Tax Reform

Both chambers of Congress have now passed the tax overhaul bill.  It’s the first such overhaul in more than 30 years.

The next stop is President Trump’s desk, where he is expected to sign it into law before the end of 2017. The tax overhaul provides heavy tax cuts for corporations and business owners. It also expands or restores some tax benefits for individuals.

The individual provisions would expire by the end of 2025, but most of the corporate provisions would be permanent.

One important note: The bill would not affect 2017 taxes, for which Americans will start filing their returns in a month or so.

Here’s a brief overview of 17 key provisions of the tax reform.

FOR INDIVIDUAL FILERS

  1. Lowers (many) individual rates: The bill preserves seven tax brackets, but changes the rates that apply to: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Today’s rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.

Here’s how much income would apply to the new rates:
— 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
— 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
— 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
— 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
— 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
— 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
— 37% (over $500,000; over $600,000 for couples)

  1. Nearly doubles the standard deduction: For single filers, the bill increases it to $12,000 from $6,350 currently; for married couples filing jointly it increases to $24,000 from $12,700.
  1. Eliminates personal exemptions: Today you’re allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents.
  1. Caps state and local tax deduction: The final bill will preserve the state and local tax deduction for anyone who itemizes, but it will cap the amount that may be deducted at $10,000. Today the deduction is unlimited for your state and local property taxes plus income or sales taxes.
  1. Expands child tax credit: The credit would be doubled to $2,000 for children under 17. It also would be made available to high earners because the bill would raise the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today.

Like the first $1,000 of the child tax credit, $400 of the additional $1,000 also will be refundable, meaning a low- or middle-income family will be able get the money refunded to them if their federal income tax liability nets out at zero.

  1. Creates temporary credit for non-child dependents: The bill would allow parents to take a $500 credit for each non-child dependent whom they’re supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability.
  1. Lowers cap on mortgage interest deduction: If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change. The bill will no longer allow a deduction for the interest on home equity loans. Currently that’s allowed on loans up to $100,000.
  1. Curbs who’s hit by AMT:  The final version reduces the number of filers who would be hit by it by raising the income exemption levels to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples.
  1. Preserves smaller but popular tax breaks: Earlier versions of the bill had proposed repealing the deductions for medical expenses, student loan interest and classroom supplies bought with a teacher’s own money. They also would have repealed the tax-free status of tuition waivers for graduate students.

The final bill, however, preserves all of these as they are under the current code. And it actually expands the medical expense deduction for 2018 and 2019.

  1. Exempts almost everybody from the estate tax.  It essentially eliminates it for all but the smallest number of people by doubling the amount of money exempt from the estate tax — currently set at $5.49 million for individuals, and $10.98 million for married couples.
  1. Slows inflation adjustments in tax code: The bill would use “chained CPI” to measure inflation, which is a slower measure than is used today. The net effect is your deductions, credits and exemptions will be worth less — since the inflation adjusted dollars defining eligibility and maximum value would grow more slowly. It also would subject more of your income to higher rates in future years than would be the case under the current code.
  2. Eliminates mandate to buy health insurance: There will no longer be a penalty for not buying insurance.
  1. Eliminates the ability to recharacterize (change your mind) a Roth conversion.

FOR BUSINESSES AND CORPORATIONS

  1. Lowers tax burden on pass-through businesses: The tax burden on owners, partners and shareholders of S-corporations, LLCs and partnerships — who pay their share of the business’ taxes through their individual tax returns — would be lowered by a 20% deduction.

The 20% deduction would be prohibited for anyone in a service business — unless their taxable income is less than $315,000 if married ($157,500 if single).

  1. Includes a rule to prevent abuse of pass-through tax break: If the owner or partner in a pass-through also draws a salary from the business, that money would be subject to ordinary income tax rates. But to prevent people from recharacterizing their wage income as business profits to get the benefit of the pass-through deduction, the bill would place limits on how much income would qualify for the deduction.
  1. Slashes corporate rate: The bill cuts the corporate rate to 21% from 35%, starting next year. The bill would also repeal the alternative minimum tax on corporations.
  1. Change how U.S. multinationals are taxed: Today U.S. companies owe Uncle Sam tax on all their profits, regardless of where the income is earned. They’re allowed to defer paying U.S. tax on their foreign profits until they bring the money home.

Many argue that this “worldwide” tax system puts American businesses at a disadvantage. That’s because most foreign competitors come from countries with territorial tax systems, meaning they don’t owe tax to their own governments on income they make offshore.

The final GOP bill proposes switching the U.S. to a territorial system. It also includes a number of anti-abuse provisions to prevent corporations with foreign profits from gaming the system. In the meantime it would require companies to pay a one-time, low tax rate on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets (e.g., equipment abroad in which profits were invested), slightly higher than the rates in the Senate- and House-passed bills.

Source – CNNMoney

If the Loveland area – or anywhere along the Colorado Front Range – is home for you and you have concerns about the impact of taxes on your financial life, consider scheduling a complimentary consultation meeting with me.