New Tax Legislation

Yesterday, the GOP unveiled their proposed tax legislation, the “Tax Cuts and Jobs Act.” While this is just the initial proposal, as soon as next week, the House Ways and Means Committee (the principal tax writing committee of the House) will begin to propose changes and modifications, before sending it to the floor for a vote (which, if it passes would then go to the Senate, and potentially be subject to further changes).

Although speculative to talk about legislation at this early stage – given that it will likely change before it even reaches the House floor, let alone passes the House and/or Senate – it will serve as the main blue print for what the ultimate legislation will look like.

So what’s in this new proposed legislation? Here are some highlights (1):

Individual Tax Brackets

The number of individual tax brackets will be reduced from seven (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) to four (12%, 25%, 35%, 39.6%). The highest bracket would only apply to income over $1 million for married filing joint taxpayers and $500,000 for individuals, a significant increase of the current 2017 rates, where the 39.6% bracket applies to income over $470,701 for married filing joint taxpayers, and $418,401 for single filers.

Standard Deduction and Personal Exemptions

The standard deduction will (almost) double, from $6,350 per person to $12,000. (For married filing joint couples, it would increase from $12,700 to $24,000). However, the personal exemption of $4,050 per each member of the household would be eliminated. This is in part to offset the increased standard deduction, but families of five or more would then not see a benefit from the increased standard deduction, when combined with the elimination of the personal exemption.

Itemized Deductions

An estimated 30% of taxpayers choose to itemize their deductions. In light of the standard deduction doubling, that amount will very likely change, which means that less people would be impacted by any changes to the itemized deductions proposed in the new Act. However, for those that will continue to itemize, the following are certain itemized deductions that would change.

Alimony/Maintenance: Currently, maintenance payments to a former spouse are presently tax deductible to the payor and includible in the taxes of the recipient. This deduction would go away, such that the payor spouse would pay the taxes on the income, and the recipient would receive it tax free (similar to how child support is presently paid).

Mortgage Interest: There has been much speculation about whether or not the mortgage interest deduction would be outright eliminated. While it is not, but the maximum amount of debt that mortgage interest can be deducted would decrease from $1,000,000 to $500,000.

Charitable Donations: There will be no change to the charitable donation deductions.

Property Taxes: Local real estate taxes will still be an itemized deduction, although it will no longer be an unlimited deduction, and instead will now be capped at $10,000.

State and Local Taxes: Unlike property taxes, the deduction for state and local taxes would be eliminated. Given the already strong opposition this component has faced from House members from states with high state and local taxes, expect this to change somewhat if the legislation is to pass.