Highlights of The Tax Cuts and Jobs Act

Transcription

1 WEALTH SOLUTIONS GROUP Highlights f The Tax Cuts and Jbs Act The Huse is the first t release a bill in what will be a cntentius tax refrm debate This first tax refrm prpsal cnslidates tax brackets, eliminates many deductins and cuts taxes n businesses, but will it pass? Tim Steffen, CPA,CFP,CPWA Directr f Advance Planning Baird Wealth Slutins Grup Nvember 10, 2017 Over the last year there have been varius utlines, framewrks and templates issued by President Trump t get the ball rlling n tax refrm, but n Nvember 2 the Huse issued the first frmal bill that attempts t rewrite ur cuntry s tax cde. This bill cntained many f the prvisins we ve been expecting cnslidated tax brackets, limited deductins, significant business tax relief, etc. but as always there are plenty f surprises waiting t be fund in this very cmprehensive plan. This plan faces a challenging and uncertain future. First, it must pass the Huse, and with n Demcrats publicly supprting the bill, Republicans can t affrd many defectins. Many Republicans have expressed cncern ver aspects f this prpsal, making party unanimity uncertain. The same is true in the Senate, where Republicans hld an even slimmer majrity. On tp f that, the Senate plans t intrduce their wn versin f a bill any day, meaning a cnference cmmittee culd be necessary t recncile the tw. T make things mre daunting, President Trump has said he d like t have a refrm bill passed by the end f 2017, leaving less than tw mnths t cmplete the entire prcess. Belw are highlights f many f the prpsals that wuld affect individuals and businesses. Unless therwise nted, all prvisins described belw wuld take effect beginning in 2018 and wuld be permanent changes t the tax cde. UPDATE: After being debated in the Huse Ways & Means Cmmittee, the riginal Tax Cuts and Jbs Act bill received a variety f amendments. Thse amendments are highlighted belw. CHANGES TO INDIVIDUAL TAX RATES & BRACKETS This prpsal wuld cnslidate ur current seven tax brackets dwn t just fur, as shwn in the table belw. In general, incme at all levels will be taxed at a lwer rate under this bill. 1 This table cmpares the current 2017 tax brackets and rates t the amunts prpsed under this bill. Hwever, because these new rates wuldn t apply until 2018, all the incme threshlds in this table wuld be adjusted fr inflatin befre taking effect. 1 It wuld appear at first glance that taxpayers in the lwest tax bracket wuld see an incme tax increase, as incme in the current 10% bracket wuld nw be taxed at 12%. In rder t ffset this increase, bth the standard deductin and the child tax credit wuld increase, and there wuld be a new family tax credit. All f these items are explained in mre detail belw. Page 1 f 7

2 Tax Cut and Jbs Act, cntinued Married Filing Jint Tax Rate Single, Married Filing Separately Tax Rates Taxable Incme Current Prpsed Taxable Incme Current Prpsed $0 18,650 10% $0 9,325 10% $18,650 75,900 15% 12% $9,325 37,950 15% 12% $75,900 90,000 $90, ,100 25% $37,950 45,000 $45,000 91,900 25% $153, ,350 28% 25% $91, ,650 28% 25% $233, ,000 $260, ,700 33% $191, ,000 $200, ,700 33% $416, ,700 35% 35% $416, ,400 35% 35% $470,700 1,000,000 $418, , % 39.6% $1,000, % $500, % Under tday s tax system, all taxpayers receive the benefit f the lwer tax brackets even thugh their marginal incme may be taxed at a higher rate. Fr example, smene in the 39.6% bracket tday still has sme f their incme taxed at 10%, sme at 15%, etc. Under this new prpsal, hwever, high-incme taxpayers in the highest bracket wuld see a phaseut f the benefit f the new 12% bracket. Once married cuples have Adjusted Grss Incme ver $1.2 millin (singles ver $1 millin), the incme that was taxed at 12% begins t be taxed at 39.6%. This phaseut des nt apply t the 25% r 35% tax rates, hwever. CHANGES TO DEDUCTIONS T help ffset the cst f these lwer tax rates, as well as t help simplify the tax filing prcess fr many taxpayers, this prpsal wuld dramatically change ur current system f exemptins and deductins. Fr ne, the persnal exemptin the $4,050 deductin allwed fr each taxpayer and their dependents in 2017 wuld be repealed. In additin, the standard deductin wuld be nearly dubled, as shwn belw: Filing Status Current Standard Deductin Prpsed Standard Deductin * Married Filing Jint $12,700 $24,000 Married Filing Separate $6,350 $12,000 Single $6,350 $12,000 Head f Husehld $9,350 $18,000 * These amunts are expressed in 2017 dllars, and wuld be inflatin adjusted fr Rbert W. Baird & C. Incrprated. Baird des nt prvide tax advice. Please cnsult with yur tax advisr. Page 2 f 7

