H.R. 1 TAX CUT AND JOBS ACT By: Michelle McCarthy, Esq. and Tyler Murray, Esq.
Introduction History H.R. 1, known as the Tax Cuts and Jobs Act ( Act ), was introduced on November 2, 2017. It was passed by the House of Representatives on November 16, 2017. It was passed through the Senate on December 2, 2017. It was reported by the joint conference committee on December 15, 2017; agreed to by the Senate on December 20, 2017, and by the House of Representatives on December 19, 2017 and December 20, 2017. Signed into law by President Donald Trump on December 22, 2017
Summary Introduction The nonpartisan Congressional Budget Office ( CBO ) reported that under the Act individuals and pass-through entities would receive about $1,125 billion in net benefits over 10 years, which corporations would receive $320 billion in benefits The individual and pass-through tax cuts fade over time and become increases starting in 2027, while the corporate tax cuts are permanent. The CBO estimates that the Act would add an estimated $1.455 trillion to the national debt over ten years, in addition to the $10 trillion increase forecast under the current policy baseline and existing $20 trillion national debt. The Joint Committee on Taxation estimated that under the Act the GDP level would be.8% higher, employment level would be.6% higher, and personal consumption level would be.6% higher during the 2018-2027.
Changes to Individual Income Taxes Marginal Tax Rates Under HR 1 Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately 10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525 12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700 22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500 24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500 32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-200,000 35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$300,000 37% Over $500,000 Over $600,000 Over $500,000 Over $300,000
Changes to Individual Income Taxes Marginal Tax Rates Set to Take Effect in 2018 prior to HR 1 Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately 10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525 15% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700 25% $38,700-$93,700 $77,400-$156,150 $51,800-$133,850 $38,700-$78,075 28% $93,700-$195,450 $156,150-$237,950 $133,850-$216,700 $78,075-$118,975 33% $195,450-$424,950 $237,950-$424,950 $216,700-$424,950 $118,975-212,475 35% $424,950-$426,700 $424,950-$480,050 $424,950-$453,350 $212,475-$240,025 39.6% Over $426,700 Over $480,050 Over $453,350 Over $240,025
Changes to Individual Income Taxes Similarities The 10% tax bracket remained the same under the new and old tax plan The salary ranges under the second tax bracket are the same, but the rate was lowered to 12% instead of 15% There are still 7 tax brackets. Earlier versions of the bill eliminated some of the tax brackets for simplification Changes to the individual tax rates are set to expire in 2025
Changes to Individual Income Taxes Elimination of the Married Penalty The marriage penalty occurs when two individuals end up paying a higher tax rate when they are married than if they were both single. This stems from having different tax brackets for individual files and married couples
Changes to Individual Income Taxes Elimination of the Marriage Penalty Married Filing Jointly - Two $90,000 Earners Under the marginal tax rates that were to take effect in 2018 prior to the enactment of HR 1, two single individuals earning $90,000 would each pay a maximum 25% tax rate (marginal rates). Under the marginal tax rates that were to take effect in 2018 prior to the enactment of HR 1, these two individuals, if married, would earn $180,000, and pay max 28% tax.
Changes to Individual Income Taxes Elimination of the Marriage Penalty Under HR 1 the single individuals earning $90,000 would each pay a maximum 24% tax rate. These same individuals, while married and earning $180,000 will pay a maximum of 24% under the new tax plan
Changes to Individual Income Taxes Head of Household Definition: Head of Household is a filing status for single or unmarried taxpayers who keep up a home for a Qualifying Person. The Head of Household filing status has some advantages over the Single Filing status. To qualify as a Head of Household the following requirements must be met: You are unmarried or considered unmarried on the last day of the year You paid more than half the cost of keeping up a home for the year A Qualifying Person lived with you in the home for more than half the year
Changes to Individual Income Taxes Head of Household Examples of Qualifying Person Child or Grandchild who meets certain tests, qualifying relative who is your father or mother, qualifying relative other than your mother or father Benefits: Often have a lower tax rate than single or married filing separately You will receive a higher standard deduction than if you file as single or married filing separately
Changes to Individual Income Taxes Examples Individual earning $150,000 Old Plan Max rate 28% HR 1 Max 24% Head of Household Old Plan Max 28% HR 1 Max 24%
Changes to Individual Income Taxes Standard Deduction and Personal Exemption The standard deduction has roughly doubled for all filers, but the personal exemption has been eliminated. Standard Deduction Rates: Tax Filing Status Previous Standard Deduction New Standard Deduction Single $6,500 $12,000 Married Filing Jointly $13,000 $24,000 Married Filing Separately $6,500 $12,000 Head of Household $9,350 $18,000
