Over the past number of weeks, I’ve heard all sorts of speculation about tax reform. Here are some of the major provisions of the current proposed tax reform that may impact many Americans.
401k’s and IRA’s are largely left untouched…what? Yes…contribution limits and requirements are unchanged, stretch IRA’s remain in place, and favorable treatment for Net Unrealized Appreciation remains in place.
Big news…AMT would be repealed…I always knew going to church would pay off someday! Charitable contributions would remain in place as well. Individuals would have their seven current tax brackets reduced to four: 12%, 25%, 35%, and 39.6%.
The top corporate income tax rate would fall from to 35% from 20%. The proposal also creates a new 25% tax rate on the business income received by owners from "pass through entities" such as partnerships and S corporations. Small business owners actually get a break.
To pay for lower tax rates, itemized deductions would need to be reduced. The medical expense deduction would be eliminated. The deduction for mortgage interest is restricted to interest on $500,000 of borrowing, down from $1 million, and the deduction for state and local income taxes would be eliminated. If you live in CA, CT, NY, NJ, MN…ouch!
The proposed plan also doubles the standard deduction to $12,000 for individuals and $24,000 for married couples, and increases the child tax credit to $1,600 from $1,000. The net result will be favorable for lower income families who tend to rent and do not itemize. Top income families will lose a good portion of their itemized deductions and still have a 35% or even a 39.6% marginal tax rate to pay. My best guess is middle income families will mostly fare about the same depending on their specific circumstances.
Family farms and privately held companies also expect to benefit from the new proposal which eliminates the estate tax and generation skipping tax completely after 2023 while maintaining a full step up in basis. The gift tax would remain but with lower rates and an exclusion of $10 million.
Before jumping out of your chair and grabbing your pitch fork and torch, keep in mind that this is just a proposal and will have to go through reconciliation before it can be signed into law. I’m sure some of the lobbyists in D.C. are already sharpening their pitch forks as you read this.
Cheers!