The proposed tax bill we’ve all been waiting for is finally here (oh wait, that was just me?!). If your situation is similar to mine, you’ll be a little relieved at the changes since the last vague tax plans were presented. I’m excited to update the calculations so that you can see just how your tax bill might change.
A few months ago, I presented an initial analysis of the original GOP and house bills. There are many similarities to the new tax proposals, but also some significant changes and updates on exact limitations, tax brackets, and other numbers. Note, though, that if the law is passed it will assuredly see many changes from its current form.
However, I think its definitely worth taking a look at it now, since it’s likely to be a drastic change for a number of people (especially the extremely rich, but that’s another discussion). And these changes could take effect as soon as January 1st, 2018 so it’s essential to keep up to date on this.
Let’s quickly go through some bullet points of the tax bill changes and then I’ll present a tool to calculate your projected tax under the new rules.
First of all, there are some significant changes to how some types of income will be taxed. As you may be aware, the general rule from the IRS is that all income is taxable unless they specify an exception. The following are changes to income that is required to be reported.
- Alimony income will no longer be included as income and taxed at ordinary rates (and corresponding alimony payments will not be deductible).
- Passthrough income taxed at a maximum 25% rate depending on the nature of the business. Passive business interests will be eligible for the 25% tax rate, professional services firms will not be eligible at all and other business would be classified as 30% of the income eligible for the 25% rate. There are a lot of other nuances with this proposed law.
- Employers will no longer be allowed to exclude certain fringe benefits from an employee’s (ahem, you!) taxable pay. This includes tax-free tuition reimbursement, adoption assistance, achievement awards, dependent care assistance, and more. If you have these fringe benefits, you would be responsible to pay tax on the amounts you’ve received starting in 2018.
Allowable Above the Line Deductions
As the opposite of the IRS’ income rule, no deductions are allowed against income unless specified in the IRS code. Cutting deductions is always an unpopular thing, but they aren’t hesitating to do it with this proposed tax bill. Here are the following eliminated above the line deductions (meaning deductions that are calculated before arriving at adjusted gross income).
- Alimony payments will no longer be deductible (as listed above).
- In apparent disregard for the current student loan crisis, student loan interest would no longer be deducted.
- Moving expenses deduction no longer allowed.
Standard & Itemized Deductions
The standard deduction would be nearly doubled under the tax proposal. The new standard deduction would be $12,000 for single individuals, $24,000 for married filing joint filers and $18,000 for head of household filers. The number of people that would itemize their deductions under the new tax proposal would change significantly. In fact, it’s estimated that 84% of people that currently itemize would end up taking the standard deduction instead under this tax proposal. The following adjustments would be made to itemized deductions.
- Medical itemized deduction eliminated (over 10% of income).
- Complete elimination of the state & local income tax itemized deduction.
- Limit of $10,000 on property taxes deduction.
- Elimination of the personal casualty losses itemized deduction.
- Unreimbursed employee business expenses no longer deductible.
- Mortgage interest deductibility capped at $500,000 mortgage balance.
- Increased allowable charitable contribution deduction to 60% of adjusted gross income (from the previous 50%).
- Increased charitable mileage deduction to more accurately reflect vehicle cost (from the previous 14 cents/mile).
Personal exemptions would be completely eliminated under the tax proposal. In 2017, this amount was $4,050 per person, subject to a phaseout for high-income individuals.
There are also a number of tax credits that would be repealed or adjusted. Following are the most significant changes.
- Repeal Lifetime Learning Credit and Hope Scholarship Credit (most people take the American Opportunity Tax Credit anyway).
- American Opportunity Tax Credit extended to 5 years, the current rules would stay the same, except that the 5th year credit would be limited to $1,250.
- Repeal electric drive motor vehicle credit .
- Repeal adoption tax credit (because it’s not that expensive to adopt, right?!).
- Child tax credit increased to $1,600 from $1,000, plus the new income limit would be increased to $230,000 for those married filing joint and $115,000 for single and head of household filers.
- Introduction of the Family Flexibility Credit of $300 for each filer or non-child dependent. This credit would be nonrefundable and have the same income phaseouts as the updated Child Tax Credit.
Other Tax Changes
There are of course a few other changes that impact tax calculations. Here is a brief list of the most common ones.
- Tax brackets adjusted to 12/25/35/39.6 plus a limited 6% surtax on those making over $1M (single)/$1.2M (married filing joint) that potentially results in an extra $12,420 in tax for single filers or $24,840 for married filers.
- Alternative minimum tax completely repealed (hallelujah!).
- Elimination of the ability to use series EE or Series I savings bond tax-free for college expenses
- For the gain on a sale of a principal residence to be tax-free, the IRS code would now require someone to live in the property for 5 of 8 years instead of 2 of 5 years as before. It would also limit a tax-free sale to 1 in every 5 years instead of 1 every 2 years. This would provide an exception for sale due to change in place of employment, health or unforeseen circumstances. There are also income limits on the ability to have a tax-free sale of a personal residence.
- Contributions to Coverdell savings account will no longer be allowed and provisions would be made instead to roll existing funds into a 529 plan. 529 plans would then allow $10,000 per year of tax-free distributions for private elementary/high school expenses.
- Estate tax exemption doubled, then within 5 years, the estate tax will be phased out entirely.
Calculating the Impact of These Changes
In order to really understand how each of these changes will impact you, I’ve created a spreadsheet that shows your current estimated 2017 tax and then compares it to an adjusted amount based on the tax bill. You can type your numbers into the embedded spreadsheet or you can download it using the icon in the bottom right-hand corner (recommended).
If you have any questions about the spreadsheet, please drop me a line in the comments!
Whether or not each one of these tax changes occurs, I do think that we will have a few significant changes to the tax code by the beginning of the year. I would be happy, though, if they simply got rid of the alternative minimum tax and did nothing else.
If this tax reform is simplifying taxes for most Americans, it’s simply because they’re taking away many deductions. That’s not the kind of simplification that I prefer.
Regardless of what happens at the White House, at my house, I’m still focusing on saving in pre-tax retirement accounts, eliminating debt (just a mortgage!), and shifting as much of my income as possible to investment income taxed at preferential tax rates. Those strategies aren’t going away.