Changes to Individual Income Taxes The personal exemption amount of $4,150 is eliminated The personal exemption is the amount you can deduct from your income for every taxpayer and most dependents claimed on your return The personal exemption was intended to insulate from taxation roughly the minimal amount of money someone would need to get by at a subsistence level (enough money for clothes, food, and shelter). The amount is adjusted for inflation pursuant to I.R.C. Section 151. To claim a personal example, the taxpayer must be able to answer no that anyone else can claim them on their tax return as a dependent
Changes to Individual Income Taxes The personal exemption amount of $4,150 is eliminated History of personal exemption: The personal exemption amount in 1894 was $4,000 ($109,277 in 2016 dollars), but the income tax enacted in 1894 was declared unconstitutional in 1895. Over time the exemption has increased and decreased depending on political policy and the need for tax revenue, but the amount has never kept up with inflation. The repeal of the personal exemption disproportionately affects larger families
Changes to Individual Income Taxes Generally a taxpayer can claim a personal exemption for themselves, their spouse if married filing jointly, and each dependent Itemizing No Longer Worthwhile to Millions of Households It is estimated that 94% of households will claim the standard deduction, up from 70% now
Capital Gains Capital Gains Taxes The general structure of capital gains taxes is not changing Short Term capital gains are still taxed as ordinary income, which means they will be subject to the rate changes The 3.8% net investment tax that applied to high earners remains the same
Tax Breaks for Parents Child Tax Credit However, this loss should be made up by the expanded Child Tax Credit which is available for qualified children under age 17. The credit is doubled from $1,000 to $2,000, and also increases the amount of the credit that is refundable to $1,400 Additionally, the phaseout for the credit is dramatically increased Tax Filing Status Old Phaseout Threshhold New Phaseout Threshold Married Filing Jointly $110,000 $400,000 Individuals $75,000 $200,000
Tax Breaks for Parents Child and Dependent Tax Care Credit The credit which allows parents to deduct qualified child care expenses has been kept in place. This can be worth up to $1,050 for one child under 13 or $2,100 for two children Plus up to $5,000 can be sheltered in a dependent care flexible spending account on a pre-tax basis to help make child care more affordable
Educational Tax Breaks The Lifetime Learning Credit and Student Loan Interest Deduction are still in place, and the exclusion for graduate school tuition waivers survives as well Bill expands the available use of funds saved in a 529 college savings plan Includes levels of education other than college If you have a child in private school for K-12 grade levels, you can use the money in your account for these expenses
Mortgage Interest, Charitable Contributions, and Medical Expenses Mortgage Interest Mortgage interest can only be taken on a mortgage debt of up to $750,000, down from $1,000,000. Pre-existing mortgages are grandfathered in. Interest on home equity debt can no longer be deducted at all, whereas up to $100,000 in home equity debt could previously be deducted
Mortgage Interest, Charitable Contributions, and Medical Expenses Charitable Deductions Taxpayers can deduct donations of as much as 60% of their income, up from a 50% cap. Donations made to a college in exchange for the right to purchase athletic tickets are no longer deductible
Mortgage Interest, Charitable Contributions, and Medical Expenses Medical Expenses The threshold for the medical expenses deduction has been reduced from 10% of AGI to 7.5% of AGI. If your AGI is $50,000, you can now deduct any unreimbursed medical expenses over $3,750, not $5,000 as set by prior tax law. Over 75% of people who claim the medical tax deduction are over age 50, and the AARP is happy that this deduction remains
Deductions which are disappearing below the line Above the line vs. below the line Above the line deductions are deductions which are taken prior to computing a taxpayer s adjusted gross income SALT Deductions State and Local Tax deductions are now capped at $10,000 including income, sales and property taxes. This could hurt those in high-tax states like New Jersey and California Casualty and theft losses Except those attributable to a federally declared disaster
Deductions which are disappearing below the line Unreimbursed employee expenses Tax preparation expenses Other miscellaneous deductions previously subject to the 2% AGI cap Employer-subsidized parking and transportation reimbursement
Obamacare penalties will be going away Efforts to repeal the Affordable Care Act were unsuccessful, but the tax reform bill repeals the individual mandate, meaning that people who don t buy health insurance will no longer have to pay a tax penalty. This change doesn t go into effect until 2019 One potential consequence of the penalty going away would be an increase in health care premiums for the elderly Without a mandate that people have health care, younger people who use health care less often may opt out of getting health insurance, increasing premiums for those who need it There are no projections on what this could mean, but it is thought that this will cause premiums for the elderly to skyrocket
Medicare The new tax bill will result in automatic cuts to key federal programs, including a $25 billion cut to the Medicare program in 2018 as a result of the Congressional pay-go rules Pay-go rules require the Office of Management and Budget to make automatic cuts to mandatory spending when the deficit hits a certain level On Dec 22, 2017 President Trump signed a bipartisan continuing resolution to fund the federal government through January 19, 2018 that also included a waiver of the pay-go rules, so these cuts will not yet go into effect
