After the House and Senate conferees signed off Dec. 15 on the "mixed" Tax Cuts and Jobs Act, I posted a look at some of the highlights (or, depending on your political persuasion and personal tax situation) lowlights in the measure.
But that one post is not enough.
Part of the reason for take 2 today is, of course, that I love reading and writing about taxes.
And then there's the fact that this bill is big! As I mentioned in that first post on the conference agreement (which, if you're looking for them, contains the proposed new individual tax rates and income brackets), the legislative language and supporting documentation for the bill (H.R. 1) runs almost 1,100 pages.
Well, I've thumbed through some more of those pages, and received a lot of questions from all y'all, so here are some more on what will change if the bill, as planned by the Republican leadership, makes its way to the White House for signing into law this coming week.
Doomed deductions: Some write-offs that taxpayers have for, well seemingly forever, used to reduce their gross income to a smaller taxable amount will go away or be revised if/when the Republican tax bill becomes law.
This includes both itemized deductions enumerated on Schedule A and the above-the-line deductions that anyone, whether claiming the standard deduction or itemized amounts, could use.
I noted some of the deduction changes (state and local taxes, mortgage interest, medical costs, casualty losses and donations to charity) in my first post on the GOP tax bill. Here are some more deductions that are going away:
- Moving costs, which now can be claimed as an above-the-line deduction, would no longer be deductible unless the relocation is in connection with an active duty military posting.
- Alimony is a factor in many divorces. Under current law, the payment and receipt of this spousal support had tax implications. The ex receiving alimony had to count it as taxable income and the former spouse making the payments got to deduct those amounts. No more under H.R. 1.
The bill would do away with both the deduction, which appeared as an above-the-line adjustment to income on Form 1040, and the income considerations for both parties. The change would take effect in 2019. Specifically, the bill says the new rules apply to any divorce or separation instrument executed or modified after Dec. 31, 2018.
Why do away with such a seemingly small deduction amount in the grand scheme of write-offs? Because lawmakers were scraping for every dollar to keep the bill before the deficit producing amount so that it could pass with a simple majority under Senate reconciliation rules.
- Miscellaneous itemized expenses currently can be claimed on Schedule A if they exceed 2 percent of your adjusted gross income (AGI). This isn't an easy one to claim, but it does cover such things as unreimbursed employee expenses, job search costs if you're tired of working for a company that won't reimburse you for needed office supplies and, my favorite, tax preparation expenses. No more. This itemized deduction is history, at least for a while. (More on "for a while" later, so keep reading.)
The good news is that other tax breaks, including the credits that help pay for care of dependents, adopting a child and for elderly and permanently disabled persons remain intact.
And speaking of elderly and tax breaks, the additional standard deduction for the elderly and blind will remain. For filers age 65 or older in 2018, that's an added $1,300 for each age-eligible spouse where a married couple files jointly and $1,600 for an older single taxpayer. The same added amounts apply to taxpayers who are visually impaired, even if they are not in their mid-60s.
Mostly same lessons for education tax breaks: There are no changes to two of the most popular educational tax breaks, the American Opportunity Credit and Lifetime Learning Credit.
A proposal that panicked graduate students, as well as s research or teaching assistants, has worked out for those scholars. The proposed tax on tuition waivers did not make it into the bill.
A couple of education-related above-the-line deductions also survived the tax rewrites:
- School teachers will still be able to deduct up to $250 (indexed for inflation) they spend out of their own pockets to provide classroom supplies.
- Students and/or their parents also will still be able to deduct up to $2,500 in college loan interest.
And some taxpayers will benefit from an expansion of the use of 529 plan money. Under current law, the earnings by and distributions from 529 plans are not taxable when the money is used to pay allowable college costs, such as tuition, room and board, most classroom-related fees, books, supplies and equipment.
If/when the GOP bill becomes law, it will allow use of up to $10,000 per student of 529 plan money to pay for public, private and religious elementary and secondary school costs, as well as for home schooling expenses. UPDATE: In final consideration of the bill on Dec. 20, the home schooling provision was deleted to meet Senate rules limiting the legistlation's overall cost.
Home sale profit safe: Many homeowners, particularly those in areas where real estate prices have escalated, have bemoaned the tax bill change that will limit their deduction of property taxes they pay.
But there is some good news on the home tax break front. Owners who become sellers will still get to pocket tax-free a nice chunk of profit.
The tax code now says that you can keep sans capital gains tax up to $250,000 in home-sale profit if you're a single taxpayer or $500,000 if a married joint return filer. This tax-free amount is allowed as long as you own and live in the house for at least two of the last five years before the sale.
There was an effort by the tax bill writers in both the House and Senate to extend that residency period from two-of-five years to five-of-eight in order to get the tax-free home sale cash. For some reason, though (the realty sector's lobbyists, perhaps?), the existing law will remain in the tax code.
Continued capital gains rates: How about folks who face capital gains on assets other than their home sale? Good news.
The bill's explanatory language says, "The conference agreement follows the House bill and generally retains present-law maximum rates on net capital gains and qualified dividends."
Those lower long-term capital gains tax rates on assets sold after you've owned them for more than year are 0 percent rate for lower-income investors; 15 percent for most of us stock market gamblers, I mean investors; and 20 percent for the wealthiest asset owners.
