It’s Beginning To Look A Lot Like Tax Reform: Here’s What’s In The Final Version. The good news is that there will be no change in the holding time for a home owners tax shelter!

We appear to have a deal on taxes. Senate Republicans passed their version of a tax reform bill about two weeks ago. Since the House had already passed a version, the two needed to be reconciled. That happened this week in conference. Here’s a look at what’s in the conference bill and how that differs from the original proposal and from current law (if you just want to see what’s new, those provisions are in italics):

Expiration. Under current law, many tax provisions are permanent subject to inflation (like these for 2017). Occasionally, Congress passes temporary tax laws with a fixed expiration date (like these from 2015).

  • Under the conference bill, many tax provisions for individual taxpayers, including the new tax rates, will kick in beginning January 1, 2018, and will expire at the end of 2025. At that time, the law will go back to the way it is now. 
  • The House bill would have made most of the tax provisions permanent for individuals and corporations while the Senate bill would have made most of the tax provisions permanent only for corporations.

Income tax rates. We currently have seven (7) tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% (here’s what the 2018 brackets would have looked like without tax reform).

  • Under the conference bill, we will keep seven (7) brackets but with slightly different rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
  • The House bill proposed four (4) tax rates: 12%, 25%, 35% and 39.6% while the Senate bill would have kept seven (7) brackets and reduced the top marginal rate to 38.5%.

Capital gains rates. If you hold assets for one year or less, any capital gain at sale or disposal is considered short-term and generally taxed at your ordinary income tax rate. If you hold assets for more than one year before you get rid of them, your capital gain is called long-term and is taxed at rates of up to 20%.

  • Under the conference bill, the same capital gains rates will apply but the brackets will be adjusted. Additionally, those controversial FIFO (first in/first out) sales rules will not apply.

Standard Deduction. The standard deduction amounts for 2018 – before tax reform – would have been $6,500 for individuals, $9,550 for heads of households (HOH), and $13,000 for married couples filing jointly.

  • Under the conference bill, the standard deduction amounts will increase to $12,000 for individuals, $18,000 for HOH, and $24,000 for married couples filing jointly.
  • Under the House bill, the standard deduction would have increased to $12,200 for individuals, $18,300 for HOH, and $24,400 for married couples filing jointly, slightly higher than those under the Senate bill.

Additional Standard Deduction.

If you are over age 65, blind or disabled, you can tack on $1,300 to your standard deduction ($1,600 for unmarried taxpayers).

  • Under the conference bill, there is no change to additional standard deductions.
  • Under the House bill, the additional standard deductions would have been eliminated.

Personal Exemptions. Currently, you can claim a $4,050 personal exemption for yourself, your spouse, and each of your dependents.

  • Under all versions of the plan, including the conference bill, personal exemptions will disappear.

Mortgage Interest Deduction. Currently, if you itemize your deductions, you can deduct qualifying mortgage interest for purchases of up to $1,000,000 plus an additional $100,000 for equity debt. The $1,000,000 cap applies to a mortgage on your primary residence plus one other home.

  • Under the conference bill, new mortgages would be capped at $750,000 for purposes of the home mortgage interest deduction. For mortgages taken out before December 15, 2017, the limit will be $1,000,000. Beginning in 2026, the cap will also be $1,000,000, no matter when the debt was incurred (confusing, I know). Additionally, the deduction for interest on home equity debt (meaning re-fis not related to improving your home) will be eliminated beginning in 2018 – but it will return in 2026.
  • Under the House bill, existing mortgages would have been grandfathered and new mortgages would have been capped at $500,000, while under the Senate bill, the deduction would have remained in place for mortgages up to $1,000,000 but the deduction for equity debt would have been eliminated.

State and Local Tax Deductions. Currently, if you itemize your deductions, you can deduct state and local income taxes or sales taxes, and you can deduct state and local property taxes.

  • Under the conference bill, state and local tax deductions will remain in place but will be capped at $10,000 for state and local sales, income and property taxes. And yes, they already know what you’re planning, so amounts paid in 2017 for state or local income tax which is imposed for the 2018 tax year will be treated as paid in 2018. In other words, you can’t pre-pay your 2018 state and local income taxes in 2017 to avoid the cap.
  • Under the House and Senate bills, the state and local income tax or sales tax deductions would have been eliminated for individual taxpayers. Additionally, under both the House and Senate bills, the state and local property tax deduction would have remained in place with a $10,000 cap.

