Tax & Accounting News

Tax Cut & Jobs Act: Individual & Small Business Provisions

11/19/2017

Caution: This is a synopsis of some of the provisions included in the House bill (HR 1) that was passed by a vote of 227 to 205 on November 16, 2018, and the Senate's version of the bill as it was sent from the Finance Committee to the full Senate, which will probably vote on it after returning from its Thanksgiving recess. The information on the Senate's bill is based on the "Chairman's Mark" as modified. There are significant differences between the two bills, so if the Senate passes its version, the two chambers will have to reconcile their differences before the legislation can be forwarded to the President for his signature.

Standard Deductions - The legislation would substantially increase the standard deductions and limit the itemized deductions. The additional standard deduction for the elderly and blind would be repealed. The following are the proposed new standard deductions as compared to the current amounts:

The standard deduction of a dependent would not exceed the greater of $500 or $250 plus the dependent's earned income.

Senate's Proposal - The basic standard deduction would be increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, with the amount of the standard deduction indexed for inflation for taxable years beginning after December 31, 2018. Unlike the House version, the elderly and blind additions to the standard deduction would be retained.

Itemized Deductions - Currently itemized deductions include medical, taxes, home mortgage Interest, charitable contributions, and miscellaneous deductions. The Act, as proposed by the House, would substantially change what would be allowed as an itemized deduction.

Medical - Medical deductions would no longer be allowed.

Senate's Proposal - The current-law medical expense deduction would be retained.

Taxes - Would be allowed for property taxes only, but limited to a maximum of $10,000, and not at all for foreign real property taxes. Currently, this category includes a deduction for state and local income or sales taxes, which would no longer be allowed if this legislation is passed. This change is a huge point of contention for individuals residing in states with a high state and local income tax. Strategy: It may be appropriate to advise your clients who normally itemize or who are on the cusp of itemizing to estimate their state and local income taxes for 2017 and make sure they pay that amount by way of withholding or estimated taxes before year end, just in case state income tax is no longer deductible after 2017.

Senate's Proposal - No state and local taxes of any type would be allowed as an itemized deduction. However, deductions for state, local and foreign property taxes, and sales taxes, that are presently deductible in computing income on an individual's Schedule C, E, or F would continue to be deductible on those forms.

Home Mortgage Interest - Currently taxpayers can deduct the interest on up $1 million of home acquisition debt and $100,000 of home equity debt on their primary residence and a second home. The legislation would reduce the $1 million limit of home acquisition debt to $500,000 for homes purchased after 11/2/2017. The $1M cap continues to apply to mortgages already in existence on Nov. 2, 2017, as well as for taxpayers who have entered into a binding written contract before that date to close on the purchase of a principal residence before January 1, 2018, and who purchase such residence before April 1, 2018.

The Act would no longer allow home equity debt interest or second home interest as a deduction. We must assume if the equity debt were no longer deductible as home mortgage interest, it would become excess debt and traceable to its use. This can be a major issue for some of your clients that have been using their home's equity for no deductible purposes. It can also solve a problem where home equity debt was used for a business purpose, allowing the interest to be traced to the business use.

Interest paid on a pre-11/2/2017 primary residence acquisition debt that is refinanced would be allowed only to the extent the refinanced debt doesn't exceed the principal amount of the refinanced debt immediately before the refinancing. The deduction would be available only for the term of the original loan or if the principal of such original indebtedness is not amortized over its term, the expiration of the term of the first refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing).

Senate's Proposal - The $1 million acquisition debt limitation would be retained for primary and second residences, but no deduction would be allowed for interest on equity debt beginning with 2018.

Charitable Contribution - Charitable contributions will continue to be deductible, and the current 50% of AGI deduction limitation would be increased to 60%, allowing larger contributions. The long-standing charity mileage rate of 14 cents would be replaced with "a rate which takes into account the variable cost of operating an automobile."

Senate's Proposal - Conforms to the House's proposal with regard to the percentage increase.

Miscellaneous Itemized Deductions -In this catch-all category for deductions, the Act would make the following changes:

Employee business expenses - Would no longer be allowed.
Tax preparation fees - Would no longer be deductible.
Casualty Losses - Personal casualty losses would no longer be allowed except for those in federally declared disaster areas that special legislation allows without itemizing. Personal casualty gains in excess of personal casualty losses would be treated as capital gains and all such losses as capital losses.
Gambling losses would still be allowed, as would gambling expenses (added by the legislation), to the extent of gambling income.

Senate's Proposal - The Senate's bill would repeal all itemized deductions currently subject to the 2% of AGI reduction. Casualty losses incurred in a Presidentially declared disaster area would be able to be claimed as a personal casualty loss (subject to the current law $100 and 10% of AGI limitations). Regarding gambling expenses, the Senate's proposal is essentially the same as the House's and is intended to clarify that the limitation on losses from wagering transactions applies both to the actual costs of an individual's wagers and to other expenses incurred by the individual in connection with the conduct of that individual's gambling activity, such as an individual's otherwise deductible expenses in traveling to or from a casino. (Travel expenses might be applicable to a professional gambler.)

Exemptions - Under today's law taxpayers are allowed a personal exemption of $4,050 for the filer and spouse (if married) and each dependent. Under the legislation the deduction for personal and dependent exemptions would be repealed.

Senate's Proposal - The deduction for personal and dependent exemptions would be repealed.

