November 15, 2017
As this article went to press, the Senate was modifying its tax reform bill, which is now expected to include repeal of the Affordable Care Act’s individual mandate. Additional tax changes are also expected, including full repeal of the estate tax.
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As the year draws to a close, tax reform remains a priority of both President Trump and Congressional Republicans. With the introduction of the Tax Cuts and Jobs Act legislation in the House and Senate, both the President and leaders in Congress have made clear their intent to enact broad individual income tax reforms.
The House version of tax reform would, among other things:
Tax Rates
  • Create individual income tax brackets of 12%, 25%, and 35%, while maintaining a 39.6% bracket for incomes over $1,000,000 for joint filers, or over $500,000 for singles, and would impose a phase out for high income taxpayers of the tax benefit of the 12% bracket;
  • Set the standard deduction at $24,400 for married couples, $18,300 for unmarried individuals with at least one qualifying child, and $12,200 for all other taxpayers (subject to inflation), but repeal personal exemptions;
  • Repeal the alternative minimum tax;
Principal Residence Exclusion
  • Make the ownership and use tests more restrictive for the exclusion of gain from the sale of a principal residence and set an adjusted gross income phaseout beginning at $250,000 ($500,000 for married taxpayers filing jointly);
Itemized Deductions
  • Preserve the mortgage interest deduction for existing mortgages, but allow deduction of mortgage interest only on the first $500,000 of mortgage debt for purchases after November 2, 2017, limited to debt incurred to purchase the taxpayer’s principal residence;
  • Repeal the deduction for state and local income taxes and state and local sales taxes;
  • Allow a deduction of up to $10,000 for state and local real property taxes;
  • Repeal the medical expense, alimony, and moving expense deductions;
  • Repeal the deduction for tax preparation fees;
  • Repeal the overall limit on itemized deductions;
Credits
  • Increase the child credit to $1,600 ($1,000 of which would be refundable), create a $300 nonrefundable credit for non-child dependents, and provide a temporary $300 nonrefundable credit to non-child, non-dependent taxpayers (both spouses for joint returns), and increase the income amounts at which the combined credit amount is phased out;
  • Repeal some nonrefundable credits, but preserve the adoption credit;
  • Consolidate the existing education credits into one enhanced American Opportunity Tax Credit and repeal other education-related deductions and exclusions;
The Senate has released its description of the “Chairman’s Mark” of the Tax Cuts and Jobs Act reflecting many similar changes to that of the House.
The Senate would:
Tax Rates
  • Create new additional individual income tax brackets, but of 10 percent, 12.5 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent, and 38.5 percent for incomes over $1,000,000 for joint filers, or over $500,000 for unmarried individuals, and would be adjusted for inflation;
  • Increase the standard deduction, but to $24,000 for married couples, $18,000 for unmarried individuals with at least one qualifying child, and $12,000 for single filers, and would retain the enhanced standard deduction for the blind and elderly available under current law, but would still repeal the deduction for personal exemptions;
Principal Residence Exclusion
  • Modify the exclusion for gain on the sale of a personal residence, which would be available only if the taxpayer has owned and used the residence as a principal residence for at least five of the eight years with an exception for taxpayers that change places of employment, health, or unforeseen circumstances, and would also limit the ability of taxpayers to use the exclusion to once every five years;
Itemized Deductions
  • Retain the mortgage interest deduction with respect to interest on acquisition indebtedness of up to $1,000,000 ($500,000 for a married person filing a separate return), but would repeal the deduction with respect to interest on home equity indebtedness;
  • Repeal the deduction for state and local income taxes and state and local sales taxes for individuals, but would allow a deduction for state and local taxes paid or accrued in carrying on a trade or business and would allow a write off for state and local property taxes imposed on business assets;
  • Repeal the deduction for tax preparation fees;
  • Repeal the moving expense deductions, but preserve deductions for medical expenses;
  • Modify the charitable contribution deduction by increasing the cash contribution limit to 60%;
  • Repeal the overall limit on itemized deductions;
Credits
  • Increase the child credit to $1,650, create a $500 nonrefundable credit for dependents other than qualifying children, increase the income amounts at which the combined credit amount is phased out, but would lower the refundable portion of the credit threshold to $2,500;
  • Preserve the adoption credit and it appears the bill would preserve many of the education credits available under current law.
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While these reforms may have a dramatic tax impact on U.S. persons, (U.S. citizens, green card holder and other U.S. tax residents), they would appear to have little impact on nonresidents. It should also be noted the House and Senate versions of Tax Reform do not repeal or modify the Foreign Account Tax Compliance Act (FATCA), nor do they reduce the foreign financial asset reporting burden of U.S. persons. 
Although both House and Senate’s legislation are likely to be substantially amended before enactment, the possibility of existing tax breaks being repealed or greatly modified makes this a good time to begin considering how you personally may be impacted by tax reform.  
The Wolf Group will stay on top of tax reform matters and will keep you updated on any major developments as the legislation works its way through Congress. If or when a final tax bill looks to be imminent, we will seek to provide you with year-end tax planning ideas and associated services.