Highlights of the GOP tax bill that's about to become law
Saturday, December 16, 2017
There's a tax bill, but there is no tax reform. There's still an estate tax. There are still (some) state and local itemized tax deductions. There's still an alternative minimum tax. And there are enough other tweaks to confuse filers and keep tax pros very busy over the next 12 (and more) months.
Basically, the Republican tax bill lowered individual tax rates, especially for wealthier taxpayers, and made a major cut in the corporate tax rate.
So H.R. 1, the Tax Cuts and Jobs Act is, as the name says, a tax cut, not tax reform, bill. Maybe they should have given more consideration to Donald Trump's proposed "Cut Cut Cut Act" moniker.
Still, whatever you call it, the conference committee came up with plenty of modifications, but not the promised postcard filing simplification, to the Internal Revenue Code.
The good thing is that for the most part, the changes apply to the 2018 tax year. That means the Form 1040s we file next year will still mostly follow the current tax laws.
And we have a whole year to figure out just how the tax changes will help or hurt us.
That long-range timetable is good, too, since there's a lot to absorb. The conference report's cost analysis and legislative and explanatory language covers almost 1,100 pages; 1,097 to be precise, which earn this week's By the Numbers honors. At least there aren't any quasi-legible handwritten margin notes in this version.
To get started on the H.R. 1 analysis, here are the conference bill's key changes. (Update: Read about more proposed tax law changes in my Sunday, Dec. 17 follow-up post.)
Seven individual tax rates: Yep, we will still have seven tax rates in 2018. But the top individual rate starting next year will be lower, maxing out at 37 percent.
That's lower than both the House's proposed (and current) top rate of 39.6 percent and the Senate's suggested top rate of 38.5 percent.
That top rate will kick in at incomes of $500,000 for single and head-of-household filers; $600,000 for married filing jointly taxpayers; and $300,000 for married filing separately filers.
As for the majority of us in all filing statuses who won't have to worry about paying the 37 percent rate, there are six other progressive tax rates: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent and 35 percent.
The table below details H.R. 1's proposed tax rates and income brackets.
2018 tax rates and income brackets
Proposed under H.R. 1, Tax Cuts and Jobs Act, Conference Agreement
|Tax Rate||Single||Head of Household||Married Filing Jointly
or Surviving Spouse
|Married Filing Separately|
|10%||Up to $9,525||Up to $13,600||Up to $19,050||Up to $9,525|
|12%||$9,526 to $38,700||$13,601 to $51,800|| $19,051 to
|$9,526 to $38,700|
|22%||$38,701 to $82,500||$51,801 to $82,500||$77,401 to $165,000||$38,701 to $82,500|
|24%||$82,501 to $157,500||$82,501 to $157,500||$165,001 to $315,000||$82,501 to $157,500|
|32%||$157,501 to $200,000||$157,501 to $200,000||$315,001 to $400,000||$157,501 to $200,000|
|35%||$200,001 to $500,000||$200,001 to $500,000||$400,001 to $600,000||$200,001 to $300,000|
You can check out the first post of my 2018 tax-related inflation series to see these amounts compare to 2017's existing rates and also to the rates/brackets that the Internal Revenue Service thought a few months ago would be in effect next year.
If you're totally tax geeky, you also can see how the H.R. 1 tax rates/income brackets match up against recent tax history in my special page of tax tables from 2010 through, so far, 2018.
Bye-bye personal exemptions: For 2017 tax returns, a taxpayer can claim a personal exemption of $4,050 for him/herself, his/her spouse and qualifying dependents. This will be the last time for such claims, at least for a while.
Personal exemptions are gone beginning in 2018.
However, lawmakers say the loss of this amount will be ameliorated by increased standard deductions (more on these in a minute) and a bigger child tax credit.
The child tax credit will be $2,000 per child, with $1,400 of that refundable, meaning it could produce a tax refund even if the filers owes no taxes. This credit will begin to phase out for single filers making $200,000 or $400,000 if married and filing a joint tax return.
