Ten Huge Take-Aways from the Tax Cuts and Jobs Act of 2017
by James Lange, CPA/Attorney
The first thing to consider about the proposed Tax Cuts and Jobs Act is that it is just a proposed tax bill. It is possible it will face stiff resistance in the Senate and possibly get no votes from the Republicans. Jeff Flake, John McCain, Bob Corker, and Lisa Murkowski might be on that list of Republican “no” votes. So, like health care it is possible, and even likely, that nothing will happen this year and maybe not in the foreseeable future.
Depending on your personal circumstances, the Tax Cuts and Jobs Act of 2017 could be good or bad for your family. Critical factors like how many children you have, whether you live in a high-tax state and itemize your deductions or take the standard deduction, whether you own a home or are looking to buy one could sway you from benefiting from these changes or suffering from them.
In fact, there are so many variables to consider that it is difficult to make a blanket statement that the proposal will offer you tax relief. Corporate America is a clear winner. Reducing the corporate tax rate from 35 to 20 percent, Speaker Paul Ryan argues, will create more jobs and drive up wages. But critics, even Republican critics, say it is not a given that companies will pass their savings on to workers vs. shareholders through higher dividends.
However, the bill as it stands now is far from becoming law. Ultimately, the Senate will introduce more changes and what we will end up with and whether it will pass are still great unknowns. But, going forward it will still be helpful to understand some of the main provisions the bill advances so you can begin to assess the impact on you and your family.
Champions and underdogs in the Tax Cuts & Jobs Act of 2017:
- This doesn’t appear to be an overall tax-cut for the middle class, as promised. What we see in this bill is a tax cut for some, and a tax hike for others. As usual, it all depends on how much you make, how you earn your living, where you live, the mortgage on your home, your property taxes, student loans, etc. The Tax Policy Center commented that the bill wasn’t really tax reform but rather it was more of a complicated tax cut. We have compared differences for different hypothetical clients and the results were less dramatic than we thought. In one case, the elimination of the alternative minimum tax was helpful, but the dis-allowance of state and local income taxes netted out to a tax increase for one client.
- The bill reduces the number of tax brackets from seven to four. Currently the brackets are 10-15-20-28-33-35-39.6%. Under the new provisions there will be a zero bracket (in the form of an enhanced standard deduction according to the bill), and from there the brackets will be 12-25-35-36.9%. Here is how they break down:
|2017 Single Filer||2017 Married Filing Jointly||2017 Head of Household|
|$0- $9,325 – 10%||$0-18,650 – 10%||$0- $13,350 – 10%|
|$9,326- $37,950 – 15%||$18,651- $75,900 – 15%||$13,351- $50,800 – 15%|
|$37,951- $91,900 – 25%||$75,901- $153,100 – 25%||$50,801- $131,200 – 25%|
|$91,901- $191,650 – 28%||$153,101- $233,350 – 28%||$131,201- $212,500 – 28%|
|$191,651- $416,700 – 33%||$233,351- $416,700 – 33%||$212,501- $416,700 – 33%|
|$416,701-$418,400 – 35%||$416,701- $470,700 – 35%||$416,701- $444,550 – 35%|
|$418,401 + – 39.6%||$470,701+ – 39.6%||$444,551 + – 39.6%|
|Proposed Single Filer||Proposed Married Filing Jointly||Proposed Head of Household|
|$0-$44,999 – 12%||$0-$89,999 – 12%||$0-$67,499 – 12%|
|$45,000-$199,999 – 25%||$90,000-$259,999 – 25%||$67,500-$229,999 – 25%|
|$200,000-$499,999 – 35%||$260,000-$999,999 – 35%||$230,000-$499,999 – 35%|
|$500,000+ – 39.6%||$1,000,000+ – 39.6%||$500,000+ – 39.6%|
Additionally, the bill would eliminate the alternative minimum tax (AMT), a second tax calculation for people earning about $130,000 which reduces the impact of many tax breaks.
- The bill doubles the current standard deduction, giving $12,000 to single filers, $24,000 for married filing jointly, and $18,000 for heads of household.
- But before you get too excited about a larger deduction, they’ve decided to repeal the personal exemption—currently $4,050 per person—and the deductions for state and local taxes. So, it isn’t as much of a break as you think it is.
- They are taking away one of our favorite, and edgiest strategies. No more recharacterization of Roth IRAs. If you’ve heard me talk about Roth IRAs, you’ve probably heard me mention recharacterization. The ability to recharacterize, basically undo the Roth conversion, adds enormous flexibility in our Roth IRA conversion planning. This will mean that the days of do-it-yourself Roth IRA conversion calculations will be highly risky. Having a professional you can trust, who knows the system in and out, and who has the experience to get it right will become incredibly important.
- Taxpayers with a net worth of $10 million or more (and their children) have a reason to cheer as the plan almost doubles the current federal estate tax exemption from $5,490,000 to $10,000,000 per individual, with spouses exempt from any limits. The Joint Committee on Taxation has commented that this provision, while being a boon for business owners and wealthier Americans will reduce the federal revenue by around $172 billion over 2018-2027. Oh, yeah…and after 2023, the estate tax will be repealed all together. Compensating for that loss of revenue is a huge stumbling block for the proposed tax reform. Though hard to confirm, rumor has it that originally they were going to eliminate the estate tax entirely but put this provision in to secure the support of Alaska.
- While the bill does simplify many areas, it also complicates many areas. It is not a major tax simplification. I do not fear that our CPA firm will lose business because clients will find it so easy to complete their tax returns.
- While corporations and businesses will see a reduced corporate tax rate—from 35% to 20% – it will come with a price¾a much more involved and complicated filing process. New anti-abuse rules, complicated multi-national corporation rules, new tax treatments on interest, and changes in international income rules will make navigating your business tax return much more difficult. Shareholders of pass through entities, like Subchapter S corporations will get a big break, but the complications for claiming that break are considerable.
- The Act is silent on the Death of the Stretch IRA. We still aren’t sure if and when this will happen. It is very possible that they are holding it in reserve to for future negotiations pertaining to reducing the deficit. The tax cuts in this bill will massively reduce federal revenue. We’re talking in the trillions of dollars here. To get any version of this to pass, it is very likely that the GOP will have to come up with ways to offset some of the deficit. Killing the ability to stretch IRAs and retirement plans for generations is one way to do that.
- Even the Republican’s admit that this bill will increase the deficit by $1.5 trillion dollars over the next ten years, and that is a huge issue. Critics on both sides see increasing the deficit as unacceptable. Further, the Tax Policy Center and other tax policy commentators on both sides of the aisle think that this estimate is too low or too high, and many do not believe that this bill will provide the economic growth or tax-relief promised to the middle class.
If you want to read an excellent 82-page summary of the bill, check out The Fiscal Times online:
If you are looking for more of a brief overview summary, these are excellent resources:
As I mentioned above, this bill is simply the first iteration of what the final bill might look like, and it isn’t clear that anything in it is going to become law. But it bears some scrutiny since some of the main points are likely to provoke debates. We will continue to watch as the process evolves. We might even have to interrupt our series on Lange’s Cascading Beneficiary Plan once again! If that happens, I hope you will bear with us. But unless there is major news, we will see you next week as we continue exploring the advantages of the LCBP
Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017.