Part I: How the GOP Tax Bill Impacts Individual Taxpayers: Who wins and who loses? How does this affect tax planning?

The Tax Cut and Jobs Act, introduced on November 1, 2017, by the U.S. House of Representatives Ways and Means Committee, contains sweeping changes for individual and business taxpayers. The new tax legislation could be the largest rewrite of the U.S. Tax Code in decades, and will no doubt bring a tremendous amount of debate and scrutiny before it becomes law. The purpose of this article is to summarize some of the key provisions that impact individual taxpayers. We will address how the Tax Cut and Jobs Act will impact businesses in our upcoming article.

Individual tax rates on ordinary income: For 2018, the GOP bill reduces the number of individual tax rates from seven to four – 12%, 25%, 35%, and 39.6%. The proposed highest rate is the same highest rate under current tax law.

1. Married joint-filers: Under $90,000 (12% bracket), there would be mostly winners compared to the current tax rates. Between $90,000 and $260,000 (25% bracket), without the impact of other changes, there would only be winners in this income range. Again, looking only at tax rates, between $260,000 and $1,000,000 (35% bracket), there would be mostly winners but some losers in this income range depending upon which current tax rate applies. And above $1,000,000 (39.6% bracket) would be only winners because the threshold for the 39.6% rate would be much higher than under current tax law.
2.  Head of Household filers: Under $67,500 (12% bracket), there would be mostly winners compared to the current tax rates. Between $67,500 and $200,000 (25% bracket), without the impact of other changes, there would only be winners in this income range. Again, looking only at tax rates, between $200,000 and $500,000 (35% bracket), there would be mostly winners but some losers in this income range. And above $500,000 (39.6% bracket) would be only winners because the threshold for the 39.6% rate would be much higher than under current tax law.
3. Single filers: Under $50,000 (12% bracket), there would be mostly winners compared to the current tax rates. Between $50,000 and $200,000 (25%), without the impact of other changes, there would be only winners in this income range. Again, looking just at tax rates, between $200,000 and $500,000 (35% bracket), there would be mostly winners but some losers in this income range. And above $500,000 (39.6% bracket) would be only winners because the threshold for the 39.6% rate would be much higher than under current tax law.
4. Married separate filers: Under $50,000 (12% bracket), there would be mostly winners compared to the current tax rates. Between $50,000 and $130,000 (25%), without the impact of other changes, there would be only winners in this income range. Again, looking just at tax rates, between $130,000 and $500,000 (35% bracket), there would be mostly winners but some losers in this income range. And above $500,000 (39.6% bracket) would be only winners because the threshold for the 39.6% rate would be much higher than under current tax law.
5. Bottom line: Under these new tax rate brackets, most taxpayers would be better off.

WARNING: Before you conclude whether you’ll be better off, read below how your deductions and credits may be eliminated or reduced). Looking only at the tax rates, anyone who is in the 39.6% bracket could be much better off because the threshold for the 39.6% would be higher; however, the 12% rate would be phased out for joint-filers above $1.2 million and other taxpayers above $1 million, so the actual marginal rate for these individuals would be higher than the 39.6% as advertised.

Income tax rates on long-term capital gains and dividends: The GOP bill retains the existing three tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%, and the income brackets would be almost identical to current tax law. Bottom line: no winners or losers.

Exemptions and standard deductions: The GOP bill would completely eliminate personal and dependent exemption deductions, and in their place, the standard deductions would be increased: $24,400 for married joint-filers (compared to $13,000 under current tax law), $18,300 for heads of household (compared to $9,550 under current tax law), and $12,200 for other individual taxpayers (compared to $6,500 under current tax law). Bottom line: many individuals who currently itemize deductions will be claiming the standard deduction, especially those who would be affected by the proposed limitations to itemized deductions (see below); so depending on the number of exemptions and amount of itemized deductions, you may be a winner or loser under the GOP bill.

Other deductions: Itemized deductions would be eliminated except home mortgage interest, charitable contributions, and state and local property taxes.

1. Home mortgage interest: Home mortgage interest for new loans would be deductible on up to $500,000 in original mortgage debt (compared to $1 million plus another $100,000 of home equity debt under current tax law). For existing home mortgages, the current loan limits would continue to apply; however, you could only deduct mortgage interest on one qualified residence (compared to two under current tax law).
2. Charitable contributions: Cash charitable contributions to an IRS-approved public charity would be increased to 60% (compared to 50% under current tax law).
   3. State and local property and income taxes: Local property taxes would be subject to a $10,000 limit for joint filers ($5,00 for others), but possible more detrimental is that state and local income taxes would be nondeductible.
3. Other itemized deductions: Other itemized deductions, such as medical expenses, personal casualty losses, tax preparation fees, and unreimbursed employee business expenses would be eliminated.
4. Above-the-line deductions: Certain above-the-line deductions, such as alimony payments (for divorce or separation agreements after 2017) and qualified moving expenses would be eliminated.
5. IRA conversions: Lastly, converting traditional IRA conversions to Roth IRAs will be eliminated under the GOP bill.

