Tax planning is filled with uncertainty as two different bills were passed by the Senate and the House but have yet to be reconciled. It is not likely that a final version will be known until close to Christmas.
There is no way to know what the final bill will contain and whether it will get enacted by year end.
This post is to provide recommendations and guidance, but any actions or decisions should be discussed with your tax advisor and be based on your specific circumstances. This is intended to provide general information only, not political commentary.
Tax rates: In general, individual tax rates should be lower in 2018 than in 2017, so deductions should be accelerated into this year and income delayed to 2018, if possible.
The House and Senate tax rate schedules are different, so the impact on each person or couple will be dependent on your taxable income. The difference in the two rate schedules has not been widely discussed, but this is a key difference which will not be reconciled until the legislation is finalized.
Many of the changes in tax rates are temporary in the Senate bill, due to budgetary rules, and would revert back to current levels in 2026.
See a comparison of the current tax rates to the House and Senate tax plans at the bottom of this post.
Itemizing and Standard Deduction: You should review the amount of your itemized deductions (see Schedule A of your last tax return) and compare that to the proposed standard deduction figures. Each bill has a different amount as of now, but they are similar. The standard deduction for single taxpayers would be approximately $12,000 and married couples would have a standard deduction of $24,000, as of now.
By raising these standard deduction amounts, many taxpayers would no longer itemize in the future. If you fall into this category, especially after considering some of the changes/eliminations below, you should pay items which you currently can deduct in 2017, prior to December 31, 2017.
The higher standard deduction amounts are offset by the elimination of the personal exemption (was $4,050 per member of your family). If you are a family of four, currently you would deduct your itemized deductions if they were greater than $13,000 (current standard deduction amount for a couple) and deduct $16,200 of personal exemptions.
In the proposed bills, this family would get no personal exemptions and deduct the greater of the new standard deduction of $24,000 or the new definition of itemized deductions, which are discussed below.
AMT (Alternative Minimum Tax): The House bill repealed the personal AMT. The Senate bill keeps the AMT, but raises the threshold where the AMT affects taxpayers.
In general, the AMT affects those with significant deductions (not including charitable contributions) or capital gains income, relative to their overall income. From a tax standpoint, the AMT generally affects taxpayers with taxable income above $200,000 but usually does not impact very high income levels, as their deductions are a much lower percentage of their AMT income. This is a key item to monitor due to its impact and for the purpose of tax simplification.
State and local taxes: Both bills propose eliminating the deductibility of state and local income tax deductions. If you pay estimated taxes, you should accelerate your 4th quarter estimate for 2017 and pay it by December 31st. This is still being debated and may change, but most taxpayers would benefit from paying 4th quarter state or local estimates in 2017.
Property taxes: Under both bills, property taxes are capped at $10,000 per year, so if you pay more than this, you should pay any outstanding bills by year end, even if they would not be due until sometime in 2018.
The likelihood of eliminating the deductibility of state and local taxes and capping property taxes will mitigate (or offset) much of the income tax rate reductions for many taxpayers, depending on your specific situation, unless you have very high income.
Medical Deductions: Currently, this deduction is used only when someone incurs very high medical expenses, significant nursing care or at home medical expenses. The House bill eliminates the medical expense deduction and the Senate bill continues it for expenses greater than 7.5% of your AGI, if you are able to itemize.
Charitable contributions: Charitable contributions are not changed in either bill and would remain deductible, as long as you are able to itemize. This is one of the major deductions which remains unaffected, as of now. If you do not think you will be able to itemize in the future, you should consider accelerating your contributions into 2017, to get the tax benefit.
Other itemized deductions: As of now, other itemized deductions, which currently are deductible above 2% of your AGI and if you itemize, would not be deductible in the future. This would eliminate deductions for unreimbursed employee business expense, home office expense, investment and tax related expenses.
Child credits: These would be increased but are one of the main topics to be negotiated. They are currently subject to income limitations and that is expected to continue. Thus, if your income is above a certain amount, you do not get the benefit of these credits for children under 16 or 17. Due to budgetary issues, the Senate version would remove the increases in 2026.
Sale of your home: If you sell your home which is your primary residence, the first $250,000 or $500,000 of gain is tax-free (for single and married taxpayers, respectively), if you have lived in and owned the home for 2 of the past 5 years. The proposed change would be to 5 of the last 8 years. Also, you could only have one sale every 5 years which would qualify for the exclusion.
Estate tax: Currently, the estate tax exemption is $5.5 million per person. For a couple, assets above $11 million are subject to the estate tax, which is 40%.
Both plans raise the exemption amount to $11 million and $22 million, for single and married taxpayers, respectively. Estimates are that only 1,800 families per year would be subject at the proposed level, down from the current 5,000 per year now. The House bill repeals this change in 2024, so the exemption level would go back to the current exemption amounts.
From a planning perspective, we would still recommend the importance of estate planning that is focused on how you want your assets passed to heirs or charities, even if you are not subject to the estate tax.
Annual gifting: Both bills would double to $28,000 per person and $56,000 per couple, the annual gift exclusion from the Federal tax on gifts to children and other people.
Pass through income, corporate tax and other changes: At this point, the pass-through income provision is subject to significant change, so we will not be providing guidance on that topic. Corporate tax changes are beyond the scope of this blog. There are many other items which are proposed to be changed, but are not covered in this post. We have tried to cover most of the major changes or items which affect many people.
This week’s takeaway: As the tax legislation will likely not be finalized until close to the end of the year, we recommend that you take steps now to pay items that will likely not be deductible in 2018, either because you may not be itemizing in the future or the potential changes would eliminate or reduce those items.
Tax rate comparison: