Tax Reform So Far
Lawmakers are busy in Washington trying to pass tax reform by the end of the year. So far, the House of Representatives has passed its version while the Senate is struggling to get the support to pass its version. Additionally, the Senate version most likely will go through some changes before it can garner the votes it needs. While it is still too early to know exactly what the final proposal will be, there are some murmurings of which changes are most likely to go into effect.
Currently, there are a few significant differences between the House and the Senate that are worth highlighting. The House is planning to shrink the amount of mortgage-interest deductions allowed while the Senate is trying to maintain the status quo. The House also looks to reduce some of the write-offs for teacher education while the Senate looks to expand them. Both are also looking at how to handle large medical expense deductions and a consensus has yet to form.
While those differences will have to be sorted out, what may be more instructive is where the two bodies of our legislative branch agree.
Both bills currently look to nearly double the standard deduction used when taxpayers don’t itemize their write-offs. The current estimate is to increase this number to about $24,000 for married couples filing jointly. Under current tax law, about 30% of taxpayers itemize and the proposed changes could reduce that number to about 10%. This would simplify filing for many and make enforcement easier for the IRS. Charitable donations would remain deductible, but again, the threshold for itemized deductions would be higher and most people will be unlikely to receive a benefit from the donations (from a tax perspective).
As part of doubling the standard deduction, both bills look to eliminate the personal exemption for each family member. Depending on the size of your family this could be beneficial or have a negative impact.
The estate tax also seems likely to be impacted by the upcoming reforms. Current proposals suggest doubling the estate-tax exemption from the roughly $5 million currently per individual. Currently, most households already do not have to worry about estate taxes. This will increase the threshold even higher to over $20 million for a married couple.
Both bills have proposed eliminating the alternative minimum tax, a complex surtax that was meant to reduce the number of deductions high earners could use.
State and local taxes have been previously deductible at the federal level, an item most likely to be repealed to help offset the tax cuts. This will impact high tax states like California. The House would still allow a deduction for property taxes while the Senate would fully repeal that tax break.
In the coming weeks, we will keep a close eye on Congress as they press forward on enacting tax reform. If you have any questions about how this may impact you, please do not hesitate to reach out.