Actions to consider before 12/31/17 due to Tax Reform Proposals
By Julie A. Welch, CPA, PFP, CFP
The Senate narrowly passed its version of the most sweeping tax reform in three decades, “Tax Cuts & Jobs Act,” early Saturday morning December 2, 2017 BY a vote of 51-49. The House had passed its version in mid-November. So now the bills move to “reconciliation” to work out the differences and come up with a bill on which both chambers can agree so the biggest changes to the Tax Code since 1986 can get enacted. The goal …. a final bill which the President can sign into law before year-end.
Unlike the House-passed bill from mid-November with four tax brackets while retaining the 39.6% rate permanently, the Senate bill would have seven tax brackets with the highest one at 38.5% (10%, 12%, 22%, 24%, 32%, 35%, and 38.5%) only for years 2018-2025. After 2025, the rates would revert to the existing rates. While the House would eliminate the deduction for personal exemptions and increase the standard deduction to $24,400 (indexed) for married couples permanently, the Senate would do the same with a slightly different standard deduction amount but would revert to the old (current) rules after 2025. The Senate also makes sweeping changes to health care by eliminating the mandate to buy health insurance.
Some of the provisions that are highly likely to be included in the final legislation include a significantly lower corporate tax rate, a lower tax on pass-through income for businesses other than professional service businesses, a much higher standard deduction for individuals, elimination of the deduction for personal exemptions, elimination of the deduction for state and local income taxes, and a significantly increased estate tax exemption.
Here is a comparison between the House bill and the Senate bill for some of the most commonly asked about provisions:
|State and local tax deductions||Repeal but allow up to $10,000 deduction for personal property tax||Repeal but allow up to $10,000 deduction for personal property tax|
|Medical itemized deductions||Eliminate after 2017||Retains and temporarily lowers the deduction threshold from 10% to 7.5% for 2017 and 2018|
|Re-characterization of Roth conversions||Eliminated after 2017||Eliminated after 2017|
|Sale of personal residence||Expands holding period from 2 out 5 years to 5 out of 8 years to be eligible for the exclusion||Expands holding period from 2 out 5 years to 5 out of 8 years to be eligible for the exclusion|
|Alternative Minimum Tax – Individual||Repealed||Retained with higher exemptions for tax years 2018 through 2025|
|Estate Tax||Doubles the exemption and eliminates the estate tax after 2024||Retains the estate tax and doubles the exemption to $10,000,000 per person (estimate that 1,800 people annually would pay)|
|Corporate tax rate||20% beginning in 2018 (25% rate for personal service corporations)||20% beginning in 2019|
|Taxation of pass through income||Maximum rate of 25% but prohibits anyone in a professional service business from taking advantage of the lower rate||Generally allows a deduction for 23% of pass through income, limited to 50% of wages, for businesses except for anyone in a service business unless taxable income is under $500,000 for married couple|
|Alternative Minimum Tax – Corporate||Repealed||No change|
|Section 179 expenses for certain business assets||Increase limitation to $5 million and the phaseout amount to $20 million with both amounts to be indexed for inflation for 2018-2022||Increase limitation to $1 million and the phaseout amount to $2.5 million both amounts to be indexed for inflation|
|Net operating loss deduction||Most NOL carrybacks repealed, and the maximum NOL deduction would be limited to 90% of taxable income||Most NOL carrybacks repealed, and the maximum NOL deduction would be limited to 90% (80% after 2022) of taxable income|
|Like-kind exchanges||Limited to real property exchanges after 2017||Limited to real property that is not held primarily for sale after 2017|
|Entertainment expense deductions||Generally disallows deductions for entertainment, amusement, or recreation under all circumstances.||Generally disallows deductions for entertainment, amusement, or recreation except for expenses directly related with the active conduct of a trade or business (50% applies)|
|Carried interest||Short-term capital gain treatment would apply to transfer of applicable partnership interests held less than 3 years||Short-term capital gain treatment would apply to transfer of applicable partnership interests held less than 3 years|
|Mandate to buy health insurance||No change||Repeal|
In our continuing coverage of the tax reform proposals, we have blog posts from members of our tax department dealing with other important issues of the tax reform bills including the corporate tax rate, the break for pass-through income, and the home mortgage interest deductions.
In the mean-time, some things to consider before the clock strikes midnight on December 31….
- Due to the proposed elimination of many itemized deductions, if one will no longer itemize deductions in 2018, consider paying as many itemized deductions in 2017 as possible – such as state and local taxes, medical expenses, and even charitable contributions.
- Even if one will continue to itemize deductions, consider paying those items that are slated for elimination (such as state and local taxes and medical expenses) in 2017 to avoid a total loss of deduction.
- Consider accelerating deductions and deferring income to take advantage of the deduction at higher current rates applying to 2017.
- Reconsider 2017 Roth IRA conversions before December 31, 2017 based on the proposal to eliminate the ability to “undo” Roth IRA conversions.
- Consider maximum retirement plan and IRA contributions for 2017 to take advantage of the deduction at higher current rates.
- Consider contributions to donor-advised funds or private foundations allowing an immediate tax deduction while the payment to the ultimate charity can be spread over a number of years.
- Remember that Kansas enacted retroactive tax legislation in 2017 increasing the tax rates and reinstating the tax on flow-through income.
- After tax reform is enacted, be sure to update your tax and estate planning.
Remember, the differences between the bills must now be reconciled before going back to both the House and Senate for a final vote. . . so stay tuned!
Prior to engaging in any transactions, consult with competent tax counsel to determine the tax implications of the proposed transactions. This advice isn’t intended or written to be used for the purpose of avoiding penalties and cannot be used for that purpose.