Charitable Donation Deduction. Currently, if you itemize your deductions, you can deduct certain donations to qualified charitable organizations.

  • Under all versions of the bills, including the conference bill, the charitable donation deduction will remain in place with some adjustments upwards on limits for cash gifts. However, the conference bill does not include an adjustment to the charitable mileage rate (that means that it will remain 14 cents per mile as it has been since the Clinton years).

Medical Expense Deduction. Currently, if you itemize your deductions, you can deduct qualifying medical expenses which exceed 10% of your adjusted gross income (AGI).

  • Under the conference bill, the medical expense deduction will remain in place with a lower floor of 7.5% for tax years 2017 and 2018. Yes, that means it is retroactive to this year.
  • Under the House bill, the medical expense deduction would have been eliminated while under the Senate bill, the deduction would have remained in place with the 7.5% floor for 2017 and 2018.

Miscellaneous Itemized Deductions. Currently, if you itemize your deductions, you may only deduct those miscellaneous deductions which exceed 2% of your adjusted gross income (AGI).

  • Under all of the bills, including the conference bill, miscellaneous deductions which exceed 2% of your AGI will be eliminated. This includes deductions for unreimbursed employee expenses, home office expenses, and tax preparation expenses.

Above The Line Deductions. Currently, you can deduct certain expenses including student loan interest ($2,500 per tax return), moving expenses, alimony, and teacher expenses ($250 per teacher), as above-the-line deductions, meaning that you do not have to itemize to take advantage of the deduction.

  • Under the conference bill, the deductions for student loan interest and out-of-pocket teacher expenses will be retained with the current caps. The alimony deduction will be repealed – but not until 2019: The change applies to any divorce or separation instrument executed or modified after December 31, 2018 (the modification must expressly states that the new rule applies).
  • Under the House and Senate proposals, most above-the-line deductions would have been eliminated including deductions for student loan interest and moving expenses, however, under the Senate bill, the deduction for out of pocket expenses for teachers would have been retained and doubled to $500.

American Opportunity Credit (AOC) and Lifetime Learning Credit (LLC). Currently, an eligible student may qualify for the AOC, which provides a credit of up to $2,500 per year (40% of which is refundable) for qualified tuition and related expenses for each of the first four years of college (or certain other degree programs). Also currently, an eligible taxpayer may qualify for the LLC, which provides a credit of up to $2,000 per return, not per student.

  • Under the conference bill, there are no changes to the AOC or the LLC.
  • Under the House bill, the AOC would have been modified and the LLC would have been eliminated; there would have been no changes under the Senate bill.

Tuition Waivers. Currently, graduate students who work as research or teaching assistants are exempt from income tax on tuition waivers they receive in exchange for that work.

  • Under the conference bill, the exemption for tuition waivers will remain in place.
  • Under the House bill, the exemption for tuition waivers would have been eliminated; there would have been no change under the Senate bill.

Fringe Benefits. Under current law, employers may provide certain benefits, like adoption assistance, dependent care assistance, and moving reimbursements, to employees on a tax-free basis.

  • Under the conference bill, the tax break for moving reimbursements will be eliminated (except as it applies to the military) but the breaks for dependent care assistance and adoption assistance will remain in place.
  • Under the House bill, the tax break for adoption assistance, dependent care assistance, and moving reimbursements would have been eliminated, meaning that those benefits would have been taxable, while under the Senate bill, the tax break for adoption assistance and dependent care assistance would have remained in place.

529 Plans. Currently, neither the earnings nor distributions in 529 plans are taxable for federal purposes so long as the plan is used for costs associated with college like tuition and room and board as well as fees, books, supplies, and equipment.

  • Under the conference bill, up to $10,000 of 529 savings plans can be used per student for public, private and religious elementary and secondary schools, as well as home school students.
  • Under the House bill, parents could have set up 529 plans for unborn children and used up to $10,000 per year of plan funds for private elementary and secondary school expenses. The Senate bill would have expanded the use to public, private and religious elementary and secondary schools, as well as home school students but did not include the reference to unborn children.

Child Tax Credit. The credit is currently $1,000 and is refundable.

