2017 Tax Reform: Proposed Individual Tax Changes

The Tax Cuts and Jobs Act was released on Thursday, November 2, 2017 and there are major changes that could impact the tax system if passed. This post will describe all the changes to individual income taxation; and next week we will post about the corporate tax changes. Some of the changes to individual taxation include a reduction in the number of tax brackets, an increase in the standard deduction, the reduced maximum rate on business income, the repeal of personal exemptions, changes to the child tax credit and adoption credits, and limitations on certain itemized deductions such as mortgage interest, state & local taxes, real estate taxes, and medical expenses.

Changes to Tax Rates & Brackets

The proposed Act would reduce the number of tax brackets from seven (ranging from 10% to 39.6%) to four (12%, 25%, 35%, and 39.6%). Below is a table of the tax rates and the income levels that they begin:

Single Taxpayers

Income Level/Tax Rate
$0 - $11,999; 0%
$12,000 - $44,999; 12%
$45,000 - $129,999; 25%
$130,000 - $499,999; 35%
$500,000+; 39.6%

Married Filing Joint Taxpayers

Income Level/Tax Rate
$0 - $23,999; 0%
$24,000 - $89,999; 12%
$90,000 - $259,999; 25%
$260,000 - $999,999; 35%
$1,000,000+; 39.6%

Under the proposed Act, capital gains would be taxed at 0% for income levels under $77,200 for married taxpayers (half of the joint amount for single taxpayers), 15% for income levels under $479,000 for married taxpayers (half for single taxpayers), and 20% for income levels above those thresholds.

Increase in Standard Deduction & Elimination of Personal Exemptions

The proposed Act would increase the standard deduction to $24,400 for joint filers, $18,300 for head of household filers, and $12,200 for single filers. The Act would also repeal the deduction for personal exemptions, which is scheduled to be $4,150 per exemption.
25% Maximum Rate on Business Income of Individuals

The Act proposes a new maximum rate of 25% on the qualified business income of individuals. This means that income passed from a partnership or S Corporation would be taxed at 25% to the individual, compared to ordinary income tax rates as the law applies now.

Changes to the Child Tax Credit & New Family Tax Credit

The Act proposes that the child tax credit would increase from $1,000 to $1,600. This credit would be refundable up to $1,000. In addition, the Act proposes a “family flexibility credit”, a non-refundable $300 credit for each spouse.

The adoption credit would be repealed under the proposed Act.

Changes to Education Costs

Under the new proposal, the current three education credits (American Opportunity Credit, Lifetime Learning Credit, and Hope Scholarship Credit) would all be consolidated into one, called the Enhanced ATOC. The new credit would provide a 100% tax credit for the first $2,000 of qualifying higher education expenses and a 25% credit for the next $2,000 for a maximum $2,500 tax credit.

The Act proposes expanding Section 529 plans to cover up to $10,000 a year in elementary and high school expenses. It would also include expenses associated with apprenticeship programs. Currently, Section 529 plans can only be used for higher education expenses.

The plan would also repeal above-the-line deduction for student loan interest paid and employer-provided education assistance under Section 127 (currently taxpayers can exclude a maximum of $5,250).

Changes to Itemized Deductions

Under current law, mortgage interest, subject to a $1 million mortgage cap, can be included in itemized deduction. However, under the new proposal, the cap would be limited to $500,000. The Act would also limit taxpayers to only one qualified residence. State and local property taxes can still be itemized, but limited to $10,000.

State and local income taxes, sales taxes, tax preparation expenses, medical expenses, expenses attributable to the trade or business of being an employee, and personal casualty losses would all be repealed under the new Act.

Charitable contributions would increase from the 50% limitation under Section 170 for cash contributions to public charities and certain private foundations to 60%.

Changes to Income and Above-The-Line Deductions

Under the new proposal, the alimony deduction would be repealed. Instead, alimony would be paid out of after-tax dollars and would be tax-free to the recipient.

The deduction for moving expenses would be repealed under the new Act.

The Act proposes that in order to exclude gain from the sale of a principal residence, a taxpayer would have to own and use the home as a residence for five out of the previous eight years, as opposed to two out of five years under current law. In addition, the exclusion could only be used once every five years, and would be phased out at higher income levels.

The Act also proposes the current-law exclusions for the following be repealed: employee achievement awards exception, dependent care assistance programs, and adoption assistance programs.

Alternative Minimum Tax Repeal

The Act proposes the repeal of the Alternative Minimum Tax (AMT).

Estate & Generation-Skipping Transfer Taxes

The Act proposes to double the current base exclusion for estate taxes (currently $5 million) to $10 million, and to repeal the estate and generation-skipping taxes to decedents dying after December 31, 2023, while still maintaining a beneficiary’s stepped-up basis in estate property.

These proposals have not been finalized and we’re anticipating many changes to the proposed Act. If you have any questions, please feel free to contact David Zajac at The Ten Key Group at (234) 334-1966.