*This has been updated with the final tax bill here.
The Senate and the House of Representatives have passed separate versions of the Tax Cuts and Jobs Act lauded by President Trump. This leaves us with two tax reform bills that need to be reconciled before being sent to the president for final approval. Most sources expect that most provisions of the Senate version will prevail over the House version during the reconciliation process.
Here are notable differences between the two bills that may interest you:
Standard Deduction & Personal Exemption – The current standard deduction amounts for 2018 are $6,500 for individuals, $9,550 for heads of household, and $13,000 for married couples filing jointly. The Senate and House bills are similar; the new standard deduction amounts increase approximately to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly. The $4,050 personal exemption for individuals, their spouse, and each of their dependents is eliminated.
Medical Deductions – The Senate version retains qualified medical expenses as itemized deductions (10% AGI limitation) on your personal tax return and restores the 7.5% AGI limitation for individuals over age 65. The House version eliminates the medical expense deduction.
Home Mortgage Interest – This is a concern for many homeowners. The Senate version effectively maintains the deduction as it stands, which is up to $1 million of acquisition debt on first and second homes. The House version limits the deduction of mortgage interest to $500,000 on new mortgages and only on the taxpayers’ primary home. Under both plans, interest deductions on home equity loans would be eliminated.
Taxes – Both the Senate and House version would allow a maximum of up to $10,000 of real estate taxes paid as a tax deduction on Schedule A, Itemized Deductions. Under both plans, the deduction for state and local income taxes would be eliminated, affecting taxpayers in high tax states, such as New York, California, and Illinois.
Tax Rates – The Senate version retains seven tax brackets, while reducing the top tax rates to 38.5% from 39.6%. The House version has four tax brackets, 12%, 25%, 35% and 39.6%, retaining the top tax rate.
Repeal ACA Individual Mandate – The Senate version repeals the requirement requiring individuals to have health insurance or pay a penalty under the Affordable Care Act. The House version has no such repeal, and repeal lacks support by members. This difference may be the most difficult to reconcile.
Other Deductions – Under both versions, most itemized deductions for individuals would be eliminated. This includes deductions for unreimbursed employee business expenses, home office expense deduction, and other 2% itemized deductions. The charitable contribution deduction would not change. Deductions where you don’t have to itemize your deductions, also known as “above-the-line” deductions, would be mostly eliminated, including deductions for student loan interest and moving expenses.
Child Tax Credit – The credit is $1,000 per qualifying child under age 17. Under both Senate and House bills, the child tax credit increases to $1,600 and $2,000 respectively, subject to income limits.
Exclusion of Gains from Selling Your Home – Currently, for married couples, you can exclude $500,000 in capital gains from the sale of your home if you lived in the home for at least two of the last five years. The new proposal under both bills would require living in the home for five of the last eight years in order to qualify for the capital gain exclusion. The bills would also limit the use of the capital gain exclusion to once every five years.
What to Expect Next?
There are many more proposed changes, including changes to corporations, pass-through entities, alternative minimum tax, and the federal estate tax. Tax reform and major changes to the tax code are a certainty and will affect all individuals and businesses. Most changes will likely take effect from 2018, but some may affect 2017. Your final tax bill may not change much, but how you determine your taxes due will change significantly. Some representatives touted the bill as a simplification, and House Speaker Paul Ryan said you could even file your tax return on a postcard. This is unlikely.
In my experience, changes to the tax code make things more complicated. This new tax bill does not differ from ones in the past. The new regulations must be studied, understood, and implemented, and that takes time. The impact on your taxes will be determined by how the changes impact your specific situation. It’s best to ensure you are working with a licensed tax professional to ensure the best possible result.
My name is Noel B. Lorenzana, and I would be delighted to work with you on your taxes. I’m a Registered Certified Public Accountant with over 23 years of experience, dedicated to providing outstanding tax and accounting services to individuals and small businesses. My offices are virtual, so I can help you wherever you are located. Contact me for a free consultation.
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
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