There's also a $500 credit for each dependent who's not a qualifying child, like an elderly parent you support.
Bigger standard deductions: As touted often and loudly, the standard deduction amounts will nearly double starting next year.
For 2017 returns, the standard deduction amounts are $6,350 for single filers; $9,350 for heads of households; and $12,700 for married filing jointly couples.
In 2018, those amounts will go to $12,000 for single filers; $18,000 for heads of households; and $24,000 next year for married couples filing jointly.
The new deduction amounts will be indexed for inflation, just as is currently done.
SALT deductions retained, to a degree: Despite the larger standard deductions, some filers still might find it more tax worthwhile to itemize. But just what and how much they can itemize on Schedule A proved to be one of the more difficult areas.
In particular, the fight about SALT — that's the acronym for state and local taxes — got quite spicy. This tax break was part of the 1913 income tax law, which was the origin of the tax code we now know.
The concern, both political and financial, was/is that losing the ability to deduct state and local taxes will hurt taxpayers in states that have high personal income and property taxes. So the conferees compromised, keeping the tax break but limiting it.
The new law allows for the continued, but reduced, deduction of local residential property taxes (i.e., those assessed on your home) and state and local income or, if it works better for your tax situation, sales taxes. This is sort of a victory, since both the House and Senate both wanted to kill the income or sales tax component.
But now the deduction for state and local income or sales taxes, along with residential real estate taxes, cannot be more than $10,000 for all filers, married or single. The only exception here is for married taxpayers filing separately, who are limited to claiming just $5,000 of these aggregated taxes.
2017 Tax Tip Alert! If you're thinking of paying any or all of these 2018 taxes in 2017 to make the most of them while you still can, be careful.
It's still OK to pay in December a property tax bill you got this year, but which is not officially due in many cases until early 2018.
However, that's not the case when it comes to early payment of income taxes,
such as getting an early start on 2018 tax year state estimated tax payments .
The conference bill specifically notes that "an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017."
Other Schedule A deductions: In addition to retaining modified SALT itemized deductions, two other Schedule A claims will remain, but in tweaked forms, one good, the other not so good.
- Mortgage interest deduction remains, but for new home loan for your primary residence or a second home there's a lower cap. You'll only be able to deduct the interest on debt up to $750,000 rather than the $1 million currently allowed. The change also preserves the loan write-off on a second home as long as the total of the two mortgages doesn't exceed the new lower limit.
If you already had a ginormous mortgage by Dec. 15, don't worry. Your huge loan and its big interest amount is grandfathered so this limit won't affect you.
But you're out of luck if you have a home equity loan or line of credit. The conference bill suspends the deduction for the interest on home equity loans or lines of credit that under current law are allowed up to $100,000.
- Medical expenses still be allowed and actually made easier to claim, at least for a while. Allowable medical costs in tax years 2017 — 2017 Tax Tip Alert! Yes, retroactively for the 2017 tax year returns we file next year. — 2018 can be deducted when they exceed 7.5 percent of the filer's adjusted gross income (AGI). The 10 percent of AGI threshold goes back to that level in 2019.
A cynic (hey, I see your finger pointing) might say this deduction threshold reduction was done so that some voting taxpayers would have a positive tax change in mind when they go to the polls for next year's midterm elections.
- Charitable donations remain deductible. This itemized deduction for gifts to charity also was improved for the very generous. Current law says you can't give more than 50 percent of your annual income to a 501(c)(3) public charity. H.R. 1 increased that limitation on the cash amounts given to nonprofits to 60 percent of the giver's income. This might help assuage some concerns of the philanthropy sector who are concerned about how much (hint: billions) the tax changes might cost charities.
The conference bill, however, did not include the House proposal that the 14 cents per mile deduction for charitable driving be indexed for inflation. Really, Senators? How much more would this have cost? Sheesh!