Bottom line: home owners with new mortgages over $500,000, and vacation or second homeowners with mortgages, lose under the GOP bill. Individuals subject to state and local income taxes, with significant medical, personal casualty losses or miscellaneous itemized deductions will lose under the GOP bill. For individuals in the higher tax brackets, up to 80% of their deductions could be eliminated or phased out, so they may lose the most under the GOP bill.

AMT and tax credits:

1. Alternative Minimum Tax: The Alternative Minimum Tax (AMT) will be eliminated. Bottom line: individuals who were subject to the AMT due to the elimination of personal and dependent exemptions and deductions for state and local income taxes may be winners under the GOP bill.
2. Child care credit: The child care tax credit would be increased from $1,000 to $1,600 per child, and the income level before the credit starts being phased out is increased to $230,000 for joint filers (compared to $110,000 under current tax law) and $115,000 for other taxpayers (compared to $75,000 for singles and heads of households and $55,000 for married separate filers under current tax law). A new $300 ($600 for joint filers) family tax credit would apply for taxpayers, and a $300 family tax credit for dependents who are not qualifying children. Bottom line: Many middle-income taxpayers with qualifying children would win under the GOP bill.
3. Education credits and deductions:
   1. The American Opportunity Tax Credit of up to $2,500 per year per qualifying student would be retained and increased to five years (compared to four years under current tax law); however, the Lifetime Learning Tax Credit (currently up to $2,000) and contributions to Coverdell Education Savings Accounts (currently up to $2,000) would be eliminated.
   2. Section 529 plans will be more popular under the GOP bill for a number of reasons. Up to $10,000 of qualified annual withdrawals will be tax-free and Coverdell Education Savings Accounts (contributions to which will be eliminated) can be rolled over to Section 529 plan accounts.
   3. The existing deduction for up to $2,500 of annual student loan interest, tax-free treatment for U.S. savings bond interest used for qualifying education expenses, tax-free treatment for tuition discounts offered to employees (and their spouses and dependent children) of educational institutions, employer educational assistance programs (currently up to $5,250 annually) would be eliminated.
   4. Bottom line: It will be a mixed bag of education-related winners and losers here.
4. Adoption and electric vehicle credits: The GOP bill would eliminate the credit for qualified adoption expenses (currently up to $13,840 per year) and the cost of purchasing a new plug-in electric vehicle (currently up to $7,500).

 

Home sale gain exclusion tightened: Under the GOP bill, the exclusion of up to $250,000 ($500,000 for joint filers) of gain from selling your principal residence will apply only if you have owned and used your home as your principal residence for five years out of the eight-year period (compared to two years over a five-year period) ending on the sale date. Also, the gain exclusion could be taken once every five-years, and would be phased out for individuals with adjusted gross income exceeding $250,000 ($500,000 for joint filers). Bottom line: Higher income home owners who sell their principal residences after this year will lose due to the phase out of the gain exclusion.

Employer-provided benefits: The GOP bill would eliminate:

1. Tax-free employer-paid dependent care assistance programs (currently up to $5,000 per year);
2. Tax-free employer-provided adoption assistance programs (currently up to $13,840 per year); and
3. Tax-free employer-paid moving expense allowances.

Estate, gift and generation-skipping taxes: The GOP bill would increase the estate, gift and generation-skipping tax exemption to $10 million ($5.6 million in 2018 under current tax law). The estate and generation-skipping taxes would be repealed for 2024 and beyond; however, the gift tax exemption would remain in effect. Bottom line: The estate, gift and generation-skipping tax would apply for the more affluent taxpayers, however, the current estate, gift and generation-skipping tax planning strategies to avoid or minimize these taxes will not be impacted by the GOP bill.

The Bottom-Bottom Line: The GOP bill will make significant changes for individual taxpayers. But until it becomes law, there will certainly be a lot of changes made to the current proposal. Stay in touch for updates.

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NEXT UP: Be looking for our upcoming article, ” How the GOP tax bill may impact businesses: Who wins and who loses“