The House of Representatives revealed their proposed “Tax Cuts and Jobs Act” this week. The bill is touted as tax relief to middle income families, but in reality, with the loss of many adjustments to income and Schedule A deductions, it is difficult to determine who will benefit from this tax bill. The media is focusing on the doubling of the “standard deduction” and forgetting to mention that the “personal exemptions” and “dependency exemptions” have been eliminated. In many circumstances, the loss of the exemptions, $4050 per person claimed, nullifies the increase to the “standard deduction”. There are too many factors to take into account without looking at each individual tax return. To the group of taxpayers that benefit, much of the relief is temporary. The majority of the tax cuts are aimed at corporations and the wealthiest individuals.
Corporation Benefits
The top corporate rate is decreased from 35% to 20%. Businesses will be able to immediately write-off investments in new equipment. The plan also creates a new 25% rate for proprietors, and flow-through business income from entities such as partnerships and Subchapter-S corporations.
Alternative Minimum Tax Eliminated
The bill also eliminates the alternative minimum tax, primarily benefitting higher income taxpayers.
Estate Tax Phased Out
The bill immediately increases the estate tax exclusion to $10,000,000 and completely eliminates the estate tax after five years.
Increase of Standard Deduction Reduced by Loss of Personal/Dependency Exemptions
The tax plan increases the married filing joint standard deduction from $12,700 to $24,000, but eliminates the personal exemptions and dependency exemptions, ($4050 per exemption) which, for a married couple with one dependent, nullifies any benefit from the increased standard deduction; married couples with two or more dependents who use the standard deduction would actually see their benefits decrease from what they receive under current law.
The loss of the personal and dependent exemptions is offset by an increase in the child tax credit from $1,000 to $1,600, and $0 to $300 for each parent and non-child dependent; however, these increased credits are phased-out and eliminated after five years.
Reduction in Tax Brackets
The plan reduced the seven tax brackets on down to four. For a married couple, 12% would be charged on taxable income up to $90,000, 25% on $90,000 to $260,000, and 35% on $260,000 to $1,000,0000. Taxable income over $1,000,000 would be taxed at 39.6%. These ranges for these rate changes are different (lower) for singles, and head of households.
*(It is important to note that the jump from 10% to 12% is actually a 20% increase in taxes for those wage earners at the poverty level.)
Major Cuts to Schedule A and Adjustments to Income
Those who itemize their deductions will feel the greatest impact from this bill. The deduction for sales tax, or state and local income taxes gets eliminated, and the combined deduction for property tax on personal and investment use property is capped at $10,000. The elimination of the state income tax deduction hits residents of states with high income tax the hardest because many will be forced to use the standard deduction.
Likewise, the combined cap on acquisition indebtedness eligible for the mortgage interest deduction on primary and second residences is decreased from $1,000,000 down to $500,000. Taxpayers in areas that have highly appreciated real estate values will be hardest hit by change in the law.
Additionally, the bill eliminates the deductions and adjustments to income for:
Moving expenses
Student loan interest deduction
Medical expenses
Personal casualty losses
Employee business expenses
Deduction for tax preparation fees.
Alimony* (Alimony will no longer be taxable)
Keeps 401K; Eliminates IRC Section 106
The bill eliminates the deduction for employer provided health insurance under IRC Section 106. The bill leaves untouched, the deduction for 401(k) and other pension contributions.
Changes to Sale of Residence Exclusion
The lived-in and owned holding period for the exclusion on the sale of a primary residence is increased from two out of five years, to five out of eight years, and the exclusion is phased-out if modified adjusted gross income exceeds $250,000.
Eliminated Employer Provided Benefits
The exclusions from income for employer-provided benefits that have been eliminated include:
Dependent assistance programs,
Qualified moving expense reimbursements
Adoption assistance programs
Eliminated Tax Credits
The following tax credits that will be eliminated:
Adoption Credit
Mortgage Certificate Credit
Plug-In Electric Vehicle Credit
Conclusion
There are far too many factors for anyone to claim that this tax bill will help middle- income families. One suggestion is to grab your 2016 tax return and see how these changes would affect the outcome of your tax liability. Feel free to contact us if you need assistance.
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