Good morning everyone,
As I sit down to write this, it is 2:15 AM on Saturday, and just 15 minutes ago the Senate voted 51-49 to pass their version of the GOP Tax Bill, also known as HR.1 or the Tax Cuts and Jobs Act. The process itself, if any of you had the patience to watch live on C-SPAN at any point in the last few weeks, but particularly all day yesterday, was fascinating, and quite laughable. Changes were being made right up until the very last second prior to the vote, and no Senators could have possibly read or fully understood exactly what was in the bill itself. Several complaints of illegible, handwritten notes on the nearly 500 pages of the bill, were posted on the internet and social media outlets, touting that only the lobbyists really know what goodies and earmarks were inserted in the hours leading up to the vote. So I myself certainly haven’t had a chance to read it, as a final version doesn’t exist anywhere yet. We’ll all find out in the upcoming days what is included in the final amended version.
So what happens next? The bill makes its way back to the House of Representatives, to go through a process called “reconciliation”. There, the differences between the Senate version of the tax reform bill, and the House version of the tax reform bill, will be settled and agreed upon, and a final bill representing a combination of the 2 versions will then be forwarded to the president for approval, presumably before Christmas. With reconciliation still left to be done, the ultimate tax code changes still aren’t exactly known, but we can start to dig through the details at least, looking for the key items that were passed. I personally have been very anxious to be able to dig into this to see exactly how it will impact my clients, and now that tax reform looks like it will become reality, I have quite a bit of work to do!
Things will still move around a bit, but here is a summary of what we might start to expect at this point:
Here is a summary of the key points:
- Standard deduction of $12,000 for Individuals and $24,000 for Married Taxpayers. This is nearly double the current deduction, making Schedule A itemized deductions less valuable. The winner here would be people who don’t already currently itemize. Home ownership becomes a bit less attractive with this change.
- They didn’t simplify the overall number of tax brackets, it looks like there will still be 7 brackets. But overall the brackets are lower and should provide a certain level of income tax reduction for nearly everyone, though the loss of offsetting deductions will cause some people to actually pay more tax right away under the bill.
- Enhanced Child Tax Credit, doubling it from $1,000 to $2,000. The credit is said to now be available for annual incomes up to $500,000, whereas under current law the credit phases out at incomes much lower than that, around $110,000. I am not sure if the $500K limit made it into the final bill, but that is what they were pressing for up to the last day. Still unknown is whether the full credit is “refundable”, meaning if your income tax is $0, would the full credit be refunded to the taxpayer anyway, as the current rule works.
- The Alternative Minimum Tax (AMT) has not been eliminated! The biggest key to simplifying the tax code was the plan to repeal AMT, and that has not happened. Instead, they will raise the AMT exemption, such that it won’t apply to as many taxpayers as it currently does. Ultimately it looks like AMT should go back to applying to the “1%-ers” and shouldn’t impact the middle class like it has in recent years.
- For those who will still itemize deductions, it looks like the mortgage interest deduction was left alone, and should still apply for mortage principal amounts up to $1 million. The hotly debated State and Local Tax (SALT) deduction was not completely repealed, at the last minute they put back a $10,000 cap on state and local property taxes, in order to sway one GOP member’s vote for the bill. Another last-minute move was to put the medical expense deduction back to the pre-Affordable Care Act level, for those with medical costs exceeding 7.5% of their income (I believe this made it to the final approved version of the bill, but we’ll have to double-check that when it is released). High tax states like CT, NY, NJ, and CA definitely lose overall here.
- There was not a full repeal of estate tax (“death tax”) and the generation-skipping tax. Though several new exemptions were put into place such that the estate tax should only come into play for the mega-rich.
- The tax treatment of pass-thru entities is still the biggest wild card in the bill. Photos of one incredibly crucial page of the bill have been circulating the internet tonight, showing handwritten changes to the proposal that nobody seems to be able to read, so I don’t think anyone knows exactly what has been passed at the time I write this, so we wait with baited breath to see the final version of the bill. The assumption is that they passed something to the effect of a 23% deduction from taxable income, of a taxpayer’s income derived from pass-thru entities. (That is in lieu of a capped tax rate). I believe there will be heavy reconciliation with the House version of the bill on this. Limitations on the deduction exist for those in professional service businesses such as accountants, attorneys, and consultants. (This actually comprises the majority of my business clients, so I am anxious to get the real scoop on what has been passed, and what the various limitations will be, so that I can start making tax planning recommendations heading into 2018. I have some ideas on this, but will need to understand the new rules first).
- C Corporation tax rates would be reduced from a maximum rate of 35%, to a maximum rate of 20%. This would be a permanent tax cut, while the majority of the tax reductions noted above for individuals are set to expire in 2025. This was a major sticking point on the Senate floor, and was hotly debated. Repatriation of profits and cash held overseas would be subject to a lower tax for the major corporations, a move that is key to enable them to bring the money back into the US for investments domestically.
- 100% expensing of business asset purchases. I don’t at this point if this will be a permanent move, or will expire at some point. I also heard someone in the room mention full expensing of real estate investments made by businesses, which would be interesting. I am not sure if that person misspoke, or if that would really be allowed in the new rules, so I’ll be on the lookout for clarity on that particular point.
- At the very last second prior to the vote on the bill, an expansion of 529 Plans was added (proposed by Ted Cruz, it went to a 50-50 vote, and Mike Pence voted for it as the tie-breaker). The move would allow taxpayers to utilize funds in their 529 savings accounts, up to $10,000 per year, to be used for private school tuition at the elementary and high school level. Up until now, those funds could only be used towards college-level expenses. Many see this move as a major harm to our public education system, as it could create major differences in the level of education that is available to the rich and poor.
- A few oddities discovered in the bill so far, include a the removal of prior protections from oil and gas companies to drill in Alaska’s national arctic refuge area. Also, one tiny college in Michigan, Hillsdale College, received tax-exempt status, based on some sort of large endowment fund status. Betsy DeVos, the Secretary of the US Department of Education, along with her brother, are both alumni of this school of just 1400 students. (What an amazing coincidence!)
Overall, the bill adds $1.5 trillion to the national deficit. So if it does not result in the level of economic boom, job creation, and wage increases over the long term, it will ultimately be viewed as a major failure. I’ll continue to keep an eagle eye on the reform, and as things become clearer, I will post additional updates.
Be well!
Robert Gambardella, CPA
www.ConciergeTax.com
