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| 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 www.thebalance.com for a more comprehensive look at Tax Reform. Feel free to play around with this calculator too.
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