Impact of Tax Reform on Individuals - Windham Brannon Ta… · • Employer provided education...
Transcript of Impact of Tax Reform on Individuals - Windham Brannon Ta… · • Employer provided education...
Tax Cuts and Jobs Act of 2017
• House Passage of HR-1• House of Representatives passed bill by vote of 227-205
on November 16• Thirteen Republicans voted against bill• All but one of House Republicans who voted no are from
New York, New Jersey, and California• No Democrat voted for it
Budget Reconciliation Process
• Senate generally requires 60 votes to pass legislation and avoid filibuster
• Special budget reconciliation rules allow tax bill to move forward with simple majority vote in Senate
• Limit increase in federal budget deficit to $1.5 trillion over 10 years
Chances of Passage in Senate
• Final Senate vote could come as early as November 30• There are 52 Republican Senators• Sen. Ron Johnson (R-Wisconsin) and Steve Daines (R-
Montana) argue that tax rates on pass through entities are too high
• Sen. Susan Collins (R-Maine) opposes repeal of health care mandate
• Sen. Jeff Flake (R-Arizona) and Bob Corker (R-Tennessee) are concerned about budget deficits
• Other possible swing votes: Sen. John McCain (R-Arizona) and Sen. Lisa Murkowski (R-Alaska)
Tax Brackets for Married Couple Filing Jointly
$- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000
$1,000,000 $1,100,000
2017 House
10% 12% 15% 25% 28% 33% 35% 39.6%
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Tax Brackets for Single Individual
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
2017 House
10% 12% 15% 25% 28% 33% 35% 39.6%
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Tax Bracket for Trusts & Estates
$- $2,000 $4,000 $6,000 $8,000
$10,000 $12,000 $14,000 $16,000 $18,000 $20,000
2017 House
12% 15% 25% 28% 33% 35% 39.6%
Taxa
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Inco
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Phase Out of 12% Bracket
• Phase out benefit of 12% bracket by increasing tax by 6% of excess AGI over threshold
• Threshold is $1.2 million of AGI for joint returns, $600K for MFS, and $1 million for other individuals
• Does not apply to estates and trusts
Capital Gains Tax Rates
• 0% capital gains tax rate for taxpayers in 12% bracket
• 15% capital gain tax for 25% and 35% brackets• 20% tax rate for 39.6% bracket taxpayers
Change in Inflation Indexing
• Current tax brackets and exemptions adjust for Consumer Price Index (CPI)
• House bill ties inflation indexing to Chained CPI• Chained CPI assumes that consumers will choose
less expensive substitutes in inflationary times. • Consumers’ reduction of quality of consumed
goods reduces inflation
Divorced Taxpayers
• Currently, alimony is taxable to recipient and deductible to payor
• House bill provides that alimony will not be taxable or recipient nor deductible by payor
• Effective for agreements executed after 2017• No provision in Senate bill
Repeal of Tax Free Fringe Benefits After 2017
• Dependent care assistance programs – current exclusion is maximum of $5,000 per employee per year
• Qualified tuition reduction – attention Emory University Courtesy Scholarship families!
• Employer provided education assistance – $5,250 per employee is currently tax free
• Employer provided housing• Adoption assistance programs – currently $13,570 per
adoption; phases out for higher income taxpayers• Employee achievement awards – currently tax-free up
to $400 per employee for nonqualified awards and $1,600 for qualified awards
Capital Gains – Cost Basis Choices
• Current law provides choice of methods to use for cost basis when selling securities. Choices are average cost, first in, first out (FIFO) and specific identification
• House bill does not change current law• Senate bill requires that cost basis of securities sold
after January 1, 2018 use FIFO except to extent that average cost is otherwise allowed
Sale of Principal Residence: Gain Exclusion
• Gain exclusion limited to $500K for joint filers and $250K for singles; does not change
• Currently available if live in home for 2 out of past 5 years
• House bill provides gain exclusion only if live in home for 5 out of past 8 years
• House bill provides exclusion can only be claimed once every 5 years
• House bill phases out exclusion by $1 for every dollar of AGI over $500K for joint returns and $250K for singles; average of income for year of sale and 2 immediate prior years
Repeal of Deductions
• State and local income tax except for taxes incurred in carrying on a business
• Property tax over $10,000• Sales tax• Medical expenses (House bill not Senate)• Personal casualty losses, except for disasters• Unreimbursed employee business expenses• Moving expenses• Tax return preparation expense
Mortgage Interest Deduction
• Current interest deduction• $1 million of acquisition debt ($500K for MFS) and
$100,000 of home equity debt ($50K for MFS)• Principal residence and one other residence
