Tax Reform Bill Has Passed in the House of Representatives
Earlier today, the US House of Representatives passed the tax reform bill we'd been hearing about for several months in the news and heralded by our President as something that would stimulate massive investment and create all kinds of new jobs. I'm skeptical on that and cannot say I am happy with what I've seen, but this isn't a political commentary blog. Still, I feel the need to mention that the currently proposed tax reform will result in considerably decreased revenue, and will be largely devastating to the field of higher education, cause the real estate market to soften considerably in some parts of the country (for both new and existing houses) and result in wealthier taxpayers enjoying lower taxes at the expense of the middle and poorer classes of taxpayers (those with incomes under $ 24,000 remain largely unaffected and will continue to pay little or no tax). The bill passed without a single vote from any Democratic representatives (2 did not vote at all, the rest voted against), and 13 Republican representatives voting against the bill, hardly the wonderful "bi-partisan effort" on lawmaking that every President or House Speaker loves to cheer about. All but one of the Republican representatives that voted against this tax reform bill came from California, New Jersey and New York, where state and local taxes are generally the highest in the country (more on that below). Walter Jones, a Republican from North Carolina, also voted against this bill.
Here are some of the key parts of the House's successfully passed tax reform bill that affect most taxpayers:
Four new tax rates, ranging from 12% for married couples with taxable income under $ 90,000 and individuals with taxable income under $ 45,000, to 39.6 % for married couples with taxable income over $ 1 million and individuals over $ 500,000.
For the approximate 30% of taxpayers who itemize their tax deductions, they would no longer be able to deduct the state and local income taxes they pay on the state returns they file. They would also be limited to deducting no more than $ 10,000 of real estate taxes. This would largely explain the group of Republicans' vote, whose constituencies pay among the highest state income and real estate taxes in the country, choosing to dissent from the party line.
The state and local tax deductions being repealed or severely curtailed may not matter to many wealthier families, because they often lose these deductions when the Alternative Minimum Tax (AMT) is calculated on their income. The AMT would be repealed under the recently passed bill. However, many people forget that the AMT is actually an acceleration of one's lifetime income tax liability; in the years when regular income tax is computed as higher than the AMT, the taxpayer receives a credit for the AMT they paid in prior years; essentially the government is paying back the interest free loan the taxpayer was forced to give them. But if the AMT is repealed, it is not clear as to what would happen to prior years' tax credits built up from paying the AMT over the years if their is no separate tax to compare the regular income tax to.
Taxpayers who own a home and itemize their deductions would also only be able to deduct the mortgage interest on the first $ 500,000 of their mortgage balance. The National Association of Realtors and National Association of Home Builders will be putting forth heavy efforts to prevent this bill from becoming law for obvious reasons and it would make acquiring a home more difficult in the more expensive coastal states, ultimately causing a softening in the real estate market. Admittedly, the average homeowner carries a mortgage balance that is far less than $ 500,000, so most homeowners would not be affected by this change; proponents of this change will also claim that taxes are not the main driving reason behind the purchase of a home.
Charitable donations would still be deductible; however with a higher standard deduction of $ 24,400 for married couples and $ 12,200 for individuals, the number of Americans who itemize their deductions will likely decrease and thus fewer people will have a tax incentive to make charitable donations.
Although the standard deduction would be increased, a typical family of four takes the standard deduction would see more of their income taxed, as the personal exemption of $ 4050 per person we enjoyed on the 2016 return would be repealed. Under the old law, a family of four with the standard deduction would deduct a total of $ 28,900 from their income before it was taxed ($ 12,700 for the standard deduction, $ 16,200 for the exemptions), while under the new law, they would deduct only $ 24,000, resulting in $ 4900 additional income being taxed.
Whether they itemize deductions or not, taxpayers who move more than 50 miles to take a new job are allowed to deduct up to $ 5000 of moving expenses, but under the recently passed bill, only members of the armed forces who move pursuant to military orders will be able to do so. Moving long distance can be a costly expense, and I believe this deduction helped ease that burden as well as helped encourage people to make the effort to find more fulfilling and better paying jobs.
Another deduction that taxpayers below certain levels of income can take under the current law, whether they itemize or not, is up to $ 2500 in student loan interest paid. The House bill eliminates this deduction entirely. I know that for my first few years out of graduate school, when I began my career and was getting started in the workforce, this deduction helped ease the burden of my student loans on my government salary. Recent graduates with student debt would no longer have such a benefit, no matter what their income.
In another blow to the educational field, graduate students who receive teaching stipends and tuition funding from the university they attend (as well as typically do research and teach undergrads for the university) would be taxed on both the teaching stipends and the value of the free tuition. For example, a graduate student who receives an annual stipend of $ 20,000 for teaching undergrad students and $ 40,000 in tuition funding for doing research at the university they attend for their masters or PhD program would now be required to include a total of $ 60,000 of income on their returns, instead of just the $ 20,000 in teaching stipends they are required to include today.
