House and Senate Bills Provide Glimpse of Tax Reform for Individuals

The House Ways and Means Committee revealed a new tax bill, the Tax Cuts and Jobs Act. Running at almost 430 pages, the bill seeks to make sweeping changes to the current tax code. The Senate Finance Committee has also released a description of their own proposal.  While the below summary is not exhaustive, we have highlighted some important points within the two bills for individuals. The specifics of these proposals will change quickly after debate begins and differing amendments are incorporated into the legislation.  We will continue updating this blog as we become aware of any changes and as the House and the Senate begin reconciling the differences within the two plans.  The provisions for corporate tax provisions will be posted in a separate blog post.

Individual Tax Brackets

House

  • 12% for taxable incomes up to $45,000 for individuals and $90,000 for married couples
  • 25% for taxable incomes up to $200,000 for individuals and $260,000 for married couples
  • 35% for taxable incomes up to $500,000 for individuals and $1 million for married couples
  • 39.6% for taxable income amounts above the 35% threshold

Senate (Expire after December 31, 2025)

  • 10% for taxable incomes up to $9,525 for individuals and $19,050 for married couples
  • 12% for taxable incomes up to $38,700 for individuals and $77,400 for married couples
  • 22% for taxable incomes up to $70,000 for individuals and $140,000 for married couples
  • 24% for taxable incomes up to $160,000 for individuals and $320,000 for married couples
  • 32% for taxable incomes up to $200,000 for individuals and $400,000 for married couples
  • 35% for taxable incomes up to $500,000 for individuals and $1,000,000 for married couples
  • 38.5% for taxable incomes above the 35% threshold for both individuals and married couples

Business Tax Rates

  • House: Corporate tax rate reduced from 35% to 20%.  Senate:  Corporate tax rate reduced from 35% to 20%, but with a delay until 2019
  • House: Tax of up to 12% on multinational companies’ accumulated offshore earnings from cash and equivalents.  An amendment was recently put in that would increase this tax up to 14%. Senate: The proposal currently released does not appear to specify a rate on repatriated earnings. We will update once the full legislation from the Senate is released
  • House: Maximum pass-through tax rate on business income set at a maximum rate of 25%. Senate: Pass through companies allowed a 17.4% deduction of domestic qualified business income (This will be expanded on in the business reform blog post)

Standard Deduction and Exemptions

  • House and Senate: Raises from $6,350 to $12,000 for individuals
  • House and Senate: Raises from $12,700 to $24,000 for married couples
  • House and Senate: Personal exemptions would be eliminated

Itemized Deductions

  • House: Most deductions under current law would be eliminated including items such as casualty losses, medical expenses, tax preparation fees, state and local income taxes, and others. Senate: Preserves medical expenses, but most others would be repealed.  Repeals all 2% floor itemized deductions. Casualty losses would only be allowed for presidential declared disasters under section 401
  • House and Senate: Mortgage interest deduction, see below, and the charitable deduction would be preserved
  • House and Senate: The limitation on overall itemized deductions allowable would be eliminated There would no longer be any phase-outs
  • House and Senate: The limitations on cash contributions to public charities and certain private foundations would be increased to 60% of AGI from 50%

Mortgage Interest Deduction

  • House: Cap on principal residence acquisition indebtedness eligible for the mortgage interest deduction lowered from $1 million to $500,000. Senate: Cap would remain at $1 million
  • House and Senate: Only loans on a principal residence would be eligible for the deduction
  • House and Senate: Interest on home equity loans incurred after the effective date of the bill would no longer be deductible

State and Local Tax Deductions

  • House:  Real property tax expense deductions for purposes of itemizing will be allowed a cap $10,000.  Senate:  The state and local tax deduction for itemized deductions would be fully repealed and there would be no $10,000 amount allowed for real property taxes
  • House and Senate: Deduction for state and local income taxes would be eliminated for itemized deductions. The current alternative deduction for sales taxes would also be eliminated for purposes of itemized deductions
  • House and Senate: State and Local income taxes paid in carrying on a trade or business would continue to be deductible

