By: The Kiplinger Editors | The Kiplinger Tax Letter
On November 03, 2017
Start with individual taxes. There would be four listed income tax brackets: 12%, 25%, 35% and 39.6%. For singles, the 12% rate would run to $45,000, the 25% rate would top out at $200,000, the 35% one would end at $500,000, and the 39.6% rate would kick in for taxable incomes that exceed $500,000. For marrieds, 12% rate up to $90,000, 25% would max out at $260,000, 35% would end at $1 million, and the 39.6% rate would apply above $1 million. Brackets for filers who are heads of household are also included. The brackets would be indexed to inflation using a less-generous formula than now. Top earners would lose the benefit of having any income taxed at 12%. The tax rates for capital gains and dividends would stay the same.
Standard deductions would nearly double...to $24,000 for married filers and $12,000 for single individuals. Singles with children could claim $6,000 more. An increased child tax credit, too…$1,600 per dependent under age 17. And a new, temporary, five-year credit of $300 for a taxpayer, spouse and nonchild dependents. Higher-income phaseouts would apply to these credits. But personal exemptions for filers and their dependents would be repealed.
The credits for adoption, plug-in vehicles and a few others would disappear. Many education tax breaks would be nixed. But 529s would be enhanced to allow payouts for elementary and secondary education and apprentice programs. Also, the American Opportunity and earned income credits would be saved.
The alternative minimum tax would be repealed. Ditto for the estate tax… But not right away. The estate tax exemption would first be doubled, to over $10 million, starting in 2018. Full repeal of the tax is scheduled for 2024. Estate tax repeal could be in jeopardy in the Senate, where leaders are talking about keeping the tax on the books, albeit with an increased exemption. There’s no change in the asset basis step-up for heirs of estates of any size. Even if the estate tax goes, the gift tax would stick around, with a 35% rate, a lifetime $10-million exemption and a $15,000 yearly exclusion, indexed for inflation.
The bill takes a chain saw to many itemized deductions on Schedule A. The write-off for state and local income and sales taxes would be eliminated. The deduction for property taxes would be capped at $10,000. Expect heated debate on this issue. Whatever emerges will likely differ from the current House proposal.
The mortgage interest deduction would be nicked. Under current law, taxpayers can deduct interest on as much as $1 million of mortgages used to buy, build or improve a primary residence and a second home, plus the interest paid on up to $100,000 of home equity debt. The House would slash the $1-million cap to $500,000, and axe the write-off for interest on home equity loans and second homes.
The provision would generally be effective for loans incurred after Nov. 2, 2017.
The charitable contribution write-off would be saved and expanded a bit. Several other big write-offs would go away. Personal casualty losses. Gambling. Tax preparation fees. Moving expenses. Alimony, although the payments would be tax-free to recipients. Employee business expenses. And medical costs, though this last one, which impacts seniors and the chronically ill, among others, has a good chance of surviving in some form in any tax package enacted.
On fringe benefits, employee achievement awards would be taxed as income. The exclusion for employer-provided housing would be limited to $50,000 and would phase out for highly compensated folks…those earning $120,000 or more. The bill would get rid of flex plans for child care costs. So, working parents could no longer contribute up to $5,000 of pretax wages to dependent care FSAs. No more tax-free employer-provided moving expense reimbursements.
Even the home sale exclusion doesn’t escape unscathed under the House bill. For joint return filers, the $500,000 exclusion starts to phase out dollar for dollar when adjusted gross income tops $500,000. For singles, the $250,000 exclusion begins to phase out at $250,000 of AGI. The requirements to qualify for the tax break would be tighter. Filers must own and use the residence as their primary home for at least five out of the eight years before the sale…up from two years out of five.
Generally, tax benefits for retirement savings haven’t been curtailed. There had been whisperings that House GOPers wanted to reduce the amount of pretax payins to 401(k)s. President Trump put an end to that talk, at least for now. There is an important change involving Roth IRA conversions. The House proposal would bar IRA owners who convert their traditional IRAs to Roth IRAs from later undoing the switch and recovering the income tax paid.
Exempt organizations aren’t left untouched. Among the changes: Private colleges with large endowments would pay a new 1.4% excise tax on net investment income. The tax would apply to schools with at least 500 students and non-education-related assets valued at $100,000 or more per full-time student.
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