The American Opportunity, Hope Scholarship and Lifetime Learning Credits are unchanged, saving students who pay tuition up to $ 2500 in federal taxes, but have been combined into the same program for the sake of simplicity.
Perhaps to make up for the repeal of the personal exemptions, the Child Tax Credit has been increased from $ 1000 to $ 1600, but is phased out for married couples with more than $ 230,000 of income and individuals with income of more than $ 115,000.
Individuals who receive self-employment income from their own business or a partnership in which they are actively involved would pay income tax at a special 25% rate instead of the regular tax rates. I am unclear as to how this part of the proposed new law would work and it appears that any person receiving self-employment or partnership income of less than $ 90,000 would pay a higher tax rate, but as always, the devil is in the details and I will reserve any judgment on this part of the bill until I better understand it. It is clear, however, that this tax rate would not apply to licensed professional businesses like my own and others such as doctors, dentists or architects.
For those who are able to accumulate significant wealth in the course of their lifetime but risk the unfortunate problem of only being able to pass on $ 5 million of it without suffering the estate tax, the exemption would be doubled to $ 10 million and then fully repealed after 2023. Whether our government deserves to have a share of the wealth built up by a hardworking and successful family over their lifetime is not something I want to debate, but I do believe the estate tax helps prevent all our country's wealth from being concentrated in the hands of a few super rich families (our President being among them). Let's not forget our history; such a scenario was at least a partially driving force behind some extremely violent and unpleasant revolutions in numerous countries.
Other areas have been affected by the recently passed tax reform but at some point I had to end this post. Do not make any plans around what I have just written; the Senate version of the proposed changes to our tax laws is somewhat different and will probably stall most of these changes from being formally written into law before Congress adjourns for the year. Furthermore, the Senate has a smaller Republican majority than the House and has a greater chance of deadlock, potentially further stalling these changes.
As I've said before, I try to avoid political commentary, but this has been the most shocking set of proposed changes to our system of taxation. Many people, potentially even myself, could benefit from these changes, but of course it is more than being just about me. Our country's future is at stake here. It is at a time like this that contacting your Representatives and Senators to express your opinion about these proposed changes is more important than ever, as I do not see the positive aspects being touted under this proposed tax reform (increased investment and job creation) materializing so easily, while the negative aspects of it (decreased tax revenue, softening real estate values, reduced support for higher education and wealth being concentrated in a smaller portion of the population) are of greater certainty.
Are you paying student loan interest? A proposed change to the student loan deduction may benefit you.
It's been four months since my last blog post, and though I apologize for not posting more often, there hasn't been much to report about on the taxation front as our current Presidential administration attempts to push its tax reform proposals through Congress while trying to explain how the decreased revenue the federal government needs will be replaced. So far, no real answers on that front.
Our President is not the only one proposing changes to our federal tax code, however realistic or unrealistic they may be. Six different Congressional representatives, together, have sponsored a new bill that proposes a potentially beneficial change to those who pay student loan interest, known as the Student Loan Interest Tax Deduction Expansion Act, also known as bill number HR3573. I am not one to get very political on my blog or with clientele, but I think this proposed change in the law merits some attention, as many of my clientele are paying a substantial amount of student loan interest every year and there has been a constant call for student loan reform over the last ten years. For some, the interest is deductible and saves them a noticeable amount of federal tax, while for others it has much less of an effect on their return or no effect at all. This proposed change could significantly increase the deduction for those already receiving it, and potentially grant a deduction to those who earned too much to benefit from the interest deduction before.
Currently, student loan interest paid during a year is deductible from your taxable income whether you itemize deductions or not - if you do not itemize and take the standard deduction, you also receive a deduction for student loan interest, just as you would if you itemized deductions. However, the total amount you may deduct is capped at $ 2500 per year, no matter how much you paid. Also, if you file as single or head of household, and your annual income is greater than $ 65,000, the deduction begins phasing out and phases out entirely if your total income is $ 80,000 or more. For those filing joint returns with their spouse, the deduction begins to phase out at $ 130,000 and phases out entirely at $ 160,000 in annual income. For anyone paying over $ 2500 in student loan interest every year and/or earning more than these income thresholds, the monthly student loan payment can be a constant thorn in the side if it does nothing to reduce annual taxes, as was the case for me about three years after I finished graduate school - I continued to make student loan payments for another 6 years, but not a penny of the interest was deductible because my income exceeded threshold for single filers (not asking for any sympathy here, just expressing my frustration over a deduction I enjoyed for three years and then had taken away from me).
Under the proposed new law, the amount of deductible student loan interest would be capped at a much higher $ 7500 for single filers and $ 15,000 for married filers, and would be disallowed (not gradually phased out) for single filers with income of more than $ 100,000 per year and married filers with income totaling more than $ 200,000 per year. I have numerous clients who would either see a greater deduction or receive a new deduction they were not receiving before. At least a few clients of mine are below the current annual income thresholds and allowed to take the deduction but pay well more than the current cap of $ 2500 in student loan interest; this proposed change would be of great benefit to them.