Tax Rates - Under current law there are seven tax brackets; 10, 15, 25, 28, 33, 35 and 39.6%. The proposed tax rates would be 12, 25, 35 and 39.6%. Each of the brackets are a step function, meaning that the income within each is taxed at the same rate until the income exceeds that bracket at which time the additional income is taxed at the next brackets rate. The thresholds would be inflation adjusted after 2018. The table below illustrates the proposed tax brackets.

12% Bracket Higher Income Phase-Out - The Act would phase out the benefit of the 12% tax bracket by $6 for every $100 the taxpayer's AGI exceeds $1 Mil for single taxpayers and $1.2 Mil for MFJ.

Senate's Proposal - There would still be seven brackets, but the rates would be lowered as shown in the table below. There would not be a phaseout of the lower brackets for high-income filers as is proposed by the House. Amounts would be inflation adjusted for years after 2018.

Kiddie Tax - The Act would modify the way the "kiddie tax" is calculated and removes from the computation any reference to the child's parent's return.

Senate's Proposal - Kiddie Tax - The Senate's bill would change how the tax of a child with unearned income is calculated, with the child's tax no longer based on the parent's tax situation or the unearned income of siblings. Instead, the child's taxable income attributable to earned income would be taxed using the single brackets and rates, while taxable income attributable to net unearned income would be taxed using the rates and brackets for trusts and estates.

Enhanced Child Tax Credit and New Family Tax Credit - The Act would increase the amount of the child tax credit (CTC) from the current $1,000 to $1,600 and the first $1,000 (subject to inflation adjustment) would be refundable. In addition, the Act would add a $300 nonrefundable credit for non-child dependents.

A taxpayer would have to provide a Social Security number for the qualifying child in order to claim the enhanced child tax credit.

The Act also includes a "family credit" that would provide a $300 nonrefundable credit for each taxpayer, and each spouse where a couple is filing jointly. The taxpayer identification number of each individual for whom the $300 credit is claimed would need to be included on the return, and it must have been issued before the return's due date. The non-child and the family credit would expire after 2022.

These credits would phase-out for taxpayers with income beginning at $115,000 for single filers and $230,000 for joint filers.

Senate's Proposal - The child tax credit would be increased to $2,000 per qualifying child, and the age limit for a qualifying child would be changed so that it would apply to a qualifying child under the age of 18 (currently under age 17). The maximum refundable portion of the credit would be $1,000, subject to inflation adjustment. A $500 nonrefundable credit would be allowed for qualifying non-child dependents. The phaseout threshold would be $500,000 for for all filing statuses (this is down from $1 Mil for MFJ as originally proposed). The phaseout threshold amounts would not be indexed for inflation. There is no provision in the Senate's version for the family credit proposed by the House.

Capital Gains Tax - The Act retains the special rates for long-term capital gains, but increases the tax bracket range for the 15% bracket. The following table illustrates the taxable incomes at which the capital gains tax rates would apply. These amounts would be inflation-adjusted after 2018.

Senate's Proposal - Same breakpoints as in the House's version.

Education Benefits

Coverdell Education Savings Accounts - No further contributions would be allowed after 2017 and the funds can be rolled into a Sec 529 plan.
Sec 529 College Savings Plan - Would continue and a provision would be added allowing up to $10,000 a year to be used for grammar school and high school education expenses. Rollovers from Sec 529 plans to ABLE programs would be allowed. A 529 plan could be established for an unborn child (defined as a child in utero).
Higher Education Interest - The Act would repeal the deduction of up to $2,500 for higher education interest.
Employer Provided Education Assistance - The Act would repeal the $5,250 tax-free fringe benefit available to employees under existing law.
American Opportunity Tax Credit (AOTC) - The Act would retain the current AOTC and enhance it by increasing the number of years that it applies from 4 to 5 with the credit in the 5th year limited to $1,250 and no more than $500 would be refundable. The phaseout thresholds would be inflation-adjusted after 2018.
Lifetime Learning and Hope Credits - The Act would repeal both of these credits.

Senate's Proposal - The Senate's bill does not include any reforms for education credits or education savings plans except as follows:.

Sec 529 Plans - Contributions to a 529 plan for an unborn child would be permitted after 2017.

Distributions after 2017 from 529 plans would be allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of the designated beneficiary's family.

Enhanced ABLE Accounts - Effective upon enactment and through 2025, the contribution limitation (currently the per-donee annual gift exclusion amount) would be increased with respect to contributions made by the designated beneficiary of the ABLE account, who would be allowed to contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household or (b) the individual's compensation for the taxable year. In addition the designated beneficiary of the ABLE account would be allowed to claim a Saver's Credit for contributions made to the account.

Plug-In Electric Drive Motor Vehicle Credit - Repealed after 2017.

Senate's Proposal - This credit is not mentioned in the Senate's bill.

Residential Energy Efficient Property - Geothermal, wind energy and fuel cell property credit was only allowed prior to 2017. They would be included, effective for 2017, along with solar as property qualified for the 30% credit in years through 2019, 26% in 2020 and 22% in 2021.

Senate's Proposal - This credit is not mentioned in the Senate's bill.

Alimony - Currently alimony is deductible by the payer and income to the recipient. The Act would retain that treatment for divorce agreements completed through 2017. For divorce agreements entered into after 2017, alimony would no longer be deductible by the payer and would not be income the recipient.