House and Senate Reach Final Agreement on the Tax Cuts and Jobs Act – Individual, Estate, Gift and Trust
On Friday December 15, 2017 the Conference Committee released their report detailing the specifics of the Tax Cuts and Jobs Act Bill expect to pass both chambers of Congress and signed by President Trump before the end of the week. The Committee Report comes after several weeks of negotiations; with changes being made as late as the evening before it was issued. Last minute negotiations were required to raise revenue and convince holdouts to back the legislation. The legislation includes sweeping modifications and is the biggest rewrite to the Internal Revenue Code since the 1986 Act.
The legislation is expected to pass both houses and be signed into law by the President. The question that all of you are asking is: How will this impact me? Following is an overview of the Individual, Estate and Trust provisions.
Income Tax Rates
The House proposed four tax brackets, and the Senate proposed staying with the same number of brackets as under prior law, seven. In the end, the Conference agreement resulted in staying with seven brackets, however, the new brackets are broader with the highest bracket capping out at 37%. What this means is that a married couple filing jointly will need to exceed $600,000 of taxable income ($500,000 single) before they reach the highest bracket. Under current law, the highest bracket was reached by a married couple filing jointly at approximately $467,000 ($415,000 single).
The beneficial lower capital gain tax rates applicable to long-term capital gains and qualified dividends will remain in effect under the Conference agreement. The rates will continue to be 0%. 15% and 20% and will apply at income levels similar to that under the current law. The Conference agreement sets the maximum income of a married couple filling jointly brackets as follows:
- – 0% up to $77,200 (single $38,600)
- – 15% up to $479,000 (single $425,800)
- – 20% in excess of $479,000 (single in excess of $425,800)
Historically, tax rates applicable to income earned by trusts has generally mirrored the individual brackets, although applied at much lower thresholds. Under the Conference agreement, this has changed with the new scheme reflecting only four brackets capping out at 37% and reaching the highest marginal rate at taxable income of $12,500. Similarly, the 20% capital gain is reached at taxable income of just $2,600. As a result, there will need to be continued diligence in determining when income is taxed at a trust versus flowing through to its beneficiaries to manage the overall tax burden. The rate adjustments related to ordinary income are effective for tax years beginning after December 31, 2017 and before January 1, 2026.
Alternative Minimum Tax (AMT)
The AMT came into existence as a result of the 1986 Tax Act and has been an issue on Congress’ agenda to deal with ever since. The provisions in the Conference agreement temporarily increase the exemption amounts and the exemption amount phase-out thresholds for the individual AMT.
For taxable years 2018 through 2025, the AMT exemption amount is increased to $109,400 for married couples filing jointly, and $70,300 for all other taxpayers (other than estates and trusts). The phase-out thresholds are increased to $1,000,000 for married couples filing jointly, and $500,000 for all other taxpayers (other than estates and trusts). Unlike current law, these amounts are indexed for inflation.
Above the Line Deductions
Alimony, under current law, is an above the line deduction for the payor, and includable in the recipients income. Under the Conference agreement, the payor no longer gets a deduction and the recipient no long includes the payment in income. This is applicable to agreements entered into after December 31, 2018. The Conference agreement also applies to earlier agreements if they are amended after December 31, 2018 and expressly state that this change applies to them. The deduction applicable to eligible educators is maintained at its current level without modification.
Under current law, there are provisions allowing for employers to reimburse employees for qualified moving expenses on a tax-free basis by excluding them from gross income. There are also provisions allowing employees to take an above the line deduction for qualified moving expenses to the extent that they are not paid for by their employer, and meet certain distance and employment requirements. Under the Conference agreement, both of these provisions are generally suspended for the years 2018 through 2025. The one exception to this suspension applies to members of the U.S. Armed Forces.
