This is another communication to keep you informed (during your last minute Christmas shopping) on the latest tax reform proposal, “Tax Cuts And Jobs Act.”
Here are the highlights:
Expiration: The tax law will begin effect on Jan 1, 2018 and expire at the end of 2025. At that time, the law will go back to the way it is now. (Oh joy, looks like 2025 will be more tax reform negotiation).
Income tax rates: The bill still has seven (7) brackets, but slightly lower rates; 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Contrast that with what we have now; 10%, 15%, 25%, 28%, 33%, 35%, 39.6%.
Capital gains rates: same capital gains rates apply but adjust to brackets mentioned above for those equities held less than a year.
Standard deduction: The amounts will increase significantly; $12,000 for individuals, $18,000 for Head of Household, $24,000 for Married Couples Filing Jointly. Compare this with the current amounts of $6,500, $9,550 and $13,000 respectively.
- Child tax credit: It doubles to $2,000 per child and will be refundable up to $1,400, subject to phase outs.
- Mortgage Interest Deduction: For mortgages taken out before Dec 15, 2017, the limit will be $1,000,000, otherwise new mortgages are capped at $750,000. Additionally, the deduction interest on home equity debt is eliminated in 2018 and scheduled to return in 2026. Currently, you can deduct mortgage interest up to $1,000,000 plus an additional $100,000 for equity debt.
Gains from sale of your home: No changes from current law. You can exclude up to $250,000 ($500,000 for married couples) as long as you have resided in the home for at least 2 of the last 5 years.
State and local tax deductions: Continues to allow people to write off the cost of state and local property taxes up to $10,000.
Alternative Minimum Tax: It remains for individuals, but exemptions increase to $70,300 for individuals and $109,400 for married taxpayers.
Corporate tax rate: Reduced to 21% – down from 35%
Small and medium businesses: Taxed at their individual tax rates less a 20% deduction for business related income, subject to certain wage limits and exceptions. This deduction is disallowed for “professional services” businesses (doctors, lawyers, financial advisers).
Obamacare mandate: Under current law, you pay a penalty if you do not have minimum health coverage. This penalty would be eliminated.
Federal estate tax: The exemption amount doubles from the current amount of $5,490,000 for individuals or $11,000,000 for married couples.
While this isn’t an exhaustive list, it does provide highlights on a number of important issues discussed during the process. (If you want to read the conference bill, you can read it here as a PDF).
The House and Senate hope to vote on the final proposal this week and deliver it to the President for signature before Christmas.
Again, the purpose of this email is informing only. There is no action required on your part at this time.
We wanted to keep you “in the loop” regarding any potential changes to the tax code. As you know, taxes are a BIG part of all of our strategic financial plans. Any changes will have a ripple effect for all of us.
We’ll continue to keep an eye on it.
All the best,
Client First Tax & Wealth Advisors