The Tax Cuts and Jobs Act, H.R. 1, agreed to by a congressional conference committee on Friday and expected to be voted on by both houses of Congress during this week, contains a large number of provisions that would affect individual taxpayers and in effect the amount of income taxes they would end up paying. It is important to note that all of the income tax changes affecting individuals would expire after 2025 if no future Congress acts to extend the bill’s provisions. The individual tax provisions would sunset, and the tax law would revert to the current laws that are on the books.
The bill would increase the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of households, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers is not changed by the bill. The standard deduction change may have a profound impact on the individual tax payer and the amount of taxes paid depending on their individual situation.
In the present format of the tabled bill, personal exemptions would be repealed, this change might have far reaching impact on the individual tax payer and the amount of income taxes paid.
Passthrough income deduction
For income tax years after 2018 to 2025, individuals would be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorships, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. “Qualified business income” is interpreted as the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business that is undertaken by the taxpayer within the United States. These do not include specified investment-related income, deductions, or losses.
It is important to note that if W-2 wages are present and are above the threshold of the taxable income, a limitation on the deduction would phased in. Also, if income is above the threshold for specified service trades or businesses the deduction would be disallowed.
A specified service trade or business is defined as any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees. However, a taxpayer is excluded from taking this deduction if the taxpayer has taxable income in excess of $157,500 or $315,000 in the case of a joint return from such operation.
The taxpayer is allowed to deduct 20% of the qualified business income with respect to such trade or business. In general, the deduction is limited to 50% of the W-2 wages paid with respect to the business. Capital-intensive businesses are allowed 25% of wages paid plus a portion of the business’s basis in its tangible assets. However, if the taxpayer’s income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 20% of the qualified business income with respect to each respective trade or business.
An S corporation shareholder’s reasonable compensation, guaranteed payments, or payments to a partner who is acting outside of his capacity as a partner would not be included as “Qualified business income”.
Child tax credit
Individuals would see an increase in the amount of the child tax credit allowed on their income tax return if the proposed changes are enacted. The amount would increase to $2,000 per qualifying child. The maximum refundable amount of the credit would be $1,400. A new nonrefundable $500 credit for qualifying dependents who are not qualifying children is also created. The phase out threshold would increase to $400,000 for married taxpayers filing a joint tax return and $200,000 for other taxpayers.
The bill would modify Sec. 529 plans, this modification would allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. It is worth noting that this limitation applies on a per-student basis. Also, certain homeschool expenses would qualify as eligible expenses.
Certain student loan would discharge on account of death or disability. These proposed changes can have significant monetary effect on an individual’s income tax return.
The limitation on itemized deductions would not exist through 2025. This change could have significant monetary implications on the individual tax payer.
Home mortgage interest on acquisition indebtedness has been reduced to $750,000 down from the current amount of $1 million. This change can also be impactful of the individual tax payers.
The proposed changes will not affect a taxpayer who has entered into a binding written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017. As of such, they will be allowed the current-law $1 million limit.
Home equity loans.
The home equity loan interest deduction would be repealed through 2025. This can also affect a tax payer negatively in that it can result in them getting a smaller income tax refund when they file their taxes.
State and local taxes
Under the final bill, individuals would be allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes. This is another limitation that will adversely affect tax payers if they have in-excess of $10,000 in state and local taxes.
However, the bill specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.
Under the bill, taxpayers can only take a deduction for casualty losses if the loss is attributable to a presidentially declared disaster. Therefore, any losses not attributed to a presidentially declared disaster is not deductible. This change can also affect negatively affect the tax payers and the refund they receive from filing their income taxes.
The term “losses from wagering transactions” is clarified to include not only to the actual costs of wagers, but also other expenses incurred by the taxpayer in connection with his or her gambling activity.
The bill would increase the income-based percentage limit for charitable contributions of cash to public charities to 60%. A charitable deduction for payments made for college athletic event seating rights would not be allowed.
Miscellaneous itemized deductions
All miscellaneous itemized deductions subject to the 2% floor under current law would be repealed through 2025 by the bill.
The bill would reduce the threshold for deduction of medical expenses to 7.5% of adjusted gross income for 2017 and 2018.
Alimony and separate maintenance payments are not deductible by the payor spouse for any divorce or separation agreement executed after Dec. 31, 2018. Neither would such payments are included in income by the payee spouse. This is another change that will affect the refund received by tax payers.
Except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station, the moving expense deduction would be repealed. This an above the line deduction that will affect the tax return received by tax payer.
Exclusion for bicycle commuting reimbursements
The bill would repeal through 2025 the exclusion from gross income or wages of qualified bicycle commuting expenses.
Moving expense reimbursements
The bill would repeal through 2025 the exclusion from gross income and wages for qualified moving expense reimbursements, except in the case of a member of the armed forces on active duty who moves pursuant to a military order.
The bill would exclude conversion contributions to Roth IRAs from the rule that allows IRA contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA. This would prevent taxpayers from using recharacterization to unwind a Roth conversion.
Estate, gift, and generation-skipping transfer taxes
There will be a doubling of the estate and gift tax exemption for estates of decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026. The basic exclusion amount provided would increase from $5 million to $10 million and would be indexed for inflation.
Alternative minimum tax
The ATM exemption has been increased for tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026. The AMT exemption amount would increase to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return) and $70,300 for all other taxpayers (other than estates and trusts). The phaseout thresholds would be increased to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers (other than estates and trusts). The exemption and threshold amounts would be indexed for inflation.
The amount of the penalty imposed on taxpayers who do not obtain insurance that provides at least minimum essential coverage, effective after 2018 would be eliminated.
All in all, the current bill with all the proposed changes will have far reaching financial implication on the individual tax payer. In some instances, the tax payer will have a larger tax refund, in other cases a smaller tax refund will be had by the tax payer.
User | 18/12/2017