Highlights of the 2018 House and Senate Tax Reform Bills

Both the House and the Senate have passed different 2018 tax reform legislation and have not reconciled the differences. The proposed tax bills are moving targets and specific items change daily. The following are some highlights of the non-reconciled proposed tax legislation by the House and the Senate.

Tax Brackets and Capital Gain Rate

• House has lowered the number of tax brackets and has widened the range that would tax dollars at a lower rate.
• The Senate on the other hand has kept the 7 tax brackets but widened the range that would tax dollars at a lower rate.
• The Capital Gain Rate is largely unchanged.

Standard Deduction & Personal Exemptions

• The Standard deduction almost doubled from Married Filing Joint originally at $12,700 to proposed $24,400, Single originally at $6,350 to proposed $12,000; and Head of Household originally at $9,350 to proposed $18,000.
• The Personal Exemptions originally set at $4,150 per taxpayer, spouse and dependents would be eliminated. How that changes W-4 and payroll withholding charts remains to be seen.

Child Tax Credit

• The House proposed a child tax credit at $1,600 per child under 18 which is up $600 and age limit went up a year instead of under age 17.
• The Senate has proposed the child tax credit to be $2,000 per child under 18 which doubles the tax credit and age limit also increases a year. The increase in the child tax credit may offset the loss of personal exemptions for taxpayers with children under the age of 18.

Alimony

• For Alimony agreements executed after 12-31-17, the House proposed to disallow the alimony deduction and not tax the Alimony received.

Sale of Principle Residence

• Sale of your Principle residence to take the exemption would change the number of years you would need to reside in the home to 5 of 8 years instead of 2 of 5 years. Lengthening the time, you must stay in your home to exempt the gain from principle residence from 2 years to 5 years

Itemized Deductions

• Real Estate Tax is proposed to be capped at $10,000 for Married Filing Joint and capped at $5,000 for Single taxpayers.
• The State and local tax deduction would be disallowed for individual taxpayers but allowed for businesses as a deduction.
• Home mortgage Interest Deduction,

o The House limits the mortgage interest deduction to mortgages up to $500,000, but would affect new mortgages starting in 2018.
o The Senate doesn’t change the deduction but only allows the deduction for home purchases and disallows for home equity interest paid.

• Charitable Contributions do not appear to be adversely affected.
• Medical Expenses

o The House disallows the deduction for medical expenses
o The Senate allows medical expenses and lowers the 10% Adjusted Gross Income threshold back down to 7.5% of Adjusted Gross Income.

Deductions Eliminated

• Moving Expenses.
• Unreimbursed Employee Expenses.
• Meals and entertainment except for out of town and overnight travel.
• Adoption credit would be eliminated.

Business

• 30% of business income from sole proprietors, partnerships, S Corporations tax would be capped at 25%.
• Corporate tax rate would decrease from 35% to 20% except personal service corporations would be taxed at 25%.
• Net Operating Loss Carrybacks would no longer be allowed.
• Accelerated depreciation (1st year depreciation/ expensing) would be greatly expanded.

Estate Tax & Gift Tax

• The House doubles the Estate Tax exemption from $5.6 million to $10 million indexed for inflation or $11.2 million and stays in place until December 31, 2024 when it is set to repeal.
• The Senate also doubles the estate tax exemption but does not repeal the estate tax in 2025.
• There is no proposed change to the Gift Tax in either the House or the Senate proposals.

Alternative Minimum Tax

• The House repeals the Alternative Minimum Tax (AMT).
• The Senate keeps AMT in place with minor changes to the income threshold.

Affordable Care Act

• Senate repeals the Affordable Care Act
• The House keeps the Affordable Care Act in place.

Tax Planning Action Items you may want to consider.

With the proposed tax legislation continuously changing, you may want to consider prepaying itemized deductions such as real estate taxes, state and local taxes, make your 2018 charitable deductions in 2017. In 2018 if proposed standard deductions pass, a couple Married Filing Joint will need over $24,400 in itemized deductions to itemize and note the above proposed itemized thresholds. Also, if drafting an alimony agreement may want to have it finalized if possible in 2017 for deduction purposes or if on the receiving side of alimony payments have the alimony agreement finalized in 2018 for potential non-taxation. You may consider deferring income if possible into 2018, which greatly depends upon what tax bracket you are in and where your taxable income sits within your tax bracket.