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All Contents © 2017The Kiplinger Washington Editors
By Sandra Block, Senior Editor
Kevin McCormally, Chief Content Officer
| November 2017
We knew immediately that the tax-overhaul blueprint released by House Republicans November 2 was a long way from the finish line. Despite fitful efforts at crafting tax plans, beginning when the Republicans took over the House of Representatives in the 2010 elections, the detailed proposal released by Ways and Means Chairman Kevin Brady (R-Texas) was seen by many as the first real step.
That became even more clear on November 9 when Senate Republicans released their version of a major overhaul of the nation’s tax system. Now, the full House and the full Senate must agree on their respective plans, with the two competing versions then sent to a conference committee to resolve differences. Republicans hope to have everything resolved and final legislation on the President’s desk for a signature before Christmas. Every taxpayer needs to pay attention over the next few weeks. Here are 12 provisions in the GOP bills that could affect your pocketbook.
A hallmark of the House tax plan is the call to nearly double the standard deduction, which would not only make more income tax-free but also simplify the system. Congressional analysts say bulking up the standard deduction would let more than 30 million taxpayers avoid the hassle of itemizing write-offs on their tax return. The bigger standard deduction would be bigger than all their qualifying expenses. The proposal would raise the standard deduction on a single return from $6,350 to $12,000 and from $12,700 to $24,000 on a joint return.
Oh, but there is a catch: In exchange for the bigger standard deduction, the proposal gets rid of the $4,050 for each exemption claimed on the return. So, a married couple with four kids would lose $24,300 in exemptions in exchange for the $11,300 boost in their standard deduction. (For some families, part of that would be made up via larger child credits. Also, single filers with one child or more would get an even bigger standard deduction: $18,000.)
The House plan estimates that increasing the standard deduction will cost the government about $1 trillion over 10 years; eliminating the personal exemptions would cost taxpayers about $1.5 trillion over the same period.
The Senate proposal is similar.
The House plan calls for squeezing the current system of seven income tax brackets down to just four brackets. Proponents say it simplifies the law, but few taxpayers actually use the brackets to figure their bill (they use software or, for those with taxable income under $100,000, pick a number off a table). But where the new tax brackets start and end will have a lot to do with what you owe.
The plan calls to replace the current 10% bracket with a 12% bracket. That might sound like a punishment for lower-income earners, but proponents say they’ll be okay because more of their income will be tax-free. At the other end of the scale, after much debate, House tax writers decided to leave the top rate at 39.6%, but that rate would kick in at a much higher taxable income level: $1 million versus $470,700 on a joint return under today’s rules. On the joint return, taxing the $529,300 difference at 35% instead of at 39.6% would save the couple nearly $25,000.
On the other hand, the House proposal would effectively create a fifth, 45.6% bracket for some high-income taxpayers. The goal is to claw back the benefit of having any of their income taxed at the 12% rate. The 6% surcharge would apply to taxable income starting at $1 million on individual returns and $1.2 million on joint returns. It would apply until the extra 6% levy offsets the amount of savings produced by having the first $45,000 on a single return or $90,000 on a joint returned taxed at 12% instead of 39.6%. After those savings are wiped out, the rate would fall back to 39.6%.
Here are the current tax brackets and those proposed in the House plan:
These numbers are not set in stone. As part of President Bill Clinton’s tax legislation in 1993, lawmakers proposed imposing what was called a “millionaire’s surtax” with a 39.6% rate on taxable income over $1 million. In the end, that rate kicked in at $250,000.
The Senate proposal would keep the current preferential rates for long-term capital gains and qualified dividends, including the 0% rate for lower-income taxpayers.
Leo Reynolds via Wikipedia
The Senate has very different ideas about tax brackets. Its plan would continue to have seven tax brackets, but with different rates and different break points. (The Senate plan does not include a bubble bracket.)
Here are the current tax brackets and those proposed in the Senate plan:
Not only would the Senate bill lower the top marginal rate, like the House bill, the top rate would kick in at higher levels. Although reducing the number of rates is sometimes hailed as a way to simplify tax return preparation, in fact few taxpayers ever see these tax rate schedules. They either hire someone to do their return or use tax software that automatically determines their tax bill. And, for those who still use pen and paper and have taxable income under $100,000, only a single calculation is needed regardless of their top tax bracket.
Argonne National Laboratory via Flickr
To simplify the law, the House plan would do away with several tax credits, including:
• The credit for the elderly and the disabled, which can be worth up to $1,125 to qualifying low-income taxpayers.
• The credit for plug-in electric vehicles, which is worth of up $7,500 to subsidize the cost of qualifying vehicles.