3 Tax Cut and Jbs Act, cntinued In exchange fr the increased standard deductin, the fllwing expenses wuld n lnger be cnsidered deductible: State and lcal incme and sales taxes. Medical expenses. Mving expenses. Tax preparatin expenses. UPDATE: The bill was revised t keep the current law that allws active duty members f the military t deduct mving expenses pursuant t a military rder. Unreimbursed business expenses f an emplyee. These and the tax preparatin expenses are amng a grup f expenses called miscellaneus itemized deductins, and are nly deductible if they in ttal exceed 2% f AGI. Eliminating these tw items will make it mre difficult t exceed that flr. Persnal casualty lsses, ther than thse due t events cvered under special disaster relief legislatin. The charitable deductin fr 80% f the amunt paid t a cllege fr the right t purchase athletic tickets. Cntributins t Archer Medical Savings Accunts (MSAa). Emplyer cntributins wuld nw becme taxable, as well. MSA balances culd still be rlled ver t a Health Savings Accunt (HSA) n a tax-free basis. MSAs have n advantages ver HSAs, s when this change is cmbined with the lss f the deductin fr medical expenses, an HSA becmes an even better planning tl fr thse wh qualify. In a surprise mve, the deductin fr alimny paid t an ex-spuse wuld als be disallwed, and the incme wuld n lnger be taxable t the recipient. This wuld nly apply t divrces entered int after 2017, s existing agreements wuld nt be impacted. This culd have a significant effect n thse ging thrugh divrce negtiatins tday, especially if alimny payments are determined using existing tax law but the agreement isn t finalized until Other expenses wuld remain deductible, althugh their benefit wuld be reduced: Prperty taxes n real estate wuld remain deductible, althugh the deductin wuld be capped at $10,000. The deductin fr persnal prperty taxes wuld be repealed. The deductin fr mrtgage interest wuld be limited in the fllwing ways: Fr 2017, the interest paid n the first $1 millin f mrtgage debt is deductible, alng with the interest n up t anther $100,000 f hme equity debt. The interest n existing lans wuld cntinue t be deductible under thse rules, but fr any lans entered int after Nvember 2, 2017, the debt cap wuld be lwered t $500,000. Existing debt that is refinanced after this date wuld cntinue t qualify under the current rules. Interest n a hme equity lan wuld n lnger be deductible under this prpsal. Currently taxpayers can deduct the interest n a primary residence and a secnd residence. Under this prpsal, interest wuld nly be deductible n a primary residence. Currently, lsses frm gambling can nly be deducted t the extent f gambling winnings, while ther expenses cnnected t gambling can be deducted in excess f winnings. This prpsal wuld cap the deductin fr bth lsses and ther expenses t the amunt f gambling winnings. In 2017, high-incme taxpayers are subject t the Pease limitatin, which results in the phasing ut f itemized deductins. This phaseut wuld be repealed under this prpsal. One area where deductins wuld be expanded is related t charitable cntributins, albeit nly slightly. Under this prpsal, deductins that wuld have been subject t the 50% f AGI limitatin (such as cash gifts t public charities) Rbert W. Baird & C. Incrprated. Baird des nt prvide tax advice. Please cnsult with yur tax advisr. Page 3 f 7