Family and Child Tax Credits

  • House: A new Family Credit of $300 for each parent and non-child dependent. Senate: This Family Credit would be increased to $500
  • House: Child Tax Credit increases from $1,000 to $1,600. Senate: Child Tax Credit increases to $2,000
  • House and Senate: This plan would retain the adoption credit and the child and dependent tax credit.  This could change once the Senate releases legislative language

Education Incentives

House

  • The Hope Scholarship and Lifetime Learning Credit would be eliminated
  • The eliminated provisions above for education credits and deductions would instead be consolidated into an enhanced single American Opportunity Tax Credit, with a 100% credit maximum of first $2,000 and a 25% credit on the next $2,000 as under current law. $1,000 of the credit would be refundable and a 5th year of post-secondary education would be eligible at half the credit of the first 4 years
  • Coverdale education contributions would be eliminated. However, a tax-free roll-over into a 529 plan would be allowed
  • Elementary and high school expenses would now be allowed under a 529 plan of up to $10,000 per year. Qualified expenses would also include those from apprenticeship programs
  • Deductions for student loan interest would be eliminated
  • Deduction for qualified tuition and related expenses would be eliminated
  • Interest on US Savings Bonds used for qualifying education expenses will no longer be tax exempt
  • The exclusion from income of employer-provided education assistance would be eliminated

Senate

There does not appear to be any specific language yet regarding education incentives within the Senate plan. The many incentives described above do not appear to be proposed for repeal. However, since all that has been released is a description of the plan, we will update if language is within the actual released legislation.

Alternative Minimum Tax

  • House: AMT would be eliminated Senate: AMT would be eliminated, but the repeal provision would expire December 31, 2025
  • House and Senate: Any AMT credit carryforwards would be allowed a refund of 50% of remaining credits in tax years 2019, 2020, and 2021

Retirement Account Changes

  • House and Senate: Provision allowing for re-characterization between Roth and traditional IRA contributions would be eliminated
  • House: Hardship distributions would allow for earnings and employer contributions to also be included Senate: Does not address yet in released materials

Other Individual Tax Changes of Note

  • House: Alimony would no longer be deductible by the payor and no longer income to the payee. Senate: The current description does not have any language that includes the repeal of the alimony deduction
  • House and Senate: Moving expense deductions would be eliminated
  • House: Archer MSAs deductions would no longer be allowed, but could be rolled over into an HSA tax-free. The current HSA tax benefits would remain in place. Senate: Does not address yet in released materials
  • House and Senate: Employee unreimbursed business deductions would be eliminated
  • House: Many employer-provided benefits to an employee would no longer be excluded from income. These include items such as employee achievement awards, dependent care assistance, adoption assistance and qualified moving expenses. Senate: The proposal eliminates the exclusion from income of qualified moving expenses just as the House plan. There is no language yet regarding other exclusions
  • House and Senate: The exclusion of gain from the sale of a principal residence would now require that the resident live in the home for 5 of the past 8 years before being eligible. This exclusion would also be allowed once every 5 years

Estate and Gift Tax

  • House: Full repeal taking effect in 2024. Senate: No repeal
  • House and Senate: Increases exemption for an individual from $5.49 million to $10 million, indexed for inflation. A married individual could effectively transfer $20 million as both would be allowed this exemption as in current system
  • House and Senate: Step-up in basis for property passing to heirs at death would remain in place
  • House: The gift tax exclusion would be changed to $10 million for lifetime transfers with a top rate of 35%. The annual exclusion a donor could gift per year would stay at $14,000. Senate: The proposal on doubling the exemption for estates and gifts is the same. However, there is no wording released yet relating to the annual gift exclusion or the top tax rate on gifts. We will update once the full bill is released

What isn’t changing?

  • Earned Income Tax Credit will remain in place
  • Charitable Deduction will remain in place

While legislation is still pending, we will keep you updated on the latest developments. Contact an Anders advisor with questions on how the proposed changes could affect you or your business.