- Casualty losses also will still be able to be claimed, but only when they are due to losses from a major, presidentially declared disaster. Other casualty and theft losses will no longer be deductible.
Pass-through income taxes: How and how much to tax business income that's passed through a person's personal tax return was a big tax rewrite sticking point. Judging from some of the conversations I've had with tax pros, both online and personally, it still could be problematic.
In the most general terms, Congressional conferees basically followed the Senate proposal, as least as far as how to tax such business earnings that are reported on an individual taxpayer's personal tax return.
These entities would get a 20 percent deduction for pass-through income, less than the 23 percent deduction the Senate bill had proposed. The House had proposed a 25 percent tax rate on pass-through earnings.
UPDATE, Dec. 18: More details on the pass-through tax proposal here.
Estate state tax lives: The estate tax is the ultimate tax survivor. Although it was eliminated in 2010 as part of the battle over the taxes under George W. Bush, it was resurrected in 2011.
Republicans really, really, really wanted to kill it again, but the conferees nixed that idea.
The new tax law, however, would double the exemption amount to which the federal estate tax would apply. That would be $10 million, adjusted annually for inflation, instead of the current $5 million, which for 2017 was inflation adjusted to $5.49 million.
Alternative minimum tax: The Alternative Minimum Tax (AMT) is both killed and kept. The corporate AMT would be repealed. The individual AMT, however, would stay in the tax code. But the exemption amount would increase.
The new AMT exemption amount would be $109,400 for married taxpayers filing a joint return (half that where couples file separate returns) and $70,300 for all other individual taxpayers.
Obamacare mandate survives short-term: The Affordable Care Act individual health insurance mandate will go away in 2019, not next year as the Senate had proposed. That year, individuals won't be required to buy health insurance or pay a tax penalty if they don't.
Until then, don't try to skip this. The IRS has said it will keep enforcing all ACA rules as long as they're still on the books.
This year delay could mollify some in the GOP — OK, mainly Maine Sen. Susan Collins — who are concerned about the Congressional Budget Office's projection that eliminating the mandate will increase insurance premiums and lead to 13 million fewer Americans with insurance in a decade.
Postponing the end of the mandate theoretically gives Congress all of 2018 to figure out how to stabilize insurance markets or come up with a workable replacement for the health care law.
Corporate tax rate slashed: And, oh yeah, about corporate taxes, which were/are the biggest driver of this whole bill.
The corporate tax rate will be slashed to 21 percent, replacing the current 35 percent tax rate. That much of a reduction is why the House and Senate have gone through contortions to offer at least some individual tax cuts.
Here the conferees once again compromised, going up a percentage point on the corporate tax rate from the 20 percent originally proposed in H.R. 1 and championed by the prez.
But the new law would make the 21 percent business rate effective in 2018 rather than delaying it a year as the Senate had proposed.
Nothing lasts forever: The bill also makes the corporate tax rate cut permanent.
However, individual tax provisions for the most part will expire at the end of 2025.
Yes, it seems unfair, especially if the changes will help you and/or you believe that members of Congress are elected to represent their constituents' interests.
But the method by which the Senate has chosen to consider H.R. 1, known as reconciliation (so that it only needs a majority to pass) and specifically the Byrd rule, means that the upper chamber cannot approve tax measures that that increase the deficit over the coming decade.
So individual tax provisions were sacrificed to corporate (and political action committee) interests to meet that deficit requirement.
Republicans on Capitol Hill swear, though, that the economic growth from the corporate tax cut will boost the economy so much that we'll all benefit.
We'll see. Or not. Anyway, that's where we are now and through 2025 with individual taxes.
Lots more to come: Again, the tax matters above are highlights. I'll sort through the bill more closely this weekend — thanks, Congress, for taking a chunk of my holiday planning and shopping time! — and provide more info in the coming week on other areas.
That's the same timetable lawmakers are facing.
The House and Senate are scheduled to vote on the bill next week, with the House going first on Tuesday, Dec. 19. The goal is to get it through both legislative chambers and to the White House for signing so everyone can exit D.C. for their year-end and New Year celebrations.
