Will the GOP’s Tax Plan Affect You?
Typically, I don’t write about tax bills because they may never become law. Congress’ latest plan for tax reform stands out, though, because it proposes to change many longstanding tax rules. But a lot of horse-trading goes on before final laws are enacted, and that’s already started.
While there is a lot of talk about the proposed reduction in corporate taxes (from 35% to 20%), individuals may face tax changes that aren’t so beneficial. That will be the focus here.
When it comes to personal tax deductions, many of us benefit from deductions for home mortgage interest, property taxes and state income taxes. Under the current proposal, these deductions are pared down or eliminated. For instance, the mortgage interest deduction is limited to mortgage interest on a new home valued at up to $500,000. Under present law, the cap is $1,000,000.
In an earlier version of the bill, the deductions for property taxes and state income taxes were both eliminated. But after lots of pushback from high property tax states, the property tax deduction has been preserved. However, there will be no offset on the federal return for state and local taxes.
Evaluating these tax proposals through a broader lens, they are not new or novel. For example, in Canada there are no deductions for home mortgage interest or local taxes – tax breaks we are accustomed to here.
The proposed tax plan also has the medical expense deduction slated for elimination. Currently, people can deduct medical expenses to the extent that they exceed 7.5% of adjusted gross income. Just last week, I wrote an article about how nursing home expenses can be deducted under this rule, if certain conditions are met. That may no longer be the case if this provision survives to the final bill.
The proposal eliminates personal exemptions but nearly doubles the standard deduction. What does this mean? Under present law, each person can claim a personal exemption of $4,050 for him or herself, a spouse and dependents. For big families, this exemption can make a huge difference in their taxes. Even by doubling the standard deduction (currently $6,350 for singles and $12,700 for married couples filing jointly, to $12,000 for individuals and $24,000 for married couples), it may not outweigh the loss of personal exemptions.
There are other noteworthy changes that should be watched as the bill wends its way through committees and the Senate. For example, the proposal:
• Eliminates deductions for alimony, student loan interest, tax preparation and moving expenses.
• Eliminates the deduction for state and local taxes.
• The exclusion for dependent care assistance accounts is eliminated.
• Eliminates the Alternative Minimum Tax (AMT), which affects taxpayers with large amounts of unearned income. For many, this may be good news.
• Eliminates the estate tax and generation skipping tax by 2023, but until then, the exemption is increased from $5.6 million to $11.2 million beginning in 2018. Only 2% of American pay this tax.The gift tax remains, but is reduced from 40% to 35%.
• Reduces the number of tax brackets from seven to four: (12, 25, 35 and 39.6%). Tax at the 25% bracket rate would begin at $45,000 of taxable income for singles and $90,000 for married couples. The 35% bracket would begin at $200,000 for single taxpayers and $260,000 for married joint filers. Taxpayers will be in the 39.6% bracket if they have taxable income over $500,000, if single, or $1,000,000 for joint filers.
This is only part of the story, but it hits the high spots. Changes to corporate pass through rules, like-kind exchanges, and business and energy credits are another matter. Those who own closely-held businesses should keep an eye on those proposals.