Alternative Minimum Tax The Alternative Minimum Tax (AMT) will remain in place for individuals and couples. The AMT is a supplemental income tax imposed which requires in addition to baseline income tax for certain individuals, corporations, estates, and trusts that have exemptions or special circumstances allowing for lower payments of standard income tax The AMT is triggered when taxpayers make a certain income and eliminates many deductions for those in higher brackets to make sure they pay at least some taxes. You have to calculate your AMT if your adjusted gross income is above the exemption
Alternative Minimum Tax If you make more than the trigger amount, you ve got to calculate your taxes twice Once for the regular income tax, and once for the AMT You must pay the higher amount of tax Status 2017 2017 2018-2025 2018-2025 Exemption Phaseout Exemption Phaseout Single / Head of $54,300 $120,700 $70,300 $500,000 Household Married Filing Jointly $84,500 $160,900 $109,400 $1,000,000 Married Filing $42,250 $80,450 N.A. N.A. Separately
Social Security and Investment income Seniors are benefited by H.R. 1 in that the way Social Security and investment income are taxed do not change While seniors earnings and pension income will be subject to new individual tax brackets and rates, those changes will result in tax cuts, not increases
Estate Tax Changes When a decedent dies their assets become property of their estate. Any income generated is also part of the estate and may trigger the requirement to file an estate income tax return. Examples of assets which would generate income of an estate Savings accounts CD s Stocks Bonds Mutual Funds Investment property
Estate Tax Changes IRS Form 1041 must be filed if the estate generates more than $600 in annual gross income Under HR 1, the estate tax exemption is doubled from $5,600,000 for individuals to $11,200,000 and from $11,200,000 for married couples to $22,400,000. The rate remains 40%. Estate tax vs income tax. Estate tax based on assets owned at death, income tax for income generated after death. Estate tax is calculated based upon the value of the estate. Anything above the exemptions above will be taxed at 40%
Estate Tax Changes Tax to Estate and Trust Income under old plan Under $2,550 15% $2,550-$5,950 25% $5,950-$9,050 28% $9,050-$12,400 33% Over $12,400 39.6%
Estate Tax Changes Tax to Estate and Trust Income under H.R. 1 Under $2,550 10% $2,550-$9,150 24% $9,150-$12,500 35% Over $12,500 37%
Repatriation of Foreign Cash and Assets There are about $2.6 trillion in U.S. corporations foreign profits held overseas In an effort to bring this money back to the U.S., the new tax law sets a one-time repatriation rate of 15.5% on cash and equivalent foreignheld assets and 8% on illiquid assets like equipment, payable over an 8 year period
Examples of tax changes for the elderly Retired woman, 65 years old, receives Social Security benefit of $18,000 per year, $11,000 from a 401(k), and has $10,000 in medical expenses Her tax bill will not change under the new tax plan. She doesn t pay anything now, and won t pay any taxes under H.R. 1 The increased standard deduction means that if she did receive more income in the next 8 years, more of it would not be taxable
Retired man, 70 years old, annual income of $50,000 ($18,000 Social Security, $28,000 pension, $4,000 in 401(k)), medical expenses of $7,500 per year Under the current law he would pay $3,988 in taxes Under the new bill he would pay $3,416 Savings of $572 The savings mostly come from the tax cut to his pension income No changes will be made to his social security income and 401(k) income He will not itemize because the higher standard deduction makes it not worthwhile to itemize his medical expenses
Married couple, 75 years old, annual income of $75,000, $50,000 a year in medical expenses. Their income is $25,000 in social security, $50,000 from their 401(k). Under either the old tax system or the new tax plan they will not pay any taxes due to the amount they spend on medical expenses Under the old plan they could deduct medical expenses above 10% of their income and under the new plan they will deduct medical expenses above 7.5%
Married couple, 65 years old, annual income of $150,000. $50,000 in wage earnings, $50,000 in Social Security benefits, $50,000 in investment income from their 401(k). $15,000 in out-of-pocket medical expenses, and currently pay $15,613 in federal income tax Under the new tax rates and rules they will pay $13,554 The main source of the tax cut is the lower tax rates on their earned income, but they benefit slightly due to the allowance for medical expenses as well
Married couple, $1,000,000 in annual income. $950,000 in investment income each year and $50,000 in Social Security benefits. They make charitable donations of $100,000 a year, have $25,000 in medical expenses, and pay $79,000 in state and local taxes Under the current system they pay $151,768 in federal income taxes Under the new tax plan they will pay $163,917, or 8% more The increase comes from the loss of all but $10,000 of their state and local tax deduction
Colorado State Tax Colorado State charges a flat 4.63% on taxable income, determined based upon the federal Adjusted Gross Income. Since CO tax is based on federal income The new tax bill decreases the tax rate for most individuals at a federal level, but people s taxable income is expected to increase because of the change with federal deductions Individuals who usually itemize are limited in the amount of state and local tax they can deduct on their federal returns. Without the deduction there is no addback This can help the taxpayers if they no longer deduct Colorado income tax