Tax reform took a lurch forward over the weekend with both the House and Senate passing different versions of the bill. You’ll find a lot of similarities between the two: overall tax rates are lower for individuals and businesses, child credits are increased, itemized deductions are simplified. However, there is compromising to be done. The houses will now work to reconcile the differences between the two versions, ideally coming up with a single plan before Santa Claus comes to town.
Until then, here’s a rundown of the top 5 areas that impact most of our client families:
| What? | 2017 | House Proposal | Senate Proposal |
|---|---|---|---|
| Tax Brackets | 7 brackets10% 15% 25% 28% 33% 35% 39.6% (Income over $470,00) |
4 brackets12% 25% 35% 39.6% (Income over $1M) |
Adjust existing 7 brackets to new income levels and rates. Like the house proposal, the top tier would apply to those with income over $1M. |
| State Income and Sales Tax | Fully deductible | Repealed entirely. | |
| Personal Exemptions | $4,050 per person (phased out for couples with AGI over $313,800). | Repealed entirely | |
| Standard Deductions | $13,000 standard deduction for couples. For individuals/spouses over A65 or blind, an extra $1,250 deduction is available. | Increase to $24,000 for couples. Additional deduction would disappear. | Increase to $24,000 for couples. Additional deduction would stay. |
| Estate Tax Exemption | $5.49M per person is exempt from estate tax. This would increase to $5.6M in 2018 if reform did not pass. 40% tax on transfers over that amount. | Increase to $11.2M exemption per person. | |
Okay…as Certified Financial Planners and self-admitted tax nerds, we can’t actually limit this to 5. It’s not in our blood. So, if you’re like us and interested in digging into more of the details—particularly around the changes to deductions—here’s another five for you:
| What? | 2017 | House Proposal | Senate Proposal |
|---|---|---|---|
| Deductibility of property taxes | Fully deductible | Repealed entirely | |
| Deducibility of real estate taxes | Fully deductible | Limited to $10,000 | |
| Deductibility of medical expenses | Deductible over 10% AGI | Repealed entirely. | Deductible over 7.5% AGI for 2017-2018 only. AGI floor would then be 10% for 2019+. |
| Deductibility of Mortgage Interest | Interest up to $1.1M can be deducted. Up to $100k can be in a home equity loan. Debt can be held on primary residence and one other house. | Limit would fall to $500k. $0 deductible if on home equity loan. Only debt on primary residence deductible. | Current law remain the same except moving forward, $0 deductible if on a home equity loan. |
| Deductibility of Misc. Itemized Deductions | Misc. expenses are deductible over 2% AGI (tax prep fees, advisory fees, unreimbursed business expenses, etc.) | Remove the deduction for tax prep fees and unreimbursed business expenses. | Repealed entirely. |
From everything we’ve read, these proposals will not make an impact on your 2017 returns. However, they will open the door for some tax planning opportunities moving forward. We look forward to working with you and your CPA to make the most of your hard earned money.
