- The proposed Tax Cut and Jobs Act (TCJA), which is making its way through Congress, would be the first major tax reform in over 30 years.
- Under TCJA, corporate tax rates would move from 35% to 20%.
- Trump’s tax plan called for collapsing seven tax brackets to three. The proposed plan in the House has four tax brackets, and the Senate’s plan still has seven brackets.
- Standard deductions are doubled in the both plans, and itemized deductions are eliminated except for charitable and home mortgage interest on loans up to $500,000.
- The Affordable Care Act (ACA, also referred to as “Obamacare”) mandate would be eliminated, and no penalty would be imposed on individuals who do not wish to enroll in a health insurance plan.
The sweeping tax code rewrite that President Trump promised during his campaign has finally passed the Senate, and it’s headed for final reconciliation with the House version of the plan. As expected, Republican fiscal conservatives, except for Senator Corker, set aside their principles and gave Trump what he wanted: “massive tax reduction.” While the reduction in the business tax rate is substantial, marginal rates should have been reduced significantly in the Senate version of the plan.
Here is a list of some key provisions of the tax cut plan (TCJA) that, if enacted, will have the greatest impact on individual taxpayers:
Brackets & Rates For Married-Joint Filers:
Note: the Senate version of the plan does not reduce the number of tax brackets - a goal of the Congressional plan and President Trump.
Brackets for single files are one-half married taxpayers:
The standard deduction for joint filers moves to $24,000 for married taxpayers and $12,000 for individuals; the personal exemptions will be eliminated.
No change: 0,15, and 20% rates
The TCJA retains the 3.8% Affordable Care Act tax on net investment income.
The Senate bill “back door" capital gains hike on individual investors is awful and it should be eliminated. Mutual funds got a carve out and are exempt from first in, first out (FIFO) while individuals will be forced to sell their most highly appreciated assets using FIFO.
Alternative minimum tax (AMT) remains partially in place ensuring the wealthy pay some form of tax.
Itemized deductions are eliminated other than charitable and mortgage interest. Most taxpayers will have no need to itemize with the doubling of standard deductions, simplifying their tax returns and making it easier to file.
- There is an increase in the child tax credit. TCJA increases credit to $1,600 but only $1,000 is refundable. TCJA increases income levels at which Child Tax Credit phases out. Credits are complex and do not help simplify tax return filing.
- Property tax deductions are capped at $10,000 annually under both bills.
- Mortgage interest deductions are eliminated on home equity loans. Mortgage interest on home loans is eliminated at $500,000. According to the Home Depot CEO in a recent CNBC interview: “Only 5% of Americans have a mortgage greater than $500,000.”
- The state and local tax deduction (SALT) is eliminated completely in both proposals. This is a very thorny issue and still under intense discussion.
Business Income Tax:
As we stated in our January piece entitled, “Trump’s Tax Plan: The Simplified Facts": “Fundamental tax reform is needed to promote economic growth, job creation, and international competitiveness. Our corporate tax rate is 10 points higher than the global average."
U.S. corporate tax rates are now competitive with many other countries, and it’s expected to spur investment in equipment, buildings, and labor. The TJCA cuts the corporate tax rate from 35% to 20%. The corporate alternative minimum tax remains in place although Representative McCarthy of California is calling for a uniform corporate AMT. Technology companies, which benefit from research and development deductions, are hurt the most, hence the recent sell-off in the tech sector.
- Supporters of the Senate plan point out that corporate income is generally taxed twice — once at the company level and a second time when earnings are paid out to shareholders — so the proposal is fair.
- The TCJA will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%.
- Enhanced expensing for manufacturers and Real Estate Investment Trusts: No surprise here — the new tax law favors Trump and his son-in-law’s business entities. In fact, commercial real estate may be the biggest winner under the proposed plan.
Our tax code will no longer penalize small business owners in America — the backbone of our economy and the real job creators.
- Pass-throughs in the House plan move from a top tax rate of 39.6% to 25%, while prohibiting anyone providing professional services (e.g., lawyers and accountants) from benefiting from the lower rate.
- The Senate plan allows for a 23% tax deduction. Under the Senate plan, the deduction begins to phase out for anyone in a service business except those with taxable incomes under $500,000. Above $600,000, there's no deduction at all.
Year-end tax planning:
It’s easy to feel overwhelmed when it comes to the subject of tax planning. While we don’t yet have a clear understanding of the details of the final bill, it's very likely that some combination of the above highlights from the TCJA Plan will become part of our tax law by Christmastime. Therefore, some traditional tax planning strategies may still apply. Here are a few to contemplate:
- Consider changes in income and personal circumstances in light of potential tax law changes.
- Accelerate or prepay deductions in 2017. Why? Higher tax rates this year = more valuable deductions plus potential complete loss of certain tax deductions in 2018.
- Prepay your 4th quarter 2017 state income taxes and 2018 property taxes (the new threshold is $10,000).
- Pay down your home equity line or refinance your home mortgage.
- Harvest tax losses to offset capital gains. Pay attention to the "wash sale" rule and wait 31 days to buy back the same security.
- Consider gifting a portion of your required minimum distribution (RMD) from your IRA direct to a charitable institution by December 31. Note: Charitable gifts to hurricane relief are deductible even for those who do not itemize.
- Delay retirement plan distributions and Roth IRA conversions.
- Consider AMT: Defer or accelerate income and bonuses.
The end goal of tax reform is to make our tax system as fair as possible for everyone and promote growth. While these bills are far from perfect, especially for individual taxpayers, the business tax cuts are expected to spur investment in equipment, buildings, and labor. And that's good for all of us.
We will keep you informed of material changes to our tax laws that may go into effect by Christmas.
Sources: The Wall Street Journal Online; Bloomberg News; Forbes.com; CNBC News; Business Insider; Reuters News.
The information contained in this piece is intended for information only and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.
The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by Cambridge Wealth Management, LLC. Opinions expressed are current as of the date of this publication and are subject to change. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.