U.S. Senate Passes the Tax Overhaul Bill: U.S. Senate Passes the Tax Overhaul Bill: What’s Next and How to Plan for 2018
In the early hours of December 2nd, the U.S. US Senate passed the tax overhaul bill in a vote of 51-49 mostly along party lines.
Tax Planning in December 2017
In planning for the final tax bill to become effective for 2018, there are many opportunities to delay recognition of income now that may be subject to lower tax rates and accelerate payment of expenses that will qualify for the itemized deduction. These include:
- Self-employed individuals should send invoices typically received in December in January.
- Homeowners with mortgages in excess of $500,000 should consider paying any January 2018 mortgage payments now because such a payment includes December interest.
- Taxpayers whose real estate taxes are in excess of $10,000 should consider prepay real estate taxes due in the first quarter before the end of this year.
- Individuals who make estimated tax payments should pay fourth quarter state income tax before the end of 2017 rather than in January when due.Individuals who make large donations to charity should make any 2018 donations in 2017.
- If you are moving shortly, try to pay all of your moving-related expenses before the end of 2017.
- For businesses, if you own any rental properties, consider placing these properties into an LLC or other pass-through entity.
What to Expect Next
The next steps will be the House and Senate reconciling these differences and another full vote by each. Some provisions of the Senate bill are permanent, such as the change to the corporate tax rate; however, many are set to expire as early as the end of 2025.
Proposed Changes to the Tax Structure: How the Senate and the House Bills Compare
- Income Tax Brackets for Individuals: The Senate bill has seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. The House includes only four: 12%, 25%, 35%, and 39.6%. Personal Exemption: Both bills also eliminate the personal exemption.
- Standard Deduction: The Senate bill increases it to $12,000 for individuals and the House increases it to $12,200.
- Child Care Tax Credit: The Senate bill increases it to $2,000 per child (the second $1,000 will not be refundable) and provides a $500 credit for non- dependent children. The House bill increases it to $1600.
- Itemized Deductions: Both bills allows for a property tax deduction up to $10,000. The Senate bill allows an interest deduction on mortgage debt up to $1,000,000, while the House version caps the loan limit at $500,000 for new mortgages. The Senate bill keeps the medical and dental expense deduction but temporarily lowers the 10% threshold to 7.5% for 2017 and 2018. The House bill eliminates it. The charitable donation deduction remains the same in both bills. The Senate bill eliminates some above the line deductions, such as moving expenses. However, it also increases the deduction for education expenses for teachers from $250 to $500. Both bills eliminate all other itemized deductions.
- Alternative Minimum Tax (AMT): The Senate keeps the AMT with marginal increases to the threshold amounts, while the House eliminates it.
- Estate, Gift and GST Tax: While the House bill repeals the estate tax, the Senate bill allows for an exemption amount up to $10,000,000 per person.
- Estates and Trusts Income Tax Rate: The Senate increases the threshold at which Estates and Trusts reach the maximum tax rate from $7,500 to $12,500.
- 529 Plan Expansion: The Senate bill allows up to $10,000 per year of federal savings accounts for educational purposes to be used for tuition at elementary and secondary schools and expenses for home-schooled students in addition to the post-secondary schools.
- Sale of Principal Residence: The Senate bill increases the timing that the $250,000 ($500,000 for married couples) exclusion of gain on the sale of your principal residence can be applied to property used and owned to five out of the last eight years.
- Corporate Tax Rate: Both alter the corporate tax rate to 20%.
- Pass-Through Business Income Tax Rate: The House bill drops the top income rate to 25% and 9% for businesses earning less than $75,000. The Senate bill includes a 23% income rate however the deduction would only be available to anyone in a service business earning less than $250,000 for an individual and $500,000 for a married couple. The new House proposal taxes pass through entities at a flat 25% and not at the property owner’s income bracket. In the Senate bill, landlords earning more than $700,000 annually would stay at a top rate of 38.5% unless the rental properties or a management company pays out significant w-2 wages. These provisions under both the House and Senate bills are not applicable to service professionals.
- Multinational Corporations: US companies currently pay taxes on worldwide profits, no matter where such income is earned. The Senate proposal makes the US a territorial system, allowing companies to pay taxes on income earned only within the US. Both bills also include a repatriation tax ranging from 7 – 14% to encourage US businesses to bring assets back to the US.
Gibney is continuing to monitor these developments. For questions about the tax proposals or planning for 2018, please contact: