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Summary and Update of Individual Tax Proposals (House and Senate)

By: John P. Bennecke |

The House and Senate are meeting formally today to work toward a compromise on the differences between their respective Tax Proposals.  While they are similar in many areas currently under consideration for change, when you look a little deeper they do have some significant differences in approach and ultimately impact for taxpayers.  Many of the areas being discussed may have an impact on your 2017 tax positions, so we want to provide a high level summary of the areas we are monitoring and analyzing.

Summary of Individual Tax Proposals (House and Senate)

Individual Tax Rates – The House and Senate bills contain provisions to modify the tax bracket structure.  Under the House bill contains 4 tax brackets from 12% on the low-end to 39.6% on the high end, retaining the top bracket with the current law.  The Senate bill has 7 tax brackets from 10% on the low-end to 38.5% on the high end.  Within both bills the maximum rate is applicable to individuals with taxable income of $ 500,000 or more for single taxpayers and $1,000,000 or more for those filing jointly.  Under the current proposals the maximum thresholds have increased from $418,400 for single taxpayers and $470,700 for those fling jointly under the current tax laws.

Update Based on December 13, 2017 session between the House and Senate Republicans.

Joint Agreement – Cut top individual tax rate to 37%.

Itemized Deductions

State and Local Tax Deduction – One of the more controversial changes relates to an individual taxpayers deduction for state and local taxes paid.  Under both the house and senate bills the deduction for state and local taxes has been eliminated.  One 2017 tax planning strategy to consider is prepaying your 2017 state and local taxes by the end of 2017, to take advantage of the deductibility of these taxes.  However, consideration to other tax implications such as AMT ( Alternative Minimum tax must be considered. However, consideration to other tax implications such as AMT ( Alternative Minimum tax must be considered.

Joint Agreement – Limit the combined deduction for State and Local to income and property taxes to $10,000.

Mortgage Interest Deduction – Under both the House and Senate bills they are significantly modifying what some consider to be the most impactful itemized deduction they receive, the home mortgage interest deduction.  Under the House bill the home mortgage deduction would be limited to new mortgages which do not exceed $500,000, there would be a cap on the those mortgages after November 2, 2017.  Under the senate proposal the cap would be $1,000,000.  Under both bills no deduction would be allowed for home equity debt or mortgages on non-primary residences.

Joint Agreement – Mortgage deduction for interest will be capped on mortgages of $750,000 or more.

Charitable Contributions – Under both bills there is little change to the deductibility of Charitable Contributions.

Miscellaneous Deductions – Under both the House and Senate bills several items previously allowed as deductions will be eliminated as deductions.  Here is a short list of some of the more common items proposed to be eliminated as deductions as part of this bill.  Tax Preparation Fees, Investment Advisory Fees, and un-reimbursed employee business expenses.

Income Items/ Components of Tax

Sale of Stocks – Under the Senate bill taxpayers would no longer be allowed to use a specific identification method for sales of securities, any stock sold after December 31, 2017 must be sold in a first-in first-out ( FIFO ) bases which eliminates the ability of taxpayers to harvest losses and or minimize gains.  The House bill does not address this issue.

Gain on Sale of Principal Residence – Under the current law taxpayers were allowed to exclude gain on the sale of principal residence up to the first $250K for single taxpayers and $500K for those filing jointly.  Under both the House and Senate rules the exclusion will only be available for those individuals who have used their home for at least 5 or the previous 8 years as their principle residence.  Additionally, the House bill contains provisions to reduce the exclusion to zero for individuals exceeding certain income thresholds and the Senate bill does not include these limitations on the exclusion.

Tax Rate on Pass-Through Income – Both bills provide different methodology for reducing the tax to individuals for income they receive from Business income earned within Pass-Through entities.  The House bill proposes lowering the tax rate to 25% which would apply to Passive investors, for those who actively participate in the business this lower rate would only apply to 30% of the business income, normal individual rates would apply to the remainder determined by the individuals tax brackets. ( applies with exceptions for specified types of service business )  The Senate bill takes a completely different approach in allowing a deduction for what they deem qualified business income, the deduction would be equal to 23% of the Qualified Business Income.

Joint Agreement – Provides a 20% deduction on qualified pass-through business income, and extends this break to trusts as well as individuals.

Alternative Minimum Tax ( AMT ) – The House bill proposes to completely eliminate the Alternative Minimum Tax ( AMT ) and allow for previously credited AMT to offset future regular tax and partially refundable. ( subject to limitations )  The Senate bill retains the AMT, but increases the threshold to whom the tax would apply.

Obamacare Taxes ( Net Investment Income Tax ) – Neither the House nor the Senate contain provisions to eliminate the 3.8% tax imposed on Net Investment Income.  The expectation is that any change to this law would come under a more comprehensive change to the current healthcare legislation.

We are monitoring the current legislative process closely, and will keep you updated as to the Legislative changes and impacts to your personal tax situation.