• House bill• Grandfathers existing debt, including refinancing• Limits deduction to interest on $500K of debt incurred
after November 2, 2017• Can only deduct interest on a principal residence• Interest on home equity debt is non-deductible
Charitable Contributions
• Cash contributions currently limited to 50% of adjusted gross income (AGI)
• Change cash contribution limit to 60% of AGI after 2017• Repeals 80% charitable deduction for contributions to
university athletic seating rights• New standard mileage rate for charitable use of an auto• Repeals the exception that allows charities to file a
return with required documentation rather than delivering information to donor directly
“Pease” Limitation on Itemized Deductions
• Requires higher-income individuals to reduce itemized deductions
• Lesser of 3% of AGI above a threshold or 80% of itemized deductions
• Threshold is AGI over $313,180 for joint filers and $261,500 for singles
• House bill repeals Pease limit
Education Funding Accounts
• Coverdell Education Savings Accounts• Prohibit contributions after 2017• Provides tax-free rollover into Section 529 plans
• Section 529 Plans• Distributions of up to $10,000 per year may be used for
qualified expenses for elementary school and high school
• Qualified expenses include expenses associated with apprenticeship programs
• Unborn child (in utero) may be named as a designated beneficiary
Education – Items to Repeal
• Student loan interest deduction• Tuition and fee deduction• Exclusion of interest from U.S. Savings Bonds Series
EE and Series I (issued after 1989) used for qualified higher education expenses
• Repeals begin in tax year 2018
Personal Exemptions
• Currently $4,050 per person• Phases out for married couples beginning with AGI
of $313,800 and $261,500 for singles• House bill repeals at end of 2017 & consolidates
into standard deduction
Alternative Minimum Tax
• House bill repeals for 2018 tax year• Currently, taxpayers receive a tax credit for all or
some of AMT paid in prior years• House bill allows refund claims for 50% of
remaining AMT credits in 2019, 2020, and 2021• Taxpayers can claim refund for 100% of remaining
credit in 2022
Education Tax Credits
• Combine current American Opportunity Tax Credit (AOTC), Hope Scholarship Credit, and Lifetime Learning Credit into one enhanced AOTC
• Repeal Hope and Lifetime Learning credits• Limit AOTC to 5 years of post secondary education
with credit in 5th year only half the rate of 1st 4 years
• Reduce refundable portion of credit from $1,000 to $500
Child Tax Credit
• Current Law• Credit is $1,000 per child under age 17• Credit begins to phase out when MAGI exceeds $110K
for joint filers and $75K for singles• Credit is refundable for some taxpayers
Child & Family Tax Credits
• Changes• Credit increases to $1,600 per child • Additional $300 non-refundable credit for non-child
dependents• New family flexibility credit of $300 • $300 credits phase out in 2022• Phase out begins when MAGI exceeds $230K for joint
returns and $115K for singles• Portion of credit is refundable for some taxpayers
Energy Tax Credits
• Current credit extended through 2022• Credit rate of 26% for property placed in service
during 2020• Credit rate of 21% for property placed during 2021
Repeal of Tax Credits
• Electric vehicle credit• Adoption credit• Disability retirement credit• Mortgage interest credit
Estate Tax
• 2018 exemption is currently is $5.6 million per person
• House bill doubles estate tax exemption and GST exemption to $11.2 million per person; continue adjustment for inflation
• Estate tax remains at 40%• House bill repeals estate tax and GST after 2023• Basis step-up is preserved• No portability beginning in 2024
Estate Tax Timeline
• 2018-2023 double current exemption • 2024-2027 estate tax is repealed• 2028 reverts to existing law
Gift Tax
• Current gift tax exemption and rate are same as estate tax
• House bill does not repeal gift tax• House bill lowers gift tax rate to 35% for transfers
after 12/31/2023• Retains annual gift tax exclusion; $15K per person
in 2018, up from $14K per person in 2017
#WBInsights17
The Budget Numbers
• Major Sources of Revenue• Repeal personal exemptions:
$1.57 trillion• Repeal itemized deductions:
$1.26 trillion• Repatriation Tax:
$223 billion
• Major Revenue Losses• Changes to estate, gift, and GST
tax: ($172 billion)• Decrease individual tax rates:
($1.1 trillion)• Increase standard deductions:
($921 billion)• Repeal AMT: ($737.0 billion)• Flat 25% pass through rate:
($448 billion)• Flat 20% corporate tax rate:
($1.46 trillion)
Preliminary Budget Estimatesfrom the Joint Committee on Taxation
Example Taxpayers:Impact of Senate Version of Tax
Changes
James Jason Amber Kayla & Nick Sophie & Chad
Ordinary Income $30,000 $52,000 $75,000 $85,000 $165,000
Pass Through Income $- $- $- $- $-
Marital Status Single Single Single Married Married
Earners 1 1 1 1 2
Children - 2 - 2 2
Tax Def. Retirement Contrib.