To paraphrase Tiny Tim's famous holiday observation (major mea culpa, Charles Dickens), "God help us, every one!"
REMINDER: You can read even more about the huge GOP tax bill and its proposed changes in my Sunday, Dec. 17 follow-up post.)
Jacob, if you're self-employed those types of business expenses are still deductible on your Schedule C (if you're a sole proprietor). If you mean work-related costs as an employee for which you are NOT reimbursed, you can deduct those as itemized miscellaneous expenses on your 2017 return, but that option does not exist for 2018 taxes. It was eliminated from the Schedule A by the tax reform bill, the Tax Cuts and Jobs Act. Kay
Posted by: Kay Bell | Friday, March 30, 2018 at 12:17 AM
Can you still deduct mileage and hotel costs for work
Posted by: Jacob | Thursday, March 29, 2018 at 08:51 PM
Jane, these tax-saving benefits (FSAs and 401k plans) were left as is. Kay
Posted by: Kay Bell | Sunday, December 24, 2017 at 12:54 PM
Will 401K and FSA now be taxed
Posted by: Jane allison smith | Sunday, December 24, 2017 at 03:44 AM
Thanks for the update on taxes
Posted by: Chuck | Wednesday, December 20, 2017 at 10:49 AM
Although it's a 7 bracket system, (when originally they wanted to reduce the individual tax code to 3 or 4 brackets), it effectively feels like fewer brackets because of the closeness of the rates in a couple cases, and an oddly narrow income range for another rate.
10-12% (why not just call it 11% ?)
22-24% (why not just call it 23% ?)
I wonder why the small jumps from 10-->12 and 22-->24, but the huge jumps from 12-->22 and 24-->32.
Also 32% rate is a pretty narrow band in the high income range. It's got to be well less than 1% of the population falls into the 32% bracket as the highest bracket.
Posted by: James | Monday, December 18, 2017 at 01:36 PM
Tawnya, no changes there. Only medical-related change in the tax bill was to lower the AGI threshold for itemized deductions. Kay
Posted by: Kay Bell | Sunday, December 17, 2017 at 05:32 PM
Will self employed individuals still be able to write off their health insurance premiums under the proposed tax bill?
Posted by: Tawnya M Poe | Sunday, December 17, 2017 at 05:13 PM
E, good news here, too. There's no change to current law that allows the stepped-up basis to inherited assets. Kay
Posted by: Kay Bell | Sunday, December 17, 2017 at 01:10 PM
Any change to step-up basis on appreciated assets for beneficiaries at death? Heard rumors of that some time back. That would be bad.
Posted by: E Schaeffer | Sunday, December 17, 2017 at 11:11 AM
Thanks Kay - You are great and I love your blog!
Posted by: Glen | Sunday, December 17, 2017 at 10:35 AM
Hey, Glen, good question. I'm working on post now with more of the law changes I didn't include here and capital gains is part of that. Here's a preview: The same long-term capital gains rates we have now (0%, 15% and 20%) will still apply but the brackets will be adjusted per the new rates in the GOP tax bill. Kay
Posted by: Kay Bell | Sunday, December 17, 2017 at 10:27 AM
Kay - what about tax on capital gains for 2018? Capital gains are taxed at 0 percent when TI is below about $77900,
Posted by: Glen | Sunday, December 17, 2017 at 02:59 AM
This is a law I think needs revisiting. I understand mean testing, but this is penalizing people for planning other resources in retirement. Better way to bulk up SocSec IMO would be to hike the wage base to get more from high earners while they're making it, not while they're living on what they saved!
Posted by: Kay Bell | Saturday, December 16, 2017 at 11:39 PM
I was speaking specifically of income tax on social security benefits not earnings subject to taxation. We pay taxes on 85% of our social security benefits and we very much appreciate your response Kay!
Posted by: FS | Saturday, December 16, 2017 at 05:56 PM