As you know, significant “tax reform” legislation is currently being worked on in the House and Senate. They have each passed their own versions and now they need to be reconciled and combine into one bill. The chart below compares the two versions as of December 4, 2017. Note that most of the provisions in the Senate bill expire on January 1, 2026, while most of the House bill provisions are permanent.
|PROVISION||HOUSE BILL||SENATE BILL|
|Individual tax rates||4 brackets from 12% to 39.6%||7 brackets from 10% to 38.5%|
|Obamacare individual mandate||No change||Repeal penalty for not purchasing health insurance|
|Individual Alternative Minimum Tax (AMT)||Repealed||Increases exemption amounts.|
|Standard deduction||$12,000 for single filers, $14,000 for joint filers||$12,000 for single filers, $14,000 for joint filers|
|Mortgage interest deduction||On future home purchases, deduction limited to interest on up to $500,000 mortgage debt, no home equity debt deduction and no 2nd home interest allowed.||No change for acquisition debt, but no deduction for home equity indebtedness, (the interest on up to $100,000 of home equity loan which is currently allowed)|
|Medical expense deduction||Repealed||Reduces deduction floor from 10% to 7.5% for years beginning after 12/31/16 and ending before 1/1/19. Reverts to 10% after that|
|Itemized deduction for state & local taxes||Only property taxes deductible, up to $10,000 per year||Only property taxes deductible, limited to $5,000 for single filers and $10,000 for joint filers|
|Deduction for cost of tax preparation||Repealed||Suspended|
|Deduction for miscellaneous itemized deductions||No change||Suspended|
|Child tax credit||Increases credit to $1,600 and increases the income level of the phase-out to $115,000 for single filers and $230,000 for joint filers||Increases credit to $2,000 per child, increases age limit by one year to 17, and increases the income level of the credit phase-out to $500,000|
|Corporate tax rate||20% rate, effective for years beginning after 12/31/17||20% rate, effective for years beginning after 12/31/18|
|Corporate Alternative Minimum Tax (AMT)||Repealed||AMT remains, with 20% rate|
|Sec. 179 asset expensing||Expense cap increased to $5M, phased out above $20M||Expense cap increased to $1M, phased out above $2.5M|
|Tax on pass-through income||Maximum 25% rate on “business income” of individuals. This provision will include some complex rules to prevent wages from being characterized as business income||For non-corporate taxpayer with income from a partnership, S-corporation or sole proprietorship, a deduction of 23% of pass-through income would be allowed. Many higher income (taxable income over $500,000 for joint or $250,000 for other filers) owners of service businesses would be excluded from taking this deduction.|
|Limitation on business losses for non-corporate taxpayers||no change||Business losses over $250,000 for single or $500,000 for married taxpayers would be suspended and carried forward|
|Gain on sale of principal residence||no change||Taxpayer must own & use home as a principal residence for 5 out of previous 8 years in order to exclude the maximum $500,000 of gain on the sale. The exclusion can only be used every 5 years.|
It is difficult to say who will be a “winner” and who will be a “loser” under these tax bills without an individual analysis, but it is clear that taxpayers in states with high income taxes and high property costs, such as California will likely end up paying more federal tax. Taxpayers who don’t itemize, or have lower itemized deductions will probably come out ahead, given the higher standard deductions. We will just have to wait and see how our lawmakers reconcile these two bills, but at this point it appears that the deduction for state income taxes will be gone, and mortgage interest will be impacted.
As always O & S is ready to answer your questions and help you plan a tax strategy. Please contact us for more information.
By Laurie Hamblin, CPA
Senior Tax Manager