Tax Cuts and Jobs Act H.R. 1 - 2017 Tax Proposal

2017 Tax Reform

Last week the House of Representatives released a proposal that was touted as simplifying the U.S. tax code.  This "simplification" was summarized in a document that was 80+ pages, the bill was approximately 420+ pages.

After reading through the summary, I was attempting to summarize the key points of the bill to disseminate to interested parties.  Then I realized that this is just the beginning and in all likelihood this bill is going to have to proceed through the pork barrel process or logrolling before being voted on by the House of Representatives, agreed to and voted on by the Senate and submitted to the President for signing.  So in proceeding in writing about this first attempt by Congress may be an act in futility (much like the bill in it's current state), but I thought it worth pointing out some highlights of the bill as it currently stands.

Reduction of Individual Income Tax Rates - the bill consolidates from the current 7 tax brackets to 4 tax brackets. Those brackets are 12%, 25%, 35% and 39.6%.

Increased Standard Deduction - under current law, taxpayers are eligible to claim the larger of the Standard Deduction or Itemized Deductions.  The proposal looks to increase the Standard Deduction from $12,700 for Married couples in 2017 to $24,400 in 2018 (under the proposal).  The Single amounts are exactly 1/2 of the Married amounts, while eligible Head of Household taxpayers would receive the midpoint between Married and Single amounts.  The thought behind this action is to avoid the complexity of itemizing deductions for the American taxpayer.

Repeal of Personal Exemptions - under current tax law, each taxpayer is generally able to claim a personal exemption (reduction to income) for the taxpayer, spouse, and eligible dependents.  This deduction is being removed and could be an issue for large families or tax households that contain many dependents.  The tax bill attempts to address this by providing enhanced child tax credits and a dependent credit, these credits are written to be applicable for years before 2023 (so from 2018 - 2023).

Education Related Changes - for College, the tax proposal will eliminate the Lifetime Learning Credit but retain the American Opportunity Credit. Currently, the AOC is available for the first 4 years of post-secondary education, the proposal will expand to allow for a 5th year of the credit on a slight reduction from the 4 year credit.

Removal of the following items related to education: Student loan interest deduction, Tuition and Fees deduction, Employer-provided Education assistance (currently an employer can provide $5,250 per year for graduate and post-graduate studies to employees and this assistance is excluded from income, if meeting certain requirements), Qualified Tuition Reductions (educational institutions providing reduced tuition to the institution's employees and family as a benefit of employment).  These items would all be removed and require adjustments to college planning and employer benefit plans.

Itemized Deduction Simplification - the proposal would repeal deductions for state income taxes and sales taxes, medical expenses, unreimbursed employee expenses (out of pocket work expenses) and adjust deductions for real property taxes, mortgage interest and charitable deductions.

Mortgage interest would be deductible for 1 property (currently eligible for up 1st and 2nd home) and would be capped to for debt up to $500,000, down from $1,000,000.  For most taxpayers in Arizona, this will not be a big deal except for those that have a vacation home in the mountains and a primary residence in the Phoenix metro area, for example.  Taxpayers in high cost locations like California, Washington, Oregon or the east coast, may find that decreased debt limit to be an detriment.

Real property tax, or real estate tax, deductions will be capped to $10,000 or less allowed for deduction purposes.  Again in Arizona, this should not be a problem but taxpayers in high property tax states may suffer under this provision.

Charitable deductions would remain as a deduction with some minor adjustments.  Examples include charitable mileage rate would be adjusted for inflation, limitations for charity donations would be increased to 60% of Adjusted Gross Income for public charities.

Other Adjustment/Deductions - Alimony payments would not be deductible by the payor or taxable to the recipient, effective for divorce decrees executed after 2017.

Moving expense deduction would be repealed.  Under current law, if a taxpayer has a change in employment that moves them 50 miles or more (more specifics may need to be met), the expenses for the move could be a tax deduction.  This tax benefit would be removed.  Employer exclusion of moving reimbursement would also be repealed as a tax-free benefit to new employees.

Principal Residence Exclusion Rule Change - under current Federal law, a taxpayer needs to own and live in a home for 2 years and can exclude up to $250,000, if single or $500,000, if married, of gain on the sale of the home.  Under the proposed rules, the ownership and use test would change to 5 years out of the previous 8 years and the exclusion of gain would be phased out if a taxpayer's adjusted gross income exceeds $500,000 (married)/$250,000 (for single filers). The phase out is $1 for every dollar over the AGI amount.  The consideration is to prevent house flippers from making money tax-free, but appears likely to punish homeowners that have lived in an area for decades and may exceed the exclusion amounts due to inflation.

The above items are highlights of just the first 20 pages of the Tax Cuts and Jobs Act proposal summary. There are items in this tax bill that are difficult to accept and I expect the bill to be amended before becoming law. 

If you have any question or comments about the bill, send them my way and I will be glad to dig a little more into the bill to find an answer.

Also please let me know if this was helpful information.