Just like our president's tax proposals, this would reduce the revenue flowing to the federal government, at least in the short term, and it is doubtful that the final version of this law, if it passes, will have the loan interest deduction caps and income thresholds as they are proposed now. Nevertheless, we have heard numerous news stories about the constant push for student loan reform, and I think this would be a step in the right direction. If you currently pay student loan interest, whether or not this proposed law would benefit you, I urge you to contact your congressional representative (who can be found on the website www.house.gov by entering your zip code) and tell them you believe HR3573 is a bill worth supporting. I know it would have helped me for all those years I wrote monthly checks to Sallie Mae but received no tax benefit for all the interest I paid.
Trump's Proposed Tax Plan - A Quick Look
The late nights, early mornings and heavy caffeine consumption associated with busy season are over and I'm ready to start posting more useful information on this blog (it's about time after all).
By now, you are probably aware of our new President's proposals to overhaul and greatly change the federal income tax. At this time, these are nothing but proposals but it is safe to say that some of them will come to fruition in the coming months and will likely apply to your income tax filing next year.
Here's a brief summary of what has been proposed:
The seven current tax brackets with rates of 10%, 15%, 25%, 28%, 33%, 35% and 39.6% would be reduced to just three brackets at rates of 10%, 25% and 35%. The President claims that this would simplify our current tax system. While this sounds like a simplification of our current tax system, in reality it only makes the last calculation on your return somewhat simpler and does not simplify the computation of your taxable income, which ultimately drives our nation's tax policy and our individual tax planning.
The standard deduction for married couples would be nearly doubled to $ 24,000 and presumably the standard deduction for single people would be $ 12,000. Approximately 2/3 of our nation's tax return filers use the standard deduction. The majority of my clients itemize deductions, consisting mostly of mortgage interest, local property taxes, state income taxes and charitable donations. For many of my clients who itemize their deductions, this substantial increase to the standard deduction would wipe out the itemized deductions, since the standard deduction would be greater. I have some clients who chose to accelerate certain deductions in 2016 and others who plan on doing so in 2017 (i.e. making early property tax payments since they will not make an impact on their 2018 taxes). Furthermore, many people in the market to purchase their first home may be re-considering that decision, as the no longer deductible mortgage interest and property taxes would have less or no impact at all on their future taxes.
The Alternative Minimum Tax (AMT) would be repealed under the current proposals. The AMT is a parallel tax system, largely applying to higher income clients. It adds back certain deductions (state and local taxes for most people), and taxes the income at a flat 26% or 28% rate. This tax ensures people at certain levels of income pay a minimum amount of tax no matter what their potential deductions are.
The estate tax would also be eliminated under the proposed tax overhaul. Given that the estate tax currently does not apply to persons who pass away with less than $ 5.49 million in assets, this issue affects very few of my clients.
Perhaps most interestingly, our President has indicated that income from pass-through entities - partnerships, sub-chapter S corporations and single-member LLCs, would be taxed at the newly proposed corporate tax rate of 15%, rather than as regular personal income. Arguably, this could spur more entrepreneurship as it gives people who are thinking about going into business for themselves another reason to do so. However, taxes are usually not what motivates people to start their own business.
All of these proposals, if implemented have been computed as resulting in a substantial loss of revenue to the government, and there has been little explanation as to how the lost revenue would be made up. Larry Summers, who served as Secretary of the Treasury under former President Clinton, has strongly criticized this plan as being unrealistic and states he would have left his job if such a plan had been implemented in the administration in which he served. Therefore, while paying attention to these proposals for your own tax planning is important, it's important to realize these are still just proposals and it is unlikely they will all become law.
Busy Season Begins...
Busy season has begun again and I already feel myself getting backed up. I don't expect I'll be posting very much over the next few months as I work on returns seven days a week with a lot of late nights and the occasional early morning when I happen to wake up before the rest of the family does.I do hope to make at least one more post before my work gets heavily backlogged, but let me repeat some advice from last season. If you have all or most of your tax records now and are ready to start having your annual return prepared, now - and I mean right now - is the time to get these records to your tax professional. Chances are that he or she will be able to prepare it in a very short time and get it filed quickly, because few of their clients have all the necessary records ready for them. If you're receiving a refund, you'll be receiving that much sooner and if you owe money, you'll have a substantial amount of time to get to the money together to pay it by the April 18, 2017 deadline. If you have most, but not all, of your tax records available to you, submitting them to your tax professional is also a good idea, because when you get the rest of them, your return will also likely get prepared much faster, as your tax professional will probably have already entered what you sent to them earlier. Furthermore, the sooner you get your tax return done, the sooner you can start planning for next year's tax return and make whatever adjustments you need to get a more pleasing result when you file your 2017 tax return. Whether it means putting more in your 401(k) plan, increasing deposits to your health savings account, making higher estimated payments, changing your withholding so you don't have the "sticker shock" of owing a large amount when it's time to file, or getting a planned giving arrangement set up to take the highest possible advantage of the charitable deduction, the earlier in the year you do it, the better the benefit to you.