The Tax Cuts and Jobs Act was just released by the House Ways and Means Committee and it contains a large number of provisions that would affect individual taxpayers.
Here are some of the key provisions:
Under the bill, individuals would be subject to four tax rates, instead of the current seven: 12%, 25%, 35%, and 39.6%, effective for tax years after 2017. The rates under the bill would be as follows:
The starting points for each bracket would be adjusted for inflation for years after 2018. The 12% rate would be phased out for taxpayers with high incomes (over $1.2 million for joint filers and surviving spouses, over $1 million for other individuals).
Capital gains: The bill would create three capital gains tax thresholds. Capital gains that would otherwise be taxed as ordinary income below the "15-percent rate threshold" will be taxed at 0%. Capital gains that would otherwise be taxed as ordinary income below the "20-percent rate threshold" will be taxed at 15%. Capital gains that would otherwise be taxed as ordinary income above that threshold will be taxed at a 20% rate.
The 15% threshold is set at $77,200 for married taxpayers filing jointly, $38,600 for married taxpayers filing separately and single taxpayers, $51,700 for heads of household, and $2,600 for trusts and estates.
The 20% threshold is set at $479,000 for married taxpayers filing jointly, $239,500 for married taxpayers filing separately, $425,800 for single taxpayers, $452,400 for heads of household, and $12,700 for trusts and estates. Again, these amounts would be adjusted for inflation after 2018.
Standard deduction: The standard deduction would increase from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,400 for married couples filing jointly, effective for tax years after 2017. Single filers with at least one qualifying child would get an $18,300 standard deduction. These amounts will be adjusted for inflation after 2019.
Personal exemptions: The deduction for personal exemptions, currently at $4,050 per person, would be repealed after 2017.
Passthrough income: Under a new Sec. 4, a portion of business income distributed by a pass-through entity, such as a partnership, S corporation, or an LLC, would be taxed at a maximum rate of 25%, instead of at ordinary individual income tax rates, effective for tax years after 2017. The rest of the business’s passthrough income would be treated as compensation and would be subject to ordinary individual tax rates.
Income from passive activities (such as rental real estate) would be taxed entirely at the 25% rate.
The overall limitation of itemized deductions would be repealed, effective for tax years beginning after 2017. However, many deductions would be repealed, effective for tax years beginning after 2017, including:
- medical expense deduction;
- alimony deduction;
- Casualty and theft loss deduction (exception for special disaster relief losses)
- Deduction for tax preparation fees
- Deduction for moving expenses
- Deduction for contributions to Archer medical savings accounts (and employer contributions would no longer be excludable from income). Existing Archer MSAs could be rolled over tax-free into a health savings account.
- The repeal of the alimony deduction would be accompanied by a corresponding repeal of the provision requiring alimony payments received to be included in income. This repeal would apply to divorce or separation agreements executed after Dec. 31, 2017.
Employee expenses: Employees would no longer be allowed to take an itemized deduction for their expenses that are attributable to the trade or business of performing services as an employee.
Mortgage interest: The mortgage interest deduction on existing mortgages would remain the same; for newly purchased residences (that is, for debt incurred after Nov. 2, 2017), the limit on the aggregate amount of acquisition indebtedness would be reduced to $500,000 ($250,000 for married taxpayers filing separate returns), from the current $1.1 million. Also, taxpayers would be limited to one qualified residence for purposes of the mortgage deduction.
Charitable contributions: Some rules for charitable contributions would change for tax years beginning after 2017. Among those changes, the current 50% limitation for cash contributions would be increased to 60%.
State and local taxes: The deduction for state and local income or sales tax would be eliminated, except that income or sales tax paid in carrying out a trade or business or producing income would still be deductible. State and local property taxes would continue to be deductible, but only up to $10,000. These provisions would be effective for tax years beginning after Dec. 31, 2017.
The bill would repeal various credits, including the adoption tax credit, and the credit for individuals over age 65 and the permanently disabled.
Child tax credit: The allowable amount of the child tax credit would be increased from $1,000 to $1,600. The first $1,000 of the credit would be refundable. A new nonrefundable “family” credit of $300 would be allowed to each taxpayer (and spouse in the case of a joint return) and each dependent who is not a qualifying child. The $300 credit for nonchild dependents would expire after 2022.The phaseout for these credits would be increased to $230,000 of modified adjusted gross income (MAGI) for married taxpayers filing jointly and to $115,000 for single taxpayers.
Education: The American opportunity tax credit, the Hope scholarship credit, and the lifetime learning credit would be combined into one credit, providing a 100% tax credit on the first $2,000 of eligible higher education expenses and a 25% credit on the next $2,000, effective for tax years after 2017. Taxpayers would be required to provide a Social Security number to claim the refundable portion of the American opportunity tax credit.
The bill would also repeal the deduction for interest on education loans and the deduction for tuition and expenses, as well as the exclusion for interest on U.S. savings bonds used to pay qualified higher education expenses, the exclusion for qualified tuition programs, and the exclusion for employer-provided education assistance programs.
The Sec. 121 exclusion of gain from the sale of a principal residence would be amended to require that the residence has been the taxpayer’s principal residence in five of the eight years preceding the sale. (Currently is to two of the last five years) Taxpayers could use the exclusion only once every five years. (Currently available every two years) The exclusion will phase out for taxpayers with MAGI over $250,000 ($500,000 for married taxpayers filing a joint return). These changes would be effective for sales and exchanges after 2017.
AMT: The bill would repeal the AMT in its entirety, effective for tax years beginning after 2017 - Taxpayers with AMT credit carryforwards would be allowed to claim a refund of 50% of the remaining credits (to the extent the credits exceed regular tax for the year) in tax years beginning in 2019, 2020, and 2021. Then in 2022, taxpayers would be able to claim a refund of any remaining credits.Estate, gift, and generation-skipping transfer taxes: The estate tax and the GST tax would be repealed after 2023. However, inherited property would still receive a stepped-up basis. The estate tax exclusion amount would double from its current statutory $5 million to $10 million, indexed for inflation, for tax years after 2017.
The top gift tax rate would be lowered to 35% for gifts made after 2023. The gift tax exclusion amount would be $10 million, and the annual exclusion amount would be $14,000, indexed for inflation.
The bill is currently in “mark up” sessions. Once finished the bill would be released to the full House of Representatives. There is hope that it will be approved by the House of Representatives prior to the Thanksgiving holiday recess. However, the passage of a comprehensive tax reform bill into law by the end of 2017 will likely face significant hurdles.