Of course, since we're talking taxes in general and Congress fiddling around with taxes in particular, it's not that simple.
While the new tax law will keep the current capital gains tax rates, remember that they were created under a different structure of income tax rates and brackets than what's proposed in the final version of the Tax Cuts and Jobs Act. So, the applicable capital gains tax brackets must be adjusted.
How? The bill says:
The provision generally retains the present-law maximum rates on net capital gain and qualified dividends. The breakpoints between the zero- and 15-percent rates ("15-percent breakpoint") and the 15- and 20-percent rates ("20-percent breakpoint") are based on the same amounts as the breakpoints under present law, except the breakpoints are indexed using the CCPI-U [Chained Consumer Price Index; more on this later in the post, so again, please keep reading] in taxable years beginning after 2017. Thus, for 2018, the 15-percent breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals. The 20-percent breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.
At least investors get a break in that the House and Senate conferees decided to scrap first-in, first-out sales requirement. This would have produced a higher capital gains tax since the older, more-likely lower-priced shares would have had to be sold first. Now you can still decide which shares to sell.
Estate tax step-up rule remains: As noted in my earlier GOP tax bill post, the estate tax lives, but with a doubling of the exemption amount. That's a welcome change for wealthy families looking to pass along even more of their accumulated riches without facing a federal tax bill.
But wait, there's more good news for heirs. The bill keeps stepped-up basis. This rule basically steps up the value of inherited assets to what they were worth at the time of original owner's death.
For assets that have appreciated greatly since the original, now deceased, owner bought them, this means when the person who inherited it sells it, the value used to compute any taxable gains is the larger, date-of-death amount. And that step-up amount makes for less profit and hence, a small capital gains tax bill.
Maybe we should call it the step-over rule, since recipients of bequest get to go over all the unrecognized gains that essentially accrued tax-free.
And, for good measure here are a few other estate tax clarifications and/or elaborations.
The new $11 million estate tax exemption would remain, as per current law, per person. That means a married couple would be able to protect a combined $22 million worth of their estate from Uncle Sam.
Also, gifts given away before shuffling off to the great beyond remain coupled to the estate tax. This is the tax man's way of keeping rich folks from evading taxes by simply giving away their assets and cash before death. In 2018, the first $15,000 in gifts (cash or value of other assets) an individual makes to folks (no limit on the number of recipients, just on the amount given to each) year is tax-free, but beyond that the gifts will still be taxed at the 40 percent estate tax rate.
Adjusting inflation adjustments: Under current law, annual inflation-adjusted changes to many tax provisions, like the ones the IRS issued for 2018 before Congress got this far with its tax bill, are indexed to the Traditional Consumer Price Index (CPI) inflation measurement.
Under the GOP tax bill, however, future individual income tax provisions will be indexed to the Chained CPI, or as it's officially titled, the Chained Consumer Price Index for All Urban Consumers, sometimes shown as the acronym CCPI-U noted earlier in this post (the capital gains tax section, in case you want to double check).
This inflation calculation uses different measurements, notably taking into account possible substitutions consumers might make in response to the higher cost of certain items. If you want specifics, these Washington Post and Yahoo Finance stories are good CPI primers.
The bottom line is that the Chained CPI would reflect lower increases due to inflation. That would, per Congressional Budget Office reports, reduce federal deficits, which is why the bill's writers want to use it for their $1.4 trillion budget-busting tax bill.
But for taxpayers, the Chained CPI likely will be costly. When its lower rate of inflation is used to calculate future tax rates, many taxpayers will more quickly fall into higher tax brackets, meaning they'll pay more in taxes than they would have if the traditional inflation measurement had been used.
The return of the extenders: That sounds like a horror movie title and we should be afraid, very afraid. The Tax Cuts and Jobs Act will create a whole new set of these temporary tax breaks that would require Congressional action to keep their place in the Internal Revenue Code.
Specifically, many of the individual tax provisions are set to expire at the end of 2025. This is the "for a while" I mentioned earlier in the post. Thanks for making it all the way here!
Among the tax laws that will go away in a few years are the new tax rates and income brackets, the increased child tax credit and higher estate tax exemption.
Some of us were thrilled back in December 2015 when it looked like Congress was breaking itself of its extenders addiction. Back then, the Protecting Americans from Tax Hikes (PATH) Act made many tax break permanent and let others simply expire.
But deep in our tax hearts we knew that there are three, not two, sure things (sorry, Ben): death, taxes and tax changes. So, we're heading back into that expire/renew tax loop.
The reason for the expiration of many of the individual tax breaks — while, by the way, the corporate laws are permanent; something you might want to think about the next time you visit a voting booth — is, you guessed it, money.
To allow the Senate to pass the tax measure by as simple majority, that chamber's rules won't allow it to approve tax measures that that increase the deficit set by its budget over the coming decade. To accomplish that, the conferees sacrificed in 2025 the individual tax breaks.
The Scarlet O'Hara "tomorrow's another tax day" thinking is that future Senators and Representatives will find some other fiscal gimmick way to keep the individual tax breaks going since their re-elections will depend on it.
And just in case you missed my (many) earlier links within this post, you can read my first take on the GOP tax bill here.