Personal Exemptions and Itemized Deductions
The deduction scheme that has been familiar to most individual taxpayers going back to the 1950s has changed under the Conference agreement. With a goal of overall simplification, the Conference agreement suspends the personal exemption and temporarily curtails many of the itemized deductions individuals are accustomed to, and replaces them with a significantly higher standard deduction. Some taxpayers will see this as a benefit, and others will see a reduction in their overall deduction amounts.
|Current Law||Conference Agreement|
|Personal Exemptions||Suspended from 1/1/2018 through 12/31/2025|
|Standard Deduction||MFJ $13,000
|Itemized Deduction Phase Out||Itemized deductions of high income taxpayers are subject to a phase out of Adjusted Gross Income (AGI) in excess of certain thresholds||Suspended from 1/1/2018 through 12/31/2025|
|Medical Expense Deduction||Limited to the amount in excess of 10% of AGI, 7.5% of AGI for individual taxpayers over age 65||For the 2017 and 2018 tax year, the limitation is set at 7.5% of AGI for all taxpayers. Additionally, the deduction will not be an adjustment for Alternative minimum tax purposes during the same period.|
|Home Mortgage Interest||Interest expense may be deducted on up to $1.0 million of Acquisition Indebtedness and $100,000 of Home Equity Indebtedness for a total of interest on up to $1,100,000 of debt||From 1/1/2018 through 12/31/2025 no more than $750,000 of debt may be treated as Acquisition Indebtedness. During this same period the deduction for interest on a Home Equity Indebtedness is suspended.|
|State and Local Taxes||State and local income taxes, sales taxes, real estate taxes, and certain personal property taxes are deductible||From 1/1/2018 through 12/31/2025 state and local income taxes, real estate taxes and personal property taxes are deductible up to $10,000. Real estate taxes and personal property taxes associated with a trade or business or rental property are deductible without limit.
It is anticipated that many taxpayers will attempt to get around the income tax limitation by prepaying their 2018 state tax liability in 2017. However, the Conference agreement states that taxes paid in 2017 attributable to a 2018 liability will not be deductible in 2017.
|Personal Casualty and Theft Losses||Deductible to the extent not reimbursed by insurance and to the extent they are in excess of certain thresholds and 10% of AGI||From 1/1/2018 through 12/31/2025 only deductible if attributable to a disaster declared by the President under the Disaster Relief and Emergency Assistance Act|
|Charitable Contributions||There are a myriad of provisions related to charitable contributions most of which will remain unchanged||There are several provisions that will change or be modified as follows:
1. Cash contributions to a public charity are limited to 60% of AGI up from the previous limit of 50% of AGI, effective after 12/31/2017
2. Payments to colleges that result in athletic event seating rights no longer qualify as a charitable contribution. effective after 12/31/2017
|Miscellaneous Itemized Deductions Subject to 2% Floor||Includes deduction for: investment advisory fees, tax preparation fees, unreimbursed employee business expenses, safe deposit box fees, etc. to the extent the total exceeds 2% of AGI||Suspended through 12/31/2025|
Child Tax Credits
The Conference agreement increases both the amount of the child tax credit as well as the amount refundable. The Conference agreement provides that for tax years 2018 through 2025 the child tax credit has been temporarily increased to $2,000. Of this, up to $1,400 may be refundable for a qualifying child. To qualify the taxpayer must provide a social security number. Without the Social Security number the taxpayer may qualify for only a $500 non-refundable credit. The Conference agreement also significantly increases the AGI phase out threshold to $400,000 for a married couple filing jointly ($200,000 for all other taxpayers).
Affordable Care Act
Under current law, there are provisions that require taxpayers without insurance to pay a penalty also known as the Individual Shared Responsibility payment. Under the Conference agreement, the language addressing this payment is not removed, but rather the payment amount is reduced to zero beginning in 2019. It is notable that this provision takes effect a year later than most other individual provisions, and does not expire.
Education Savings Programs
Under current law, beneficiaries of IRC Section 529 plans are not subject to tax on the earnings of a plan as long as they use the proceeds withdrawn to pay qualified higher education expenses. Under the Conference agreement, this has been expanded to allow up to $10,000 per student per year to be withdrawn and used for elementary and secondary schools as well as home schools. The new $10,000 limitation does not apply to withdrawals for post-secondary education.
Estate, Gift and Generations Skipping Taxes
Under current law, there is a unified lifetime exemption amount per person of $5.49 million, and applies to transfers made by gift, transfers at death as well as transfers to skip beneficiaries (i.e., generation skip transfers). This unified exemption amount started at $5.0 million and has been increasing due to a provision that indexes the exemption for inflation. Under the Conference agreement, the law would change the base exemption amount to $10 million per person for the years 2018 through 2025. No changes are proposed to the current tax rates, and the overall estate tax is not repealed.
This is a review of many of the key Individual, estate, trust and gift provisions as outlined in the Conference agreement. If you have questions about specific provisions and how they may impact you, please contact us.