4 Tax Cut and Jbs Act, cntinued wuld nw be deductible up t 60% f AGI. Excess gifts wuld still be carried frward fr up t 5 years. Als, the permile deductin allwed fr driving fr a charitable rganizatin wuld nw be indexed fr inflatin. ENHANCED CHILD CREDIT, NEW FAMILY CREDIT In rder t ffset the prpsed eliminatin f the persnal exemptin, the Child Tax Credit wuld be expanded in the fllwing ways: The credit amunt wuld increase frm $1,000 per child under the age f 17 t $1,600 per child. A new $300 family credit wuld be allwed fr each taxpayer (including bth spuses n a jint return) plus any ther dependent that desn t qualify fr the $1,600 child credit. This family credit wuld nly apply fr the five years frm 2018 t Bth credits wuld be subject t a phaseut, but the incme level wuld be increased frm current law levels: Fr married cuples, the credit wuld be reduced by 5% f AGI ver $230,000. Currently, their phaseut begins at $110,000. Fr all ther taxpayers, the phaseut wuld begin at $115,000 f AGI. Singles are currently phased ut beginning at $75,000, and married cuples filing separately at $55,000. NEW TAX RATE ON PASS-THROUGH BUSINESS INCOME This refrm prpsal cntains a wide variety f changes t hw businesses are taxed (discussed belw), but it als makes a significant change t business incme earned by individuals. This nt nly includes incme frm Sle Prprietrships, but als thse cnsidered pass-thrughs such as S Crpratins and Partnerships. Tday, the net incme frm these businesses is taxed directly t the wners f thse businesses, using the individual tax rates (nt the crprate tax rates). Under this prpsal, sme prtin f that incme wuld be taxed at a maximum rate f 25%, althugh the amunt varies based n the wner and the type f business: This lwer rate wuld nly apply t the prtin f the incme treated as qualified business incme. The balance f the incme frm the activity wuld be treated as cmpensatin and wuld be taxed as it is tday, at the individual s regular tax rate. Fr business wners cnsidered passive investrs, 100% f their share f the business incme wuld be cnsidered qualified and wuld be subject t the maximum 25% rate. This wuld include all business incme frm publicly traded partnerships. Fr thse wners cnsidered active investrs, the rules are different: The default assumptin fr mst businesses is that 30% f the business incme will be cnsidered qualified, with the remaining 70% f their incme taxed at the standard individual tax rates. Service crpratins, whse business is based primarily in the fields f health, law, engineering, architecture, accunting, actuarial science, perfrming arts, r cnsulting, will have a default f 0% qualified business incme, making them ineligible fr the lwer tax rate. In all cases, active investrs in a pass-thrugh business will have the ability t claim a higher percentage f their incme as qualified, using a frmula that takes int accunt the activity s return n capital. UPDATE: A new lwer tax rate wuld apply t the first $75,000 f net business incme fr an active wner. The rate wuld be 11% fr 2018 and 2019, 10% fr 2020 and 2021, and 9% fr 2022 and beynd. This lwer rate wuld be phased ut nce that business incme exceeds $150,000, and wuld be fully lst at $225,000 f incme, at which pint the riginal prpsal f a 12% tax wuld apply t that first $75,000. Fr single taxpayers, the lwer rate wuld nly apply t the first $37,500 f incme, and wuld begin phasing-ut at $75,000 f incme. Rbert W. Baird & C. Incrprated. Baird des nt prvide tax advice. Please cnsult with yur tax advisr. Page 4 f 7

5 Tax Cut and Jbs Act, cntinued The 25% tax rate will als apply t sme dividends frm Real Estate Investment Trusts (REITs) and cperatives. SALE OF A PERSONAL RESIDENCE Under current law, a married cuple can exclude up t $500,000 f gain n the sale f their hme ($250,000 fr singles) as lng as it was their primary residence fr tw f the last five years, and the exclusin can be claimed nce every tw years. This prpsal wuld increase the time perid t five ut f eight years, and the exclusin culd nly be claimed nce every 5 years. In additin, the exclusin amunt wuld be subject t a phaseut. The exclusin wuld be reduced by $1 fr every dllar a cuple s AGI exceeds $500,000 (singles ver $250,000). This means cuples with incme ver $1 millin wuld n lnger be able t exclude a gain n their hme, as well as many ther cuples with incme between $500,000 and $1 millin. IRA RECHARACTERIZATIONS In the weeks leading up t the release f this prpsal, there was speculatin it wuld include a cap r even a cmplete eliminatin f the ability t make deductible cntributins t retirement plans (smetimes referred t as Rthificatin ). That cncern turned ut t be fr naught, althugh the tpic culd be revisited in the Senate prpsal. Instead, the prpsal cntained an unexpected change t Traditinal and Rth IRAs. This prpsal wuld eliminate the ability t recharacterize a Rth cnversin after it