17 Nov 2017 Tax Changes Are Coming
“I shall never use profanity except in discussing house rent and taxes. Indeed, upon second thought, I will not even use it then, for it is unchristian, inelegant, and degrading–though to speak truly I do not see how house rent and taxes are going to be discussed worth a cent without it.”
Discussions and rants on the merits and faults of taxation are filling the halls of Congress and the media as the Senate debates passage of their own version of tax reform after the House passed theirs yesterday. Kudos to the House for getting it done, for there is perhaps no function of our government more intricately, complexly, and inextricably woven into Washington politics and policy than our 73,954-page tax code.
If citizens are loathe to relinquish any part of their entitlements, Washington politicians are equally loathe to lighten the shroud of tax loopholes that conceals their special-interest favor-granting. The House did it with their larger, quieter Republican majority, while Senators must pass theirs with a razor-thin majority of two senators and all of them targeted by a host of loud and powerful special-interest opponents.
But despite the concerted efforts of the opposition, it is nearly certain that tax cuts and perhaps reform are coming, and likely this year. So it behooves us to be ready for the good and the bad. The intent of the bill is to promote economic growth by lightening the tax burden on corporations, small businesses and millions of middle-class Americans. But not everyone will see lower taxes.
A Wall Street Journal article this morning summarizes progress so far as follows:
“The House plan would provide, on average, tax cuts for every income group in 2019, according to the nonpartisan Joint Committee on Taxation, which analyzes tax policy for Congress. But that is just on average and across income groups not everyone would gain. About 8% of households would pay more in 2019 and that proportion would rise to 20% over time, according to a JCT analysis of an earlier version of the bill. For middle-income households, earning between $75,000 and $100,000, 84% would get a tax cut in 2019 and 66% would see a tax cut by 2027, while 11% would see a tax increase in year one and 26% would see a tax increase in 2027.”
The reason the cuts aren’t more generous are several. To date there has been no Democratic support of Republican’s tax reform ideas, so any hope of passage must squeeze cuts into the House’s earlier-passed $1.5 trillion 10-year budget target. Cuts cannot that increase the deficit must pass by a 60-vote majority. Democrats are not expected to join in, so the Senate must meet these budget-reconciliation rules to pass their bill with 50 votes. That’s why some of the measures, like the child tax credit sunset or go away in 10 years.
Here are some points to be aware of as you plan for year-end:
- The current bill does away with the dependent exemption which provides $4,050 for each qualifying dependent.
- There are four brackets in the House bill: 12%, 25%, 35% and 39.6%. Some taxpayers currently in the 33% bracket will move into the 35% bracket.
- Some argue that charities will see reductions in giving as donors motivated by tax deductions will take the new higher standard deduction instead of making the donations.
- Higher bracket donors benefit as they will be able to deduct up to 60% of their adjusted gross income, up from the current limit of 50% of adjusted gross income.
- Many current tax breaks are on the chopping block, including deductions for medical expenses, student loan interest, alimony, casualty losses from theft or catastrophe, moving expenses and tax prep fees.
- Republicans are keeping the mortgage interest deduction, but the limit drops to $500,000 from $1 million. Mortgages interest on vacation homes will no longer qualify for deduction nor will home equity loans or lines of credit.
- The House bill allows households to write off state and local property taxes (known as SALT) up to $10,000. The Senate currently does away with SALT altogether.
- The current House bill leaves 401(k) contributions intact, but there are some twists to be aware of. For instance, the bill currently repeals a rule that allows you to reverse or “recharacterize” Roth IRA conversions. You might desire to recharacterize if you find out that your Roth conversion (IRA deferral of income to Roth tax-free income) inadvertently bumped you into a higher tax bracket.
- Small Business Owners stand to benefit significantly as the new framework lowers the maximum rate on business income for so-called pass through entities, including sole proprietorships, partnerships and S-corporations, from the maximum 39.6% to 25%. Lawmakers have said they would adopt measures to keep entrepreneurs from recharacterizing their personal income as business income to benefit from the lower rate.
- Republicans want to repeal the estate tax or the ‘death tax;’ a 40% tax on estates exceeding $5.49 million for individual filers or nearly $11 million for married couples, starting in 2024. The estate tax accounts for less than 1 percent of federal revenue, according to the Tax Foundation.
Changes will be made to some or all of the above in the coming weeks, but it is becoming increasingly evident that passage is going to happen and that the Senate will be closer to the House bill version than the other way around. The point is, we will all be impacted by these changes in both subtle and significant ways. And despite Republicans’ best efforts to simplify, taxes will remain exceptionally complex, especially for you, our client. That is why we are adding the very best tax planning software available. We do not intend to give tax advice, or replace in any way your tax professional, but we do want to help you make the best-informed decisions possible, both short-term and long.
I am hearing a lot of grumbling and outright anger about this current tax package, particularly from young professionals in the $100,000 to 175,000 and from wealthy clients who see no improvement and potentially higher tax bills. I don’t blame them. But, let me suggest a longer view of the potential merits of the tax bill.
This is a corporate and small business tax cut being sold as a middle class cut, because that is how it must be sold. Politics are short-term because voters demand immediate results. But this bill is squarely aimed at longer term benefits – the growth of the US economy. It truly is the economy stupid. Strong economies get incumbents re-elected more than legislative victories. The difference between a 2% economy and a 3% economy is literally millions of jobs and billions and trillions more in GDP. Our businesses grow faster and our salaries go up faster.
Other benefits of faster growth include paying down our huge national debt, moving more people out of poverty thereby lessening the demands on social safety nets, improving and repairing infrastructure, strengthening our national defense through military and foreign aid, and on and on.
This bill, or the one that ultimately passes will be the best Republicans can pass given the constraints they face. If it looks anything like the current form, it promises to keep billions of dollars more in the hands of the people that make this economy work and grow.