The original House proposal called for eliminating the adoption credit, which can offset up to $13,570 of the cost of adopting a child. An early change to that proposal, though, reversed that position and retained this credit. The Senate bill retains all three credits.
Currently, the law allows ex-spouses who pay alimony under a divorce decree to deduct the amount they pay. And, the ex-spouse who receives the money has to report it as taxable income. The House plan would get the tax law out of such financial arrangements. For any divorce decree executed (or altered) after the end of this year, alimony payment would be tax-free to the recipient. . . and the paying spouse would not get a deduction.
The change would add about $8.3 billion to government coffers over 10 years, tax analysts say, probably because payers are often in higher tax brackets than recipients.
The Senate plan preserves the deduction.
The House bill slashes some tax breaks for homeowners, starting with the deduction for mortgage interest. Homeowners would be permitted to deduct mortgage interest on loans of up to $500,000, down from the current cap of $1 million. Existing loans would be grandfathered. Homeowners would no longer be allowed to deduct mortgage interest on second homes and home equity lines of credit.
The bill would retain the exclusion from capital-gains taxes on the sale of your primary home, which allows you to shelter up to $250,000, or $500,000 if you’re married. However, it would phase out the exclusion for single taxpayers with income of more than $250,000, or $500,000 for married couples. In addition, you’d have to live in your home for five out of the past eight years to qualify for the full exclusion. (Currently, you must live in your home for two out of the last five years to claim the tax break.)
The Senate plan retains the $1,000,000 limit on debt for the purchase of a principal residence but would eliminate the deduction for home-equity debt. It preserves the deduction for interest on a mortgage for a second home. Like the House bill, it would require you to live longer in a principal residence to qualify to take profit tax-free, but there is no phase-out of the exclusion from capital-gains taxes on the sale of your primary home.
Planning to relocate to another state for a new job? The House bill would eliminate a popular deduction for moving expenses. The deduction, which is available to itemizers and non-itemizers, allows you to deduct the cost of moving yourself and your household goods to a new area as long as it’s at least 50 miles from your old home. There's an exception now for members of the military.
The Senate proposal would also eliminate this deduction, with the same exception for members of the military.
The House bill would allow parents to use up to $10,000 a year from state-sponsored 529 savings plans to pay for private elementary and high school tuition. (Currently, tax-free withdrawals from 529 plans are limited to college costs.) Coverdell education savings accounts, which allow parents to save up to $2,000 a year for private elementary, high school or college tuition, would be eliminated, but owners would be allowed to roll them into a 529 plan.
The Senate plan does not address this issue.
Lawmakers shelved a proposal to limit tax-deferred contributions to 401(k) plans to as low as $2,400 a year, in response to strong opposition from the financial services industry and lots of other groups. (For 2018, workers can save up to $18,500, or $24,500 if you’re 50 or older). But the House bill would make it more difficult to convert a traditional individual retirement account to a Roth. Currently, you can reverse a conversion—and eliminate the tax bill—as long as you recharacterize the conversion by the tax-filing date, including extensions, in the year in which you convert. The tax bill would repeal this provision.
The revised Senate plan also nixes the ability to recharacterize.
The House bill would increase the exemption from estate taxes—$5.49 million in 2017—to $10 million and phase the tax out entirely by 2023. It would also repeal the alternative minimum tax, a parallel tax system developed more than 40 years ago to ensure that the very wealthy paid some tax. Currently, taxpayers who may fall into the AMT zone have to calculate their taxes twice to determine which system applies to them.
The Senate plan would eliminate the AMT but retain the estate tax. It would, however, double the amount that can be passed to heirs tax-free to $11.2 million for an individual and $22.4 million for a married couple.
The House bill calls for the elimination of the itemized deduction for unreimbursed medical expenses. (Currently, the deduction is limited to expenses that exceed 10% of a taxpayer’s adjusted gross income.)
The Senate plan maintains this deduction.
The House plan originally called for the repeal of the popular break that lets parents set aside up to $5,000 of pre-tax salary to pay for child care while they work. The break applies to the care of children under age 13 and, currently, the money can even be used to pay for summer day camp. By killing the break after this year, congressional analysts say the change will raise $3 billion over the next ten years.
One of the first changes made to the House proposal in committee was to grant this tax break a five-year reprieve. As the plan stands now, child-care flex plans would be allowed to continue saving parents money through 2022. The savings would end starting in 2023.
The Senate plans preserves the tax break.
The House plan would eliminate the deduction of state and local income and sales taxes, but allow homeowners to continue to deduct up to $10,000 a year of property taxes.
The Senate plan would completely eliminate the write-off of personal state and local taxes, including sales, income and property taxes.
Regardless of your political leanings, all sides agree that a major tax overhaul is unavoidable.
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