  • Under the conference bill, the child tax credit will double to $2,000 per child and will be refundable up to $1,400, subject to phaseouts. The bill also includes a temporary $500 nonrefundable credit for other qualifying dependents (for example, older adults).
  • Under the House bill, the child tax credit would have increased to $1,600 per child under the age of 17, subject to phaseouts, with an additional $300 credit for each parent as part of a consolidated family tax credit. Under the Senate bill, the child tax credit would have bumped to $2,000 per child under the age of 18, subject to phaseouts. Both bills would have made the first $1,000 refundable.

Credit For The Elderly & Permanent Disabled.Under current law, certain taxpayers who are over the age of 65 or retired due to a permanent and total disability may claim a nonrefundable credit of up to $750 for a return with one qualifying individual and $1,125 for a return with two qualifying individuals subject to certain limits.

  • Under the conference bill, the credit will remain in place.
  • Under the House bill, the credit would have been eliminated while under the Senate bill, the credit would have remained in place.

Exclusion Of Gain From Sale Of Your Home. Under current law, you can exclude up to $250,000 ($500,000 for married taxpayers) in capital gains from the sale of your home so long as you have owned and resided in the house for at least two of the last five years.

  • Under the conference bill, there will be no change from current law.
  • Both House and Senate bills would have changed the “two of five” rule to “five of eight.” Additionally, the proposals would limit the use of the exclusion to one sale every five years (instead of one sale every two years) with one key difference: Under the House bill, the exemption would have been subject to phaseout based on income.

Obamacare Individual Mandate. Under current law, you are required to pay a penalty if you do not have minimum health care coverage or claim a waiver or exemption (typically based on hardship).

  • Under the conference bill, the penalty would be eliminated.
  • Under the House bill, the penalty would have remained while under the Senate bill, the penalty would have been eliminated.

Alternative Minimum Tax (AMT). The AMT is a secondary tax put in place in the 1960s to prevent the wealthy from artificially reducing their tax bill through the use of tax preference items.

  • Under the conference bill, AMT will be repealed for corporations. The AMT will remain for individuals but the exemptions will be increased to $70,300 for individuals and $109,400 for married taxpayers filing jointly, which means it will apply to fewer taxpayers.
  • Under the House bill, the AMT would have been repealed entirely while under the Senate bill, the AMT would have remained in place for corporations and individuals (the latter would have been subject to a higher exemption rate).

Pass-Through Entities. Businesses use structures like limited liability companies (LLCs) or S corporations to pass income through to the owners without paying tax at the company level: Income is taxed at individual rates.

  • Under the conference bill, owners of pass-through companies AND sole proprietors (as written “taxpayers other than corporations”) will be taxed at their individual tax rates less a 20% deduction (to bring the rate lower) for business-related income, subject to certain wage limits and exceptions. The deduction would be disallowed for businesses offering “professional services” above a threshold amount; phase-ins begin at $157,500 for individual taxpayers and $315,000 for married taxpayers filing jointly.
  • Under the House proposal, owners of pass-through entities would have been taxed at a rate of 25% while under the Senate bill, they would have been taxed at their individual tax rates less a 23% deduction (to bring the rate lower). Under the House bill, businesses that offer “professional services” like doctors, lawyers, and consultants wouldn’t qualify for the reduced rate, while under the Senate bill, the deduction would be allowed subject to certain income limits.

Corporate Tax Relief. Corporations which do not pass through their income pay tax on profits at the corporate level.

  • Under the conference bill, the corporate tax rate would be lowered to 21% beginning next year.
  • Under the House bill, the corporate tax rate would be lowered to 20% beginning next year, while under the Senate bill, the lower rate would not be effective until the 2019 tax year.

Federal Estate Tax. Currently, the federal estate tax is imposed on estates which exceed $5.49 million, or nearly $11 million per married couple.

  • Under the conference bill, the federal estate and gift tax will remain in place but the exemption would double.
  • Under the House plan, the federal estate tax would have been phased out, disappearing after 2024. Under the Senate plan, the tax would have remained, but the exemption would have doubled.

As long as this is (!), it isn’t an exhaustive list. If you want to read through the conference bill on your own, you’ll find it here (downloads as a pdf). BE FOREWARNED: It is 1,097 pages long printed. Cause you know, simple is hard.

Republicans in Congress hope to vote on the proposal next week and deliver a final bill to President Trump before Christmas.

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