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2017 Tax Reform Proposal, With Actual Details

For months we have been hearing about a massive tax reform bill that would be released by the GOP. Twice we were provided documents with outlines of the plan, but as I pointed out here and here, both of those releases were extremely short on details. Well, now we have a 492 page document so we can no longer complain about the lack of detail! 

We've been digging into the details and reading summaries of the bill to figure out exactly what's included and how it changes current tax law. We know this is just a starting point and much of what is included in this proposal will likely not make it into law as currently written. Compromises will need to be made to get the bill passed so we do not recommend implementing any tax planning strategies based on what we know so far. Still, these are significant changes and we want to make sure you understand what is being proposed and how you might be impacted. Here are some of the aspects of the proposal we think will have the greatest impact on our clients:

  1. Tax Brackets - We'll go from 7 to 4 brackets under the proposed bill, with one exception. Here is a summary of the new brackets:
    • 12% - Income up to $45k for singles, $90k for married couples (combines old 10% & 15% brackets)
    • 25% - Income up to $200k for singles, $260k for married couples (combines old 25% & 28% brackets)
    • 35% - Income up to $500k for singles, $1mm for married couples (combines old 33% & 35% brackets) 
    • 39.6% - Income over $500k for singles, $1mm for married couples (increases the level at which this applies)
    • *Bonus Bracket of 45.6% - For single filers with income of $1-$1.2 million and married filers with income of $1.2 to $1.6 million there is a phaseout of the 12% bracket that essentially creates a 5th bracket at 45.6%. See the article below for more details on this.
  2. Itemized Deductions - The standard deduction will be combined with the personal exemption and the total is increased to $12,000 for singles (from $10,400) and $24,000 (from $20,800) for married couples. Meanwhile, many itemized deductions will be limited or repealed completely:
    • State and Local Income Taxes - No longer deductible
    • Mortgage Interest - Would only apply to primary residence (not 2nd home) and be limited to $500k of home acquisition debt (not home equity loans) for any mortgage taken out after November 2, 2017, which is a reduction from the current limit of $1,000,000.
    • Property Taxes - Still deductible, but limited to $10k per year.
    • Medical Expenses - No longer deductible.
    • Charitable Contributions - Still deductible and the AGI limitation on cash contributions would be increased from 50% to 60%.
    • Personal Business Expenses - No longer deductible
    • Moving Expenses - No longer deductible
    • Casualty Losses - No longer deductible
    • Tax Preparation Expenses - No longer deductible
    • Student Loan Interest - This is currently an above the line deduction, not an itemized deduction, but it would also be eliminated.
  3. Home Sale Gain Exclusion - Under current law, married couples are allowed to exclude up to $500k of gain ($250k for singles) on the sale of their primary residence, as long as it was used as their primary residence for two out of the last five years. Under the new law that requirement changes to five out of eight years and there would be a phaseout of the gain exclusion over certain income levels.
  4. Pass-Through Income - Under current law, ordinary income from a pass-through entity is taxed at your ordinary income tax rate, which can be as high as 39.6%. Under the proposed law there would be a cap of 25% on such income. If you are a passive investor in the pass-through entity, the full amount is taxed at this rate but if you are active you need to use a formula to determine what portion qualifies for the lower rate and what would be subject to ordinary rates.
  5. Estate Tax - The estate tax exemption would immediately be doubled to $11.2 million per person. In six years the estate tax would be completely repealed. The step up in basis would remain in place, so your heirs would still be eligible for a step up in basis of any assets they inherit. The gift tax would remain after the estate tax is repealed, but the $11.2 million exemption would still apply and the gift tax rate would be reduced to 35%. The portability provision that allows a surviving spouse to claim both their own and their spouse's exemption would remain in place.
  6. Alternative Minimum Tax - The bill also includes a full repeal of the alternative minimum tax system. Those with minimium tax credit carryforwards would be allowed to take them in 2018 against regular tax. If the credit is larger than the tax liability in 2018 you'd be able to carry it forward for three years and any excess would be refundable in 2022.
  7. Capital Gains and Investment Income - The bill would not make any changes to capital gains rates nor would it repeal the net investment income surtax of 3.8% for high income filers. The capital gains tax rates will remain the same at 0%, 15% and 20% , with the income thresholds also staying the same as they are under current law.
  8. Alimony - Alimony would no longer be deductible by the payer nor would it be included in income for the recipient. (This would only apply to alimony agreements entered into after 2017.)
  9. Education Credits - There are currently a variety of credits available to anyone currently paying qualified education expenses. The bill would eliminate some of those credits so the only credit remaining would be the more popular American Opportunity Credit. It should also be noted that there is a provision that would allow you to pay up to $10,000 of private elementary and high school expenses.
  10. Corporate Tax Rate - Perhaps the largest aspect of the tax reform bill is the corporate tax rate cut to 20% from the current 35%. There are also a number of fringe benefits allowable under current law that would be eliminated in an attempt to simplify business tax returns. 

There will be many tax planning opportunities available to you if the tax reform bill moves forward in its current state. We will continue to monitor the progress and have begun to put together potential planning strategies. If you have any specific questions about how some of these changes might impact you, feel free to reach out to us directly.

If you'd like a more detailed review of these changes we suggest you read this article, from Michael Kitces, which provides the most comprehensive summary of the bill we have seen yet.

-Chris Benson, CPA/PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change.  These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Please see Additional Disclosures more information.