$2,600 $4,000 $5,500 $5,500 $20,000
Deductions Standard Standard Standard Standard Itemize
Current Law $4,331 $5,198 $16,104 $11,035 $29,345
Proposed Law $3,953 $3,306 $14,327 $8,782 $27,122
Change in Tax $(378) $(1,892) $(1,777) $(2,253) $(2,223)
% Change in Tax -9% -36% -11% -20% -8%
% Change After Tax Income
1.3% 3.6% 2.4% 2.7% 1.3%
Source: Tax Foundation
Example Taxpayers:Impact of Senate Version of Tax
Changes
Soren & Linnea Laura & Seth Olivia & Richard Joe & Ethan
Ordinary Income $325,000 $2,000,000 $800,000 $48,000
Pass Through Income $- $- $- $-
Marital Status Married Married Married Married
Earners 2 1 1 Retired
Children 3 2 2 -
Tax Def. Retirement Contrib.
$37,000 $18,500 $18,500 $-
Deductions Itemize Itemize Itemize Standard
Current Law $71,629 $713,234 $318,315 $3,497
Proposed Law $64,456 $703,749 $292,478 $3,227
Change in Tax $(7,173) $(9,485) $(25,837) $(270)
% Change in Tax -10% -1% -8% -8%
% Change After Tax Income
2.2% 0.5% 2.6% 0.6%
Source: Tax Foundation
Planning Actions
• Traditional advice to defer income/accelerate deductions still applies
• If not in AMT, prepay state income tax by 12/31/2017
• For those who take medical expense deduction, maximize 2017 medical costs and prepayments
• Prepay required charitable contributions for college athletic seating in 2017
Planning Actions
• If not in 2017 AMT, avoid purchase of GA film credits and low income housing credits
• Accelerate closing date into 2017 for high income taxpayers selling a principal residence
• Make 2018 reservation for GA education expense credit by 12/15/2017
• Do not make a 2017 gift for which gift tax is owed• Purchase fixed assets used in business by
12/31/2017
Georgia Rural Hospital Tax Credit
• As a response to the financial challenges faced by Rural Hospitals, Georgia Governor Nathan Deal signed into law Senate Bill 258
• Effective January 1, 2017, taxpayers who contribute to qualified rural hospital organizations (RHOs) located in Georgia are awarded a 90% tax credit
Qualifying Rural Hospitals
• County population of 50,000 or less• Acceptance of Medicare and Medicaid• Minimum annual provision for indigent care• File 5-year plan with GA Department of Community
Health
Size & Duration of Program
• Annual limit on credits is $60 million per year• Each rural hospital cannot access more than $4
million of credits• Applies for 2017, 2018, and 2019 tax years• Unless renewed, automatically repealed on
December 31, 2019
Limits on Size of Program
• From January 1 through June 30 of each year, Georgia Department of Revenue will only approve $2 million of requests from individuals and $2 million from corporations
• From July 1 to December 31 of each year, DOR will approve additional requests, up to $60 million overall limit
Making a Donation
• Complete Georgia Heart tax credit form https://www.georgiaheart.org/my_georgia_heart/tax_contribution
• Georgia Heart submits application to GA Department of Revenue
• Within 30 days, DOR notifies its approval
Making a Donation
• Within 60 days of DOR approval, contribute to hospital by making check payable to hospital and send to Georgia HEART
• Within 30 days of confirmation of contribution, Georgia HEART provides instructions for required confirmation done on GA Tax Center on-line account
• GA HEART confirms completion
Deadline
• Must complete all required steps by December 31 to claim credit in that year
• Georgia HEART will begin accepting applications for 2018 credits on January 2, 2018
Income Tax Treatment
• Federal deduction – charitable contribution for 100% of contribution
• Georgia credit – 90% of contribution• Georgia deduction – none
Maximum Credit Limits
• Single individual – $5,000• Married couple – $10,000• Trust – 75% of GA tax• C Corporations – 75% of GA tax• No increased limits for owners of pass-through
entities
Maximum Contributions
• Single – $5,555 contribution * 90% = $5,000 credit• Married couple – $11,111 contribution * 90% =
$10,000 credit
Tax Credits: Rates of Return
Credit AMT No AMT Maximum Purchase
Education expense 127% 96% $10K but oversold (got 50% in 2017)
Rural hospital 119% 91% $10,000Film at $0.92 105% 107% UnlimitedLow income housing at $0.90 107% 109% Unlimited
Contact Information
Barbara M. Coats, CPAPrincipal
Windham Brannon
3630 Peachtree Road NE, Suite 600
Atlanta, GA 30326
Main: 404.898.2000
Direct: 678.510.2724
Fax: 404.898.2010
Email: [email protected]