Who knew tax reform could be so easy? Less than two weeks after going to conference, Republicans reconciled the differences between the House and Senate bills and released their final version of the Tax Cuts and Jobs Act last Friday (12/14) afternoon.[1] The final legislation provides significant permanent tax cuts for businesses, including reducing the corporate tax rate from 35% to 21%. Most individual taxpayers will also receive tax benefits, including lower marginal tax rates, and a reduction in the top tax rate for the wealthiest Americans from 39.6% down to 37%. However, all of the individual tax breaks will expire at the end of 2025 to comply with Senate rules.
The House Ways & Means Committee claims a typical family of four earning the median family income of $73,000 will receive a tax cut of $2,059.[2] Committee Chairman Kevin Brady (R-Tex), recognizing the importance of this legislation, thinks this legislation will grow the American economy, make American companies of all sizes more competitive, and help prevent more American jobs from continuing to go overseas.[3]
President Trump’s goal is to sign a tax reform bill by Christmas, and with votes taking place this week in the House and Senate it seems likely that goal will come to fruition.
Here’s how this bill compares to current tax law:
| Provision | Current | Proposed Final Bill[4] |
| # of Tax Brackets |
Seven 10%, 15%, 25%, 28%, 33%, 35%, 39.6% |
Seven 10%, 12%, 22%, 24%, 32%, 35%, 37% |
| Personal Exemption | $4,150 per taxpayer and dependent | Repealed |
| Child Tax Credit | $1,000 |
$2,000 Fully refundable up to $1,400 Must provide a valid SSN for the child to receive this credit |
| Standard Deduction | $13,000 married / $6,500 single | $24,000 married/$12,000 single |
| Home Mortgage Interest | Deduct interest payments up to $1M of debt | Capped at $750,000 |
| Medical Expense Deduction | Out-of-pocket expenses in excess of 10% of AGI are deductible | Retained and lowered threshold to 7.5% of AGI for 2017 & 2018; threshold goes back to 10% beginning in 2019 |
| State and Local Taxes (SALT) | Unlimited deduction | Property, Income or Sales taxes deductible up to $10,000 |
| Estate Taxes | Top rate of 40% on estates over $5.6M (2018) | Exemption doubled for estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026 |
| Obamacare Mandate | Penalty for not having health insurance | Repealed |
| Alternative Minimum Tax (AMT) |
Current Exemption Amounts
Single taxpayers $54,300 Married taxpayers filing jointly $84,500 Married filing separately $42,250 Head of Household $54,300 |
Retained with higher exemption
Single taxpayers $70,300 Married taxpayers filing jointly $109,400 Married filing separately $54,700 Head of Household $70,300 |
| Student Loan Interest Deduction | Deduct up to $2,500 | Retained |
| Charitable Contributions | Up to 50% of AGI |
Retained and increased to 60% of AGI |
| Alternative Minimum Tax (AMT) |
Current Exemption Amounts
Single taxpayers $54,300 Married taxpayers filing jointly $84,500 Married filing separately $42,250 Head of Household $54,300 |
Retained with higher exemption
Single taxpayers $70,300 Married taxpayers filing jointly $109,400 Married filing separately $54,700 Head of Household $70,300 |
| Student Loan Interest Deduction | Deduct up to $2,500 | Retained |
| Charitable Contributions | Up to 50% of AGI |
Retained and increased to 60% of AGI |
| Corporate Tax Rate | Top Rate of 35% | 21% Beginning in 2018 |
| Pass-Through Rate (Sole Proprietorships, partnerships, S Corps) | Top Rate of 39.6% | Provides 20% deduction for some “pass-through” income; expires after 2025 |
| Corporate AMT |
Exemption Amount $40,000, less 25% of AMT Income over $150,000 |
Repealed |
Next Steps
Republican leaders are convinced they have enough support to pass this legislation this week, especially after holdouts Senators Marco Rubio (R-FL) and Bob Corker (R-TN) gave their support to the bill. Sources have said it appears the House is likely to vote on the bill first, possibly as early as Tuesday (12/19). The Senate would follow, likely starting work on Tuesday or early Wednesday.[5]
Year-End Planning
Assuming tax reform is passed, two year-end planning opportunities may come into play for most people: (1) defer the recognition of income into 2018 and (2) accelerate payment of certain itemized deductions in 2017. Here are some specific examples:
- If possible, defer income until 2018 when ordinary income tax rates may be lower
- Accelerate 2018 planned charitable giving into 2017
- Pay your January 1st mortgage payment by December 31, 2017 as it includes interest for December
- Consider prepaying real estate taxes due in the first quarter and other state and local property taxes before December 31, 2017
- Generally speaking, harvest capital losses in taxable investment accounts in 2017 and apply net capital losses against ordinary income in 2017 up to $3,000
- If you are self-employed, wait until January to send invoices for payments you typically receive in December
If you live in a state with high state income taxes, think again before prepaying those taxes to claim a deduction in 2017. According to the section-by-section summary at the end of the bill,[6] “an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.” This means that if you prepay your 2018 state income taxes in 2017, you will not be able to take the deduction in 2017 and the payment will be treated as made on December 31, 2018.
As always, we will be watching the vote in the House and Senate this week closely and will continue to pour over the full 505 pages of the bill to determine additional year-end planning opportunities. In the meantime, talk to your Advisor or a member of the Wealth Enhancement Group to discuss how this bill may impact your unique situation.
[1] https://www.congress.gov/bill/115th-congress/house-bill/1/all-actions?loclr=cga-bill
[2] https://waysandmeans.house.gov/tax-cuts-jobs-act-moves-forward-house-senate-floor-full-vote/
[3] Id.
[4] https://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-%20466.pdf
[5] https://www.cnn.com/2017/12/15/politics/tax-reform-marco-rubio-final-bill/index.html?adkey=bn
[6] https://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-%20466.pdf