was cmpleted. Currently taxpayers have until Octber 15 f the year after the year f cnversin t essentially change their mind n ding the cnversin. This technique allws taxpayers t und cnversins if the accunt has fallen in value, r even d large cnversins up frnt and then reduce them later t an amunt they re willing t pay tax n. Under this prpsal, nce a Rth cnversin is cmpleted, the cnversin amunt cannt be changed. In ther wrds, taxpayers must be willing t fully cmmit t the cnversin nce it s cmpleted. This inability t recharacterize wuld als apply t cntributins t either a Traditinal r Rth IRA. Hwever, the backdr Rth cntributin technique where after-tax cntributins are made t a Traditinal IRA and then cnverted t a Rth IRA was nt addressed in this bill and wuld still be a viable strategy. SIMPLIFICATION OF EDUCATION INCENTIVES This prpsal wuld cnslidate a variety f educatin incentives, while eliminating sme thers: The deductins fr interest paid n student lans and fr qualified tuitin and related expenses wuld be repealed. New cntributins t Cverdell Educatin Savings Accunts wuld nt be allwed after 2017, althugh these accunts culd cntinue t be held and used fr educatin expenses, r rlled ver t sectin 529 accunts. Cverdell ESAs are currently the nly tax-preferred way t fund K-12 expenses, s these expenses wuld becme qualified expenses f a 529 accunt, but with an annual limit f $10,000. UPDATE: Taxpayers wuld be allwed t rllver 529 accunt balances t an ABLE accunt, which is a taxfavred savings prgram fr disabled individuals. The Hpe Schlarship Credit and the Lifetime Learning Credit wuld be repealed, leaving just the American Opprtunity Tax Credit. The AOTC prvides a 100% credit fr the first $2,000 f cllege expenses, and then 25% fr the next $2,000. The AOTC wuld be expanded t allw fr a fifth year f cllege expenses, but at half the rate f the first fur years. Interest n sme US Gvernment savings bnds is excluded frm incme tday if they are used t pay fr cllege expenses. That exclusin wuld be repealed. The tax exclusin fr qualified tuitin reductin prgrams wuld als be repealed, making these benefits taxable. These are prgrams where educatinal institutins prvide reduced tuitin r even cash payments t their emplyees and their spuses and dependents. Rbert W. Baird & C. Incrprated. Baird des nt prvide tax advice. Please cnsult with yur tax advisr. Page 5 f 7

6 Tax Cut and Jbs Act, cntinued The discharge f student lan debt that ccurs upn the death r disability f the student wuld n lnger be cnsidered taxable incme. ESTATE, GIFT AND GST TAX CHANGES This prpsal greatly reduces the impact f the estate tax befre ultimately repealing it: The estate exemptin wuld be dubled beginning in The exemptin is currently expected t be $5.6 millin, meaning it wuld becme $11.2 millin per persn, r $22.4 millin per cuple. The gift tax wuld be lwered frm 40% t 35%, althugh the same annual and lifetime exemptin amunts wuld cntinue t apply In 2024, the estate and the generatin skipping transfer taxes wuld be fully and permanently repealed. The rules adjusting the cst basis f assets t fair market value at death wuld cntinue t apply, hwever. UPDATE: The repeal f the estate tax wuld be deferred until ALTERNATIVE MINIMUM TAX REPEAL This prpsal wuld repeal the Alternative Minimum Tax that applies t individuals (and t crpratins, as well). Taxpayers wh have existing AMT credit carryvers wuld be able t use thse carryvers as fllws: Taxpayer culd claim 50% f their therwise unused AMT credit in 2019, 2020 and Any credit remaining after 2021 culd be fully claimed in In bth cases abve, the credit claimed wuld be fully refundable. BUSINESS TAX CHANGES Businesses structured as pass-thrugh entities wuld see a new lwer tax rate, as explained earlier, but thse perating as C Crpratins wuld als be subject t a new tax rate. These crpratins, which pay their wn tax rather than pass it thrugh t their wners, wuld mve frm a tax rate f essentially 35% t a new flat rate f 20%. Persnal service crpratins (as defined earlier) wuld be taxed at 25%. This bill cntains many ther prvisins affecting business, sme f which are highlighted belw: Businesses culd fully expense 100% f the cst f qualified prperty placed in service after September 27, 2017 and befre Currently business can immediately deduct 