Tax Reform is upon us and we at LSL are here to help. Classic tax planning typically involves acceleration of tax deductions and deferral of income. However, with tax reform on the loom, tax planning will look different than before as there are many deductions that will be limited or even eliminated altogether.
There are numerous changes to the tax code that will affect everyone, but we wanted to highlight some key changes that will help you plan out the rest of 2017 to take advantage of tax breaks while they are still here.
This brief article serves to focus on the differences between the House and Senate Bills.
Please note that this article is based on legislation as of the date of this article, and is expected to change in the coming weeks with the reconciliation process between the House and Senate bills. We will keep you up to date with the changes that are coming.
Individuals
Homeowners Exemption – the current law allows sellers to generally exclude $250,000 (single) or $500,000 for those filing jointly from capital gains when selling a home as long as they have lived in it for two out of the past five years. Both the House and Senate want to increase the live-in period to five out of last eight years.
Standard Deduction – The House and Senate roughly double the standard deduction, but both plans eliminate or reduce key itemized deductions. The proposed rates are as follows:
| Single | Head of Household | Married Filing Joint | |
|
House |
$12,200 | $18,300 | $24,400 |
|
Senate |
$12,000 | $18,000 | $24,000 |
Personal Exemptions – Currently, the exemption eliminates $4,050 from income for each person claimed on the tax return. Both plans eliminate personal exemptions. This would mean that families with more children would potentially pay higher taxes despite the increased standard deduction.
Estate Tax – Currently, the estate lifetime exemption is $5.6 million per individual for 2018. The house and senate roughly double the lifetime exemption to $11.2 million. The House bill would repeal the estate tax completely in 2024, while the Senate would keep the estate tax in place.
Medical Expenses – The House would eliminate medical expenses as part of your itemized deductions. Medical expenses include insurance, payments to doctors/dentists, and payments to nursing homes. The Senate bill will keep the medical expense deduction and expand it by lowering the deduction floor.
Mortgage Interest Deduction – The House and Senate bill preserves the mortgage interest deduction. However, the House bill caps the interest deduction for mortgages up to $500,000 of principal on new debt acquired after November 2, 2017. Prior debt would be “grandfathered” in and still receive a deduction for up to $1 million of mortgage debt. The Senate bill leaves the popular mortgage interest deduction set at $1 million of mortgage debt, but the $100,000 home equity interest deduction would be eliminated.
State and Local and Property Taxes –Both the House and Senate plan to eliminate state and local taxes as an itemized deduction. They both would preserve real property tax deductions, but cap the deduction at $10,000.
Child Tax Credit – The child tax credit is currently at set at $1,000. The House increases the credit to $1,600. The Senate bill increases it to $2,000.
Alternative Minimum Tax – Alternative minimum tax would be eliminated by the House and retained by the Senate with an increase in the amount of income exempt from the tax.
Miscellaneous Expenses subject to 2% of Adjusted Gross Income – These bucket of expenses include tax preparation fees and also unreimbursed employee business expenses such as continuing education, union dues, and travel costs. The House and Senate bills eliminate these deductions.
Charitable Donations – The House and Senate make slight modifications to charitable donations, but for the most part they will stay the same as they were in 2017.
Businesses
“C”Corporate Tax Rate – Both plans lower the maximum corporate tax rate from 35% to 20%. The House plans to have the rate change in 2018. The Senate delays the change until 2019.
Pass-Through Businesses – The House has a top rate limited to 35% for active owners, and 25% for passive owners. Active owners of qualified businesses are taxed at 25% on 30% of their income. The Senate creates a 23% deduction for business income capped at 50% of wages paid by the business. Both bills would exclude income from service businesses (law, accounting, etc.). The Senate bill allows small service businesses the deduction and does not apply the wage limit to small businesses.
Bonus Depreciation – The House bill states that bonus depreciation increases the current 50% rate to 100% starting September 27th 2017 through 2022. The House bill also makes bonus depreciation available to both new and used property. The Senate bill is similar except that 100% bonus depreciation appears to only be applicable to new property.
Section 179 expensing election– The house increases the limit to $5 million and phase-out to $20 million for five years. The Senate increases the limit to $1 million and phase-out to $2.5 million permanently.
Domestic Production Activity Deduction – The House eliminates the DPAD deduction. The Senate eliminates the deduction starting in 2019.
Business Interest Deduction – The House and Senate limit the interest deduction to 30% of business income before interest, taxes, depreciation and amortization plus interest income.
Entertainment Expenses – The House and Senate both will eliminate “entertainment” expenses. Costs incurred to “entertain” clients for business purposes such as season tickets to your favorite sports team was 50% deductible. With the new tax reform, entertainment expenses will no longer be deductible. Meals will continue to be deductible at 50%.
Concluding Thoughts
Our aim is to provide you peace of mind as it relates to you and your businesses. Because everyone’s tax situation is unique, we encourage you to reach out so we can help you understand how this new tax legislation could potentially affect you. If you believe you will be affected by this tax law, please call us and schedule an appointment today!
Tax Reform and How It May Affect You PDF
