Proposed Tax Reforms

Practice Areas

By : Sharvari Gandhi

Below are some of the highlights of the proposed “Tax Cuts and Jobs Act” the House Republicans unveiled recently. It is expected that there will be changes along the way as there will be many negotiations over the provisions in the bill.

Tax Law as Proposed:

  • 4 tax brackets – 12%, 25%, 35% and 39.6%
  • Almost double standard deduction – $24,000 MFJ, $18,000 HoH and $12,000 for Single (to be adjusted for inflation).
  • No more personal exemptions
  • No additional credit for individuals over 65 years or disabled persons.
  • Repeals the overall limit on itemized deductions
  • Caps property tax deduction to $10,000
  • Increases most charitable contributions deductions to 60% of AGI (currently 50% limit)
  • No more electric vehicle credit of $7,500 for buying an electric car
  • No more adoption credit.

Proposed law would eliminate the following deductions:

  • Medical Expenses (itemized)
  • Moving Expenses
  • Unreimbursed education expenses
  • Student loan interest deduction (up to $2,500 deductible under current law)
  • Tax Preparation Fees
  • Personal casualty loss deduction
  • Deduction for State and Local taxes

Employer provided assistance to employees will no longer be considered tax-free:

  • Educational Expenses (current law allows up to $5,250 tax-free to employee)
  • Dependent care expenses (current law allows employer to pay up to $5,000 tax-free to employee)

No more AMT

If a taxpayer has AMT credit carryforwards, the Act would allow the taxpayer to claim a refund of 50% of the remaining credits (to the extent the credits exceed regular tax for the year) in tax years beginning in 2019, 2020, and 2021, with the remainder claimed in the tax year beginning in 2022.

Mortgage Interest Deduction:

  • Current Law: If MFJ a couple can deduct interest on mortgages of up to $1 million.
  • Proposed Law: The deduction will be capped on interest up to $500,000 of debt (on newly purchased homes) and only one residence can qualify. If the taxpayer already owns a home this change will not impact them.

Sale of Primary Residence

  • Current Law: Own house for 2 of last 5 years in order to exclude up to $500,000 (MFJ) Capital Gain.
  • Proposed: Own house for 5 of last 8 years in order to qualify for exclusion. Also, introduces the AGI phase out starting at $500,000 for MFJ and $250,000 for other taxpayers. The exclusion can be used only once in 5 years.

Child Tax Credit:

Current Law: Credit of up to $1,000 per child under the age of 17 years refundable as ACTC.

Proposed Law: Child Tax Credit of up to $1,600 per child (only $1,000 refundable). Also, a new $300 adult dependent tax credit (non-refundable).

Family flexibility credit

Under this proposed credit each tax filer can claim a $300 non-refundable credit for self. So, if MFJ a couple can claim a credit of $600 on the tax return. This credit is separate from the CTC and can be claimed in addition to the same.

Alimony

Current Law: Alimony paid is deductible to payor and taxable to recipient.

Proposed: Alimony will not be deductible and will be tax-free to recipient.

529 Plan

Proposed law will now allow an individual to buy a 529 plan for an unborn child. The distributions of up to $10,000 per year for elementary and high school expenses will be considered as “qualified expenses” under the plan.

Education Tax Credit

Under the proposed law, the American Opportunity Tax Credit, will continue allow 100% credit for the first $2,000 and 25% for the next $2,000 of post-secondary higher education expenses. It will add the credit for the 5th year at half the rate as the first 4 years with up to $500 being refundable. The Hope Credit and the Lifetime Learning Credit will be repealed.

IRA Recharacterization

Under the proposed law, the Roth IRA recharacterization rule will be repealed. An individual will no longer be able to re-characterize a contribution to a traditional IRA as a contribution to a Roth IRA (and vice versa) and may no longer recharacterize a conversion of a traditional IRA to a Roth IRA.

Estate, GST and Gift Tax

  • Exclusion will be doubled to $10 million.
  • The Act would repeal the estate and Generation-Skipping Transfer taxes such that they do not apply to the estates of decedents dying after Dec. 31, 2023, while still maintaining a beneficiary’s stepped-up basis in estate property.
  • The Act would lower the gift tax to a top rate of 35% for gifts made after Dec. 31, 2023, and would retain a basic exclusion amount of $10 million and an annual exclusion amount of $15,000 (for 2018), as indexed for inflation.

Foreign Source Dividends

100% of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder that owns 10% or more of the foreign corporation would be exempt from U.S. taxation. No foreign tax credit or deduction would be allowed for any foreign taxes (including withholding taxes) paid or accrued with respect to any exempt dividend.