At long last, the House Republican tax plan (the “Tax Cuts and Jobs Act”) is out and it is a huge and confusing bill. Contrary to promises of simplifying the tax code, it is just as dense and complicated as the current system. Winners and losers will be determined on a case-by-case basis, depending on where you live, whether you itemize deductions and how you earn your money.
Of course, this is the starting point in the process and is likely to change in the coming days and weeks. The party brass has said that the goal is to pass legislation before the for the Thanksgiving recess.
EFFECTIVE DATE: Most provisions begin after December 31, 2017, though some, like the change in mortgage interest, have an effective date of November 2, 2017.
TAX BRACKETS: 12%, 25%, 35% and 39.6%
- 12% ($0 – $45,000 of taxable income for IND; $0 – $90,000 for MFJ)
- 25% ($45,000 – $200 for IND; $90,000 – $260 for MFJ)
- 35% ($200K – $500K for IND; $260,000 – $1M for MFJ)
- 39.6% (over $500K for IND; over $1M for MFJ)
STANDARD DEDUCTION: $12,000 IND/$24,000 MFJ. Those making up to the new standard deduction limits will pay no income tax. Currently, 70 percent use the standard deduction because it is higher than what they qualify for in itemized deductions. The expanded standard deduction would increase that percentage to 84 percent (145 million total filers), which would make tax filing a lot easier for more Americans (not quite an index card, but easier!)
FAMILY TAX CREDIT (CHILD TAX CREDIT + NEW-NON CHILD DEPENDENT CREDIT): The child tax credit will rise from $1,000 to $1600. There will also be a new $300 credit for each taxpayer, spouse and non-child dependent, though that credit would expire after five years. The threshold for the credit increases to $115K (IND) and $230K (MFJ), up from $75/$110K.
PERSONAL EXEMPTIONS: Eliminated. Currently, taxpayers are allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. For families with three or more kids and those who itemize, the loss of exemptions could offset other reductions in the bill.
STATE AND LOCAL TAX DEDUCTIONS: Repealed, with an asterisk. While homeowners in high tax localities will not be able to deduct state and local income taxes, those who itemize can take a tax deduction for property taxes up to cap of $10,000. Some Republican lawmakers from high tax states (CA, OR, MN, NJ, NY) are already opposing the bill based on this single proposal.
HOME MORTGAGE-INTEREST DEDUCTION: Mortgage interest will be deductible for loan amounts up to $500,000, down from the current $1M. The new limit would apply to new purchases after the effective date (11/2/17) and interest would be deductible only on taxpayer’s principal residence. Existing loans would be grandfathered.
Although the National Association of Homebuilders and the National Association of Realtors will fight this provision, it’s worth noting that fewer than 15 percent of existing homes sold for over $500K in August, and just 3 percent sold for over $1M.
TAXATION ON HOME SALES: Would require homeowner to own/use home as principal residence for 5 out of previous 8 years to qualify for exclusion of gain ($250 IND/$500K MFJ) on sale of principal residence (up from the current law 2 out of 5 year requirement). In addition, you begin to lose the exemption one dollar for every dollar by which a taxpayer’s AGI exceeds $250k (IND)/$500k (MFJ).
LONG TERM CAPITAL GAINS/CARRIED INTEREST: NO CHANGE (top rate=23.8%). During the campaign, politicians called for an end to a big tax break, which allows hedge and private equity fund managers to pay taxes at capital gains versus income tax rates. Trump called the beneficiaries of the loophole, “paper pushers”…the treasured paper-pusher loophole remains intact.
ALTERNATIVE MINIMUM TAX (AMT): REPEALED. The government created the AMT to penalize higher-income taxpayers who used deductions and credits to wipe out tax liability – it is expected to hit 4.5M filers in 2017, many of whom earn $200-$1M). Repealing it would reduce revenue by $440B in the first decade, according estimates.
RETIREMENT PLAN CONTRIBUTIONS: NO CHANGE. What a relief! Republicans were considering limiting the tax deductibility of a portion of your retirement plan contributions…now, that’s off the table so for 2017, the maximum pre-tax contribution for 401ks, 403bs and 457 plans is $18,000 and it rises to $18,500 next year.
ESTATE/GIFT TAX: Doubles the basic exclusion amount for gift and estate, indexed for inflation, as of Jan. 1, 2018 ($11.2M IND, $22.4M MFJ). Tax above this amount remains at 40%, until the estate and the generation skipping tax would be repealed starting in 2024. Even after repeal, step up in cost basis remains intact. The estate affects just 0.2% of all estates. For gift taxes, the top rate will edge down to 35%.
OTHER STUFF THAT IS REPEALED/ELIMINATED:
- Retirees on disability credit
- Itemized deduction for medical expenses, moving expenses
- Tax credit for adoption, alimony payments
- Deduction for student-loan interest
- Employer paid education expenses/unreimbursed employee expense for professional education
- Dependent care expenses
CORPORATIONS: The plan permanently slashes the corporate tax rate from 35% to 20%. Additionally, businesses would lose the ability to deduct certain executive compensation above $1M, tax-exempt bonds could no longer be used to build professional sports stadiums and there will be a one-time tax on overseas profits set at 12% for cash holdings and 5% for illiquid holdings, a provision meant to entice companies to bring overseas profits back to the US. The last corporate tax holiday was in 2004 and there is little evidence that the repatriated money had any lasting impact on the economy.
PASS-THROUGHS: S-Corps, LLCs, partnerships and sole proprietors will be operating under, new and somewhat confusing rules. Considering that about 95 percent of businesses fall into this category, it is important to understand. The provision makes a distinction between “salary” and “profit” income. The 25% rate, which is grabbing all of the headlines, would be applied to the profit, which the government presumes is just 30% of the money that flows out of these businesses. The rest of the money earned would be taxed as “salary” and therefore be subject to nominal personal income tax rates. Professional service organizations (i.e. lawyers, doctors, accountants, consultants and architects) are specifically excluded from the lower rate, unless they can prove that they have a capital-intensive business.
BOTTOM LINE—WHO BENEFITS FROM PROPOSED CUTS:
- $1T to Corporations and Pass-Throughs
- $228B to INDS
- $172B to Estates
MARKETS: For the 25th time, the Dow, S&P 500 & NASDAQ closed at new record highs.
- DJIA: 23,539, up 0.5% on week, up 19.1% YTD
- S&P 500: 2587, up 0.3% on week, up 15.6% YTD
- NASDAQ: 6764, up 0.9% on week, up 25.7% YTD
- Russell 2000: 1508, down 0.9% on week, up 10.1% YTD
- 10-Year Treasury yield: 2.33%, from 2.41%
- AAA Nat’l avg. for gallon of reg. gas: $2.47 (from $2.49 week ago, $2.22 year ago)