The Pending New Tax Bill and Actions to Consider
Section I: Proposed Changes
While there remain differences between the House and Senate-approved bills, below are some of the biggest changes proposed by both bills that could affect you.
Federal Income Tax Brackets
- Both the House and Senate tax bills make changes to federal income tax brackets. While the House reduces the number of brackets to four, the Senate maintains the seven current brackets, but lowers the rates for most brackets.
|House Bill||Senate Bill|
|12%||$0 – $45k||$0 – $90k||10%||$0 – $9,525||$0 – $19,050|
|25%||$45k – $200k||$90k – $260k||12%||$9,525-$38.7k||$19,050-$77.4k|
|35%||$200k – $500k||$260k – $1M||22%||$38.7k – $70k||$77.4k – $140k|
|39.6%||Over $500k||Over $1M||24%||$70k – $160k||$140k – $320k|
|32%||$160k – $200k||$320k – $400k|
|35%||$200k – $500k||$400k – $1M|
|38.5%||Over $500k||Over $1M|
- Both tax plans eliminate the personal exemption and raise the standard deduction to $12,200 single/$24,400 married (House plan) or $12,000 single/$24,000 married (Senate plan).
State and Local Tax Deductions
- The Senate has proposed a $10,000 cap on state and local property taxes, a provision that had been eliminated altogether in the House bill.
- The proposed plans eliminate tax deductions on income and sales tax.
- Both House and Senate Republicans have been keen on repealing the Alternative Minimum Tax; however, only the House bill completely eliminates it.
- The Senate bill keeps the Corporate AMT at 20%, and increases the exemption for the individual AMT from $54,300 to $70,300 for individuals and $84,500 to $109,400 for married couples.
Estate Tax Exemption
- Both Senate and House bills double the current estate tax exemption to $11 million per individual. The House bill then repeals the estate tax altogether in 2024; however, the Senate bill keeps the tax and the step up of cost basis at death remains.
Corporate Tax Rates
- President Trump has repeatedly called for a lower corporate tax rate of 15%. The latest versions of this bill lowers the corporate tax rate to 20% for both the House and the Senate bills.
- Currently, 529 plans are only eligible to be used for qualified higher education expenses. Under the Senate bill, the use for 529 plans would be expanded to cover K-12 education expenses. This could significantly increase the tax benefits and utility of these college savings plans.
- Currently, contributions of up to $14,000 per person ($28,000 per married couple) qualify for the annual gift-tax exclusion. Furthermore, the IRS allows for a five-year pre-payment election, which allows a couple to contribute up to $140,000 per student in a single year.
- FIFO (first-in, first-out) would become mandatory under the Senate tax plan. This means that, for individual investors who own multiple positions in the same stock, they would no longer have a choice in what position they sell – or gift. The oldest position (first-in) would always be the first sold or gifted. This could potentially have negative consequences for retirees drawing down their assets over time, as investors would no longer be allowed to sell later purchases first at a lower tax cost.
Section II: Actions to Consider
- Prepay part of your 2018 property tax bill in 2017. With a $10,000 property tax cap appearing likely, if your property tax is expected to exceed this amount, then prepaying can make tax sense. For example, if your annual property tax bill is $15,000 with half due in December and the remainder in April, then pay your $7,500 December portion as well as $5,000 of the April bill. End result: $12,500 deductible in 2017 and the maximum allowed deduction of $10,000 in 2018. Even if you are subject to the alternative minimum tax (AMT) in 2017, you are no worse off from a tax perspective.
- Gift or sell certain securities in 2017 before the FIFO (Senate Bill) rules apply in 2018. Example: You own 500 shares of XYZ Corp with a $50,000 gain, purchased in 2009, and another 500 shares with a $1,000 gain, purchased in 2015. If you need cash to spend next year, you can sell the 500 shares this year with the $1,000 gain and leave the earlier 500 shares alone. However, if you wait until next year to sell, you must sell the 500 shares with the $50,000 gain as you can no longer pick which tax lot to sell.
- With tax brackets for most people dropping next year (excluding those in AMT), then a deduction this year is more valuable than the same deduction next year. Additionally, state and local income taxes are no longer deductible. Actions: 1) prepay your expected state income tax in full or overpay it. 2) Make extra charitable contributions either outright or into a “gift” account where the funds are dispersed to charities in future years. 3) Prepay your January mortgage payment in December.
- To the extent you can control income, defer income into next year. However, don’t defer so much that it pushes you into a higher 2018 tax bracket.
- Medical Deductions may disappear next year (House Bill). For those expected to be over the 7.5% AGI threshold for medical deductions in 2017, try to anticipate and pay now for additional medical expenses expected in 2018. For example, if part of a long-term medical facility care is considered a medical expense, see if the facility will accept some payment now for 2018.
- 529 College Savings plans can now also be used for private schools before college (Senate Bill). Make additional contributions to 529 plans to cover pre-college and college expenses.
- For those in the Alternative Minimum Tax (AMT), recommended actions may be different.
Some of these recommendations may be changed depending upon the final tax bill passed by Congress and due to your unique tax situation, so make sure to contact your tax and financial advisor before taking any irreversible actions.
If you wish to discuss this with your WESCAP advisor, please provide WESCAP with a copy of your last federal and state tax return, if you have not already done so.