The Tax Cuts and Jobs Act: What’s next
On November 2, a proposed tax bill was revealed by the House Republicans that would make sweeping changes to both business and individual tax rules. Let’s take a look at a few of the proposed changes.
One important thing to note is that retirement tax incentives, such as the pre-tax deferral treatment of contributions into 401(k) and other defined contribution plans, did not see changes under the proposed bill.
However, there are key provisions that would significantly impact businesses and taxpayers. If passed, these provisions would take effect January 1, 2018. Remember, these are simply proposed changes. There are many steps to the process.
Here are a few additional points to note to the proposed bill.
Retirement savings changes
Under the draft bill, IRA holders won’t be able to switch traditional IRA contributions to Roth contributions, or vice versa, as allowed now with IRAs only (switching back and forth is not allowed under retirement plans like a 401(k)). The ability to reverse traditional IRA-to-Roth-IRA conversions would also be eliminated. In addition, the bill would also change the requirements for individuals requesting 401(k) plan loans, hardship withdrawals, earlier distributions, and impact loan repayment deadlines.
Fewer tax brackets
The bill reduces the number of tax brackets from seven to four. For those with investment income, this means some will pay less in taxes on short-term capital gains and dividends.
The bill doubles the standard deduction from $6,350 to $12,000 for individuals, and increases the standard deduction from $12,700 to $24,000 for married couples. It also eliminates the $4,050 per-household-member personal exemption.
Changes to often used deductions
Under the new draft, a $10,000 deduction can be taken on local property taxes, but eliminates other state and local tax deductions. And, the bill proposes a cap on mortgage interest deductions up to $500,000.
Expanded child tax credit
The credit increases from $1,000 to $1,600 per child, with an additional $300 credit for any parent or non-child dependent.
Elimination of the estate tax and AMT
The bill proposes to double the exemption on the estate tax and repeals the tax in six years. It also eliminates the Alternative Minimum Tax (AMT) for those whose adjusted gross income is as the follows:
- Single or Head of Household: $54,300
- Married Filing Jointly or Widow(er): $84,500
- Married Filing Separately: $42,250
And begins phasing out at a 25% rate for adjusted gross income as follows:
- Single or Head of Household: $120,700
- Married Filing Jointly or Widow(er): $160,900
- Married Filing Separately: $80,450
Corporate and business changes
The proposal calls for a change in the corporate tax rate from 35% to 20%. It also changes the business income tax rate and how income from foreign countries is taxed.
Now that the House bill has been released, the tax writing committee (Ways & Means) will present an opportunity for the bill to be changed and voted on before going to the House. At the same time, the Senate Finance Committee is expected to launch their own process. The bill must pass both chambers before both groups come together to pass final legislation with revisions.
What does it mean for you?
Tax reform is complicated. This is just a snapshot of the proposed changes. To fully understand the implications, it’s important to find trusted resources to help you sort through the potential impacts.
Steps you can take:
- Visit the Tax Foundation or the Tax Policy Center to get more of the full picture.
- Find out how the changes to state and local taxes could impact you based on where you live.
- Contact your financial or tax professional and ask about the potential impacts on your personal situation.
- Contact your elected officials to find out where they stand.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
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