20% of their income. There are special rules for certain types of services businesses. This provision is extremely complicated.
Here are some other issues of particular interest to us and our clients:
- No changes to cost basis rules: The Senate version of the legislation would have required investors to use the “first in, first out” (FIFO) method when calculating their cost basis for stock sales. Meaning, you would have been forced to sell your oldest shares first – which typically results in much larger taxable gains. That provision was dropped from the final agreement. Investors will continue to have the ability to choose which lots of stock they are selling.
- No changes to retirement accounts: Contribution limits to IRAs, Roth IRAs, 401(k)s and other retirement plans were not changed.
- Expansion of 529 college savings accounts: Up to $10,000 per year of money in a 529 college savings plan can be used to pay for K-12 school tuition or homeschooling.