A Forest of Changes Potentially Ahead: Individual Tax Reform through the TCJA
from Carr, Riggs & Ingram
Individuals are highly anticipating the sweeping tax reforms that have been promised by Republicans in Congress and the White House. While the House and Senate have each passed their respective versions of that tax reform, Congress will need to negotiate a single tax package before those provisions can be signed into law. To help individuals see through the brush of the Tax Cuts and Jobs Act of 2017 (TCJA) and where potential tax compromise may result, we will compare and contrast some of the major provisions in each the House and Senate tax reform bills.
Rooted in Consistency: Areas Where the Bills Agree Regarding Important Individual Tax Provisions
- Personal Exemptions and Standard Deduction. Both tax bills eliminate the deductions for personal exemptions. But the bills also nearly double the standard deduction amounts and index the higher standard deduction for inflation.
- State and Local Tax Deductions. The deduction for state income or sales taxes is eliminated under both bills. They retain a deduction for property taxes but cap the deduction at $10,000.
- Itemized Deductions. Both plans eliminate the Pease limitation, which limits the amount of itemized deductions certain higher income individuals can take.
- Carried Interest. Individuals that earn partnership interest for performing services have historically received long-term capital gain treatment when they ultimately sell that interest. Both bills would impose a three-year holding period of that partnership interest before individuals could receive the benefit of the long-term capital gain tax rates.
- Principal Residence Gain Exclusion. The bills retain the exclusion from income on gains from the sale of a principal residence ($250,000 for single filers and $500,000 for married couples). However, both bills increase the holding period from the current threshold (two out of five previous years) to a longer period (five out of the previous eight years).
Please note that while both bills seem to agree in the above areas, there are still some subtle differences that the joint committee will need to negotiate. For example, both bills are consistent regarding increasing the holding period on the primary residence gain exclusion. However, the House version goes a step further and begins to phase-out that gain exclusion for taxpayers earning more than $500,000.
Different Branches: Major Differences Between the Bill’s Individual Tax ProvisionsDifadfad
|Individual Tax Rates||Seven tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 38.5%)||Four tax brackets (12%, 25%, 35%, and 39.6%)The 12% bracket is phased-out for high-income individuals.|
|Family Tax Credits||Increases the child tax credit from $1,050 to $2,000Provides a $500 credit per non-child dependent||Increases the child tax credit from $1,050 to $1,600Provides a $300 credit per non-child dependent|
|Individual Alternative Minimum Tax (AMT)||Increases individual AMT exemption and phase-out thresholds so that fewer people would be subject to AMT||Repeals the AMT completely|
|Estate Tax||Doubles the $5.6M estate tax exemption but doesn’t repeal the estate tax||Doubles the $5.6M estate tax exemption and repeals the estate tax completely after 2024|
|Affordable Care Act (ACA) Individual Mandate||Repeals the penalty imposed on individuals for failing to have health insurance (beginning in 2019)||Does not repeal the individual mandate penalty|
|Mortgage Interest Deduction||Keeps the current mortgage interest deductionEliminates the current deduction for interest on home equity loans||Keeps current mortgage interest deduction for existing mortgages on primary residence, but caps the deduction for future loans at $500,000Eliminates the interest deduction on second homes|
|Education-Related||No changes from existing law||Repeals student loan interest deductionRepeals deduction for tuition and related education expenses
Makes tuition reduction amounts provided by educational institutions taxable to the students
CRI is Well-Planted to Deliver Individual Tax Reform Information
Many of the Senate provisions above are set to expire after 2025, while many of the House bill provisions do not sunset. CRI will continue to monitor the legislative pruning and provide you with proactive advice as the bill goes to joint committee for discussion and matures.