The Tax Cuts and Jobs Act (H.R. 1) was introduced in the House of Representatives last week. This is the first major tax law overhaul since the 1986 Tax Act, which took approximately four years of bipartisan Congressional activity to achieve. The president and Congress have stated the goal of having this massive legislation passed in the next few weeks. Even while the precise provisions of the bill remain in flux, and the Senate has not yet introduced its tax cut bill, the potential danger to our social safety net is clear.
The tax cuts in the bill set up a two-step process required by law: 1) cut taxes according to the allowance of the Budget Resolution recently passed, adding no more than $1.5 trillion to the federal debt over the next decade; and 2) use the higher debt — created by the tax cuts — to argue next year that large cuts to programs such as Medicare, Medicaid, and Social Security are necessary. Therefore, this tax cut could create additional future pressure to make Medicare and Medicaid beneficiaries pay for newly created debt.
Here are some highlights of the tax cut bill for individuals and families:
Tax brackets. The bill would collapse seven tax brackets into four: 12 percent, 25 percent, 35 percent and 39.6 percent.
- The existing top rate of 39.6 percent would remain unchanged but the income threshold would be kicked up to $1 million for joint filers — more than double the threshold for 2018. For individual filers, the threshold would rise to $500,000 from $426,700 in 2018.
- The existing 35 percent bracket, which for 2018 will start at about $425,000 for married couples, would now kick in at $260,000; for individuals, the 35 percent bracket would start at $200,000 for individuals, also down from nearly $425,000.
- The 25 percent bracket would start at $90,000 (couples) and $45,000 (individuals), up from $77,400 and $38,700 respectively.
- The 12 percent bracket would apply above the new standard deduction thresholds, which would rise from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for joint filers.
- Bracket thresholds would be indexed for inflation annually, but at a slower rate.
Consolidated family credit. The measure would create a new Family Credit, including an expanded Child Tax Credit — the benefit increases from $1,000 per child to $1,600 — and a new $300 nonrefundable credit per parent and non-child dependent, which expires in 2023. The combined credit amounts would phase out at household incomes up to $230,000, up from $110,000, and $115,000 for single filers, up from $75,000.
Personal exemptions – currently $4,050 per taxpayer and dependent – would be repealed.
Education tax credits would be consolidated into a unified American Opportunity Tax Credit; deductions for student loan interest, tuition and related expenses and other education deductions would be repealed.
Mortgage interest deduction for newly purchased homes after Nov. 2 would be available on up to $500,000 in mortgage debt, down from $1 million in current law. Deduction for interest paid on home equity debt of up to $100,000 would also be repealed for new debt incurred. Refinancing debt incurred after Nov. 2 also would be limited to $500,000 and deductions for second homes would be disallowed.
“SALT” deductions. State and local income and sales tax deductions would be eliminated, and property tax deductions capped at $10,000 per year.
Capital gains tax on home sales. Capital gains tax exclusion on sale of primary residence, which exempts up to $500,000 in profits for married couples ($250,000 for individuals), would be eligible for use once every five years, up from every two years in current law. It phases out by one dollar for each dollar of adjusted gross income above $500,000 for married couples ($250,000 for individuals). A homeowner must have lived in the residence for five out of the previous eight years to benefit, up from two out of the last five years in current law.
Charitable deductions would be reserved, but with changes including repeal of special rule allowing 80 percent of the value of donated tickets for athletic events.
Eliminates miscellaneous deductions, including for gambling losses, alimony payments, medical expenses, tax preparation fees, and moving expenses.
Retirement savings. Existing retirement savings incentives, such as pre-tax 401(k) contribution limits, would be maintained. The ability to re-characterize Roth IRA conversions to avoid the tax hit would be repealed.
Alternative Minimum Tax would be repealed.
Estate tax would be eliminated after six years, but the existing $5.6 million exemption (adjusted annually for inflation) per spouse is doubled immediately with the current 40 percent rate of tax unchanged through 2022. Gift tax parameters would not change but tax rate would be reduced to 35 percent.
Treatment of capital gains/dividends. No change is proposed to preferential treatment of long-term capital gains and qualified dividends, currently subject to a top rate of 23.8 percent for households earning more than $250,000 and individuals making more than $200,000.
We will continue to follow the efforts at tax reform and inform our readers of the likely effects on families, older adults and persons with disabilities. For more questions and concerns on Tax Reform Contact Us today!