50% f that cst (decreasing t 30% in 2019), and then depreciate the balance f the cst ver the asset s useful life. Businesses can currently expense up t $500,000 fr the purchase f prperty cnsidered sectin 179 prperty, as lng as their ttal assets placed in service fr the year dn t exceed $2 millin. This prpsal wuld increase the expense amunt t $5 millin and the phaseut amunt t $20 millin, and index bth fr inflatin. This prvisin wuld expire after 2022 and revert back t the current rule. Like-kind exchanges wuld nly be allwed fr real prperty (including rental prperties), and nt fr persnal prperty (such as vehicles r equipment). Businesses with grss receipts f less than $25 millin wuld be exempt frm varius limitatins n deducting interest expense. On the ther hand, larger cmpanies wuld see new limits n their interest expense deductin. The carryback f Net Operating Lsses wuld essentially be repealed, but thse lsses culd instead be carried frward indefinitely (versus fr just 20 years tday). Only 90% f current incme culd be ffset with an NOL carryfrward, hwever. Businesses culd n lnger deduct the cst f entertainment r recreatin activities, r membership dues relating t thse activities, as well as n-premises gyms r ther amenities fr emplyees that are primarily persnal in nature. Rbert W. Baird & C. Incrprated. Baird des nt prvide tax advice. Please cnsult with yur tax advisr. Page 6 f 7

7 Tax Cut and Jbs Act, cntinued The fllwing tax credits wuld be repealed: emplyer-prvided child care, histric building rehabilitatin, and the Wrk Opprtunity Tax Credit. EMPLOYER-PROVIDED FRINGE BENEFITS Emplyers are currently able t prvide a variety f fringe benefits t their emplyees withut the emplyee having t reprt them as taxable incme. This prpsal wuld change that treatment and make the fllwing benefits taxable t emplyees: Emplyer-prvided educatin assistance, f which up t $5,250 is currently excluded frm incme. Emplyee achievement awards. These expenses wuld als n lnger be deductible by the emplyer. Mving expense reimbursements. Adptin assistance prgrams The exclusin fr husing prvided fr the cnvenience f the emplyer r fr emplyees f educatinal institutins wuld be capped at $50,000. This reduced limit wuld als be phased ut by 50% f the emplyee s cmpensatin that exceeds a threshld ($120,000 in 2017, but adjusted fr inflatin). In additin, cntributins t Dependent Care Flexible Spending Accunts wuld n lnger be allwed. Emplyees f cmpanies that ffer these prgrams can currently fund up t $5,000, but it must be used by the end f the calendar year r it is frfeited. MISCELLANEOUS PROVISIONS A variety f ther changes were included in this prpsal, including the fllwing: The interest n private activity bnds issued after 2017 wuld n lnger be tax-exempt. Currently that interest is nly taxable fr AMT purpses. Interest paid n bnds issued t build r imprve a prfessinal sprts stadium wuld becme taxable as well. Several changes were prpsed t retirement plan rules, including expanding in-service distributin ptins fr state and lcal gvernment emplyees in rder t match private sectr emplyees, allwing emplyers t lsen the rules n hardship withdrawals frm accunts, and increasing the time in which an emplyee can pay back a plan lan after the accunt was rlled t an IRA. Sme frms f nnqualified deferred cmpensatin wuld be taxed sner, as the definitin f substantial risk f frfeiture wuld be narrwed. UPDATE: This prvisin was remved frm the bill. A variety f nnrefundable credits wuld be repealed, including the adptin credit, the credit fr plug-in electric drive mtr vehicles, the credit available when states issue mrtgage credit certificates and the credit fr thse ver age 65 wh have retired n disability. UPDATE: The adptin credit wuld n lnger be repealed. Tax-exempt rganizatins wuld be subject t a 20% tax n cmpensatin ver $1 millin paid t their five highest paid emplyees fr the year. The excise tax n net investment incme fr private fundatins wuld be a flat 1.4%, rather than a 1-2% tax. Private clleges and universities with at least 500 students wuld be subject t a 1.4% tax n their net investment incme if their assets nt directly used fr educatinal purpses exceed a threshld. Rbert W. Baird & C. Incrprated. Baird des nt prvide tax advice. Please cnsult with yur tax advisr. Page 7 f 7