Breaking News for Individual Taxpayers

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The House has released a tax bill.

This bill contains sweeping changes for both businesses and individuals. Most provisions are effective for tax years beginning after 2017.

What happens from here? The Senate will introduce its version of the bill. The Joint Committee will be charged with hammering out the differences and producing a bill to be voted on by both chambers.

Yeo & Yeo will monitor the activity as it unfolds. Follow us on social media and continue to check our blog for late-breaking news and updated information about the tax bills.

Overview of proposed changes impacting individual taxpayers

Changes in Tax Rates. The current seven individual tax rates would be reduced to four (12%, 25%, 35% and 39.6%), and applicable at the following levels:

  • 12% – applies to the first $45,000 of taxable income for single filers and $90,000 for joint filers.
  • 25% – applies to taxable income over $45,000 for single filers and $90,000 for joint filers.
  • 35% – applies to taxable income over $200,000 for single filers and $260,000 for joint filers.
  • 39.6% – rate applies to taxable income over $500,000 for single filers and $1 million for joint filers.

Capital Gains and Dividends. Net capital gains and dividends would continue to be taxed at their current 0%, 15% and 20% rates, and would also continue to be subject to 3.8% net investment income tax.

Taxation of Pass-through Income. The proposal contains a complex set of rules governing the tax rate applicable to income from S corporations, partnerships, LLCs and sole proprietorships.

  • Passive Activities. Income from passive activities qualify for the 25% tax rate.
  • Nonpassive Activities. In order to prevent abuse, active businesses will use a default 70%-30% allocation ratio. 70% will be taxed at ordinary individual rates with 30% qualifying for the 25% rate. For personal services, like doctors, lawyers, accountants, and financial advisors, all income is presumed to be earned income and subject to ordinary individual rates. An alternate calculation will be available.

Itemized deductions.

  • Medical expenses would no longer be deductible.
  • State and local income tax expenses are no longer deductible.
  • Real estate taxes may be deducted, but limited to $10,000.
  • Mortgage interest expense is deductible on a principal residence only, with an indebtedness cap of $500,000 for new mortgages after November 2, 2017.
  • No deduction for home equity loans would be allowed going forward.
  • The limitation for charitable contributions increases from 50% of AGI to 60%.
  • The deduction for personal casualty losses would be eliminated, as would most miscellaneous itemized deductions.

Other changes. The following additional changes are outlined in the proposed bill:

  • Increase in the standard deduction to $24,400 for joint filers, and $12,200 for single filers.
  • Elimination of personal exemptions.
  • Elimination of the “Pease” limitation on itemized deductions.
  • Repeal of the alternative minimum tax.
  • Retention of the estate tax through 2023, with a doubled basic exemption to $10 million. After 2023, the estate tax and generation-skipping tax would be repealed (but the step-up in basis provision would remain).
  • Increase in the child tax credit from $1,000 to $1,600, with a new $300 credit available for non-child dependents and taxpayers themselves.
  • Elimination of the ability to deduct the payment of alimony (with receiving spouse no longer having to include in income).

Phase-outs. Certain tax benefits would be phased out for higher income taxpayers. The benefit of the new 12% individual tax bracket would be phased out for single taxpayers with adjusted gross income over $1,000,000 and joint filers with income over $1,200,000. The phase-out for the child tax credit and new family tax credit would increase for single filers from $75,000 to $115,000 and for joint filers from $110,000 to $230,000.

Education. A number of changes were made to education provisions. First, the American Opportunity Tax Credit, Hope Scholarship Credit, and Lifetime Learning Credit would be combined into one American Opportunity Tax Credit (AOTC). The new AOTC provides for a 100% credit for the first $2,000 of qualified expenses, and a 25% credit for the next $2,000 of expenses, for the first four year of post-secondary education. The new AOTC also provides for a credit for a fifth year of post-secondary education at half the rate of the first four years.

The bill also eliminates new contributions to Coverdell education savings accounts, and expands 529 plans to allow unborn children to be designated as beneficiaries. It also covers expenses for apprenticeship programs and up to $10,000 of elementary and high school expenses.

Other education provisions that were repealed include:

  • Above-the-line deduction for student loan interest expense.
  • Above-the-line deduction for qualified tuition and related expenses.
  • Exclusion from income of employer-provided education assistance.

If you have questions, please contact a member of Yeo & Yeo’s Tax Services Group or your local Yeo & Yeo office.

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