Tax Reform Bill – Key Highlights
Finally. A day later than expected, the proposed “Tax Cuts and Jobs Act” tax reform bill was released. Here’s what you need to know.
#1 Income Tax Brackets Reduced from 7 to 4
Reducing the tax brackets for individuals from 7 (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) to 4 (12%, 25%, 35%, and 39.6%) does make planning for most people simpler. These charts do a good of explaining how the current brackets compare to the proposed.
One point missing from the charts is how those earning over $1,000,000 (individual filers) and $1,200,000 (joint filers) might be impacted. Income above these thresholds will incur a surtax on a portion of the income that falls in the 12% tax bracket.
#2 Changes to Deductions and Credits
In 2015 (the latest year for which the information has been fully compiled), there were over 150 million income tax returns filed. Of those, approximately 30% of tax filers itemized their deductions, while the rest utilized the standard deduction. In addition to promising “major, major tax cuts” to American workers, the proposed bill aims to simplify tax reporting. Regardless of one’s opinion on the bill, a number of the proposed changes will indeed simplify tax reporting. In fact, it is estimated that less than 10% of households will itemize deductions under the proposed plan. Here’s why:
Increases to the standard deduction (note, however, that the $4,505 personal exemption will be eliminated):
- $6,350 to $12,000 for individuals
- $9,350 to $18,000 for heads of households, and
- $12,700 to $24,000 for joint filers.
Changes to many other deductions:
#3 Other Key Highlights
While is is hard to whittle down 400+ pages into concise and useful information, there are a few other key highlights in the bill you should know:
- 401(k)s – Despite the back and forth on this, there are no changes to pre-tax contribution limits. So keep saving!
- 529 accounts – Not just for qualified higher education expenses. The bill proposes to allow up to $10,000 per year of elementary and high school expenses to be considered qualified expenses. A good result for those saving for private elementary and high school.
- Alternative Minimum Tax (AMT) – Aims to be eliminated which is a change that just about everyone is in favor of remaining in the bill.
- Estate Tax/Generation-skipping Transfer Tax – Increases the exemption to $11 million per person, with permanent repeal in 6 years.
- Corporate Tax Rate – Decreased from 35% to 20%.
- Business Income from Pass-Through Entities – Income from a pass-through entity such as an S corporation, partnership, or LLC, will be treated as special “business income of individuals” and subject to a maximum 25% rate. However, not all such income will be subject to the special rate. A business owners that is active in the business will have some of her income taxed as ordinary income.
#4 This is just a proposed bill!
Plan based on what you know and can control. If any of the proposed changes could have a significant impact on a decision you need to make today, seek the advice of a professional before taking any action.
In the meantime, here’s a brief review of what happens next…
The first step to moving forward with the proposed tax reform bill actually took place on October 26. That is when the House voted to approve (by a very narrow margin) the Senate’s version of the 2018 federal budget:
- The details of the budget allowed the tax reform package to increase the federal deficit by $1.5 trillion (the estimated value of the proposed tax cuts) over a decade; and
- The passage of the budget kick-starts the reconciliation process, the window during which the Senate can pass legislation with a simple majority instead of the 60 votes needed to end debate and move a bill to vote.
Next, the House Ways & Means Committee will begin its “markup” of the bill and present a final version to the full House. Speaker of the House Ryan has said he aims for the House to pass the bill prior to Thanksgiving.
In the meantime, the Senate Finance Committee will launch its own version of the bill, which could be quite different than the House’s version.
Once the House and Senate have each voted and passed their own versions of the bill, the process moves to conference to work out the differences and produce a single bill.
Assuming a single bill can be agreed upon, both chambers will then need to pass that final version. The final step is sending the bill to the president for signature. Whether or not that can all be accomplished prior to January 1 is anyone’s guess.