Friday, December 8, 2017

Tax Reform a MONUMENTAL Task

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

As you may have heard, Congress is working towards a Tax Reform bill to take effect in 2018.  I’m not ready to use terms like tax relief or tax cuts but both proposals favor simplifying the tax code - a monumental task.  There’s work to be done, but there appears to be enough momentum (House and Senate bills must merge through conference committee, pass the House and Senate and the President must sign) to take a look at some key provisions and a few differences:

Lower Tax Rates and end of The Alternative Minimum Tax – Both tax bills (House and Senate) favor lower tax rates and an end to the Alternative Minimum Tax, but there are a few differences:

Difference:  The House tax bill repeals the Alternative Minimum Tax entirely but a last minute change to the Senate tax bill only lessened the bite (impacting fewer taxpayers).  

Difference:  The Senate tax bill lowers tax rates but doesn’t reduce the number of tax brackets (seven).  The House tax bill lowers tax rates and simplifies tax brackets extensively (down to just four).

Fewer Itemized Deductions offset by an increased Standard Deduction – Both tax bills support an increased Standard Deduction (roughly doubling it) offset by fewer potential itemized deductions (only beneficial to the extent greater than the Standard Deduction).  However, there are (again) some differences:

Difference:  The House tax bill reduces the eligible mortgage interest (itemized) deduction to interest paid on balances up to $500,000 (for new mortgages), while the existing mortgage interest (itemized) deduction limit remains unchanged in the Senate tax bill.   

Difference:  The (itemized) deduction for medical expenses is retained in the Senate tax bill but eliminated entirely in the House tax bill.

Replacing Exemptions with an increased Child Tax Credit – Both tax bills suggest replacing personal exemptions with lower tax brackets (to simplify) and an increased Child Tax Credit. 

Difference:  The Senate tax bill phases the child tax credit out at $230,000 of income while the House tax bill does so at $500,000 of income.

Difference:  The child tax credit itself differs too ($1,600 tax credit per child in the House tax bill and $2,000 tax credit per child in the Senate tax bill).

Estate Tax Exemption and Gift Tax Exclusion – We appear to be headed for an increase to the Estate Tax Exemption (amount you can transfer free of Estate Tax) and no change to the Gift Tax Exclusion (amount you can gift per individual, per year, without any Gift Tax filing implications).

Difference:  Both tax bills roughly double the Estate Tax Exemption (to $11,000,000), but the House tax bill goes one step further by eliminating the Estate Tax entirely in 2024.

The impact of 2018 Tax Reform will vary by taxpayer.  Taxpayers who don’t typically take the itemized deduction (or barely do), stand to benefit quite a bit.  The fate of taxpayers who typically take advantage of numerous itemized deductions (especially California taxpayers, with elimination of the deduction for state income taxes paid in both tax bills), will have to wait for the final merged tax bill.  Either way, if/when the rules change, we will look to interpret, adjust and clarify opportunities the same way we always do. 

Dustin J. Smith, CFP®

The above explanation is summarized and generic.  Please consult your tax professional with any specific questions and take a look at this summary from for a more comprehensive look at Tax Reform.  Feel free to play around with this calculator too.  

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