On November 2, the GOP finally released real details about its tax reform plan. As of November 6, it’s being “marked up” by the House Ways and Means Committee, which could see more changes before approving the bill for vote. The Senate Finance Committee will begin a parallel process sometime in the coming weeks. If the tax bill passes, it would take effect January 1, and if it doesn’t pass, there’s some indication an attempt will be made to make it retroactive to that date once it has passed.
A slew of changes are proposed, including a cut in the number of tax brackets, alterations to the deductions that can be claimed, and exemptions. Here are a few questions to ask yourself to determine the impact to you.
Under the new law, the number of tax brackets would be reduced from 7 to 3. For some, that means their tax rate will drop, but others will find themselves bumped up into a higher bracket. Individuals making up to $45,000 and couples making up to $90,000 would pay a top tax rate of 12%. Individuals making up to $200,000 and couples making up to $260,000 would pay a top tax rate of 25%. Individuals making up to $500,000 and couples making up to $1 million would pay a top tax rate of 35%. The top bracket will pay 39.6%.
The standard deduction will stay in effect, moving to: $12,200 for individuals; $18,300 for heads of household; $24,400 for married couples. Unfortunately, the additional standard deduction, personal exemptions, mortgage interest deductions on new homes, and state and local tax deductions (i.e., SALT) have been either restricted (e.g., SALT is capped at $10,000) or removed (e.g., medical expense, student loan interest, alimony, and moving expense deductions).
As the plan exists now, no changes have been proposed for the tax breaks on 401(k) plans, IRAs, or other retirement accounts. In terms of the estate tax, Republicans want to repeal the federal tax by 2024, but some immediate relief will be available to heirs when the estate tax exemption doubles.
It’s important to note that these changes will not impact the taxes you will file on finances for 2017, meaning those you pay by April 15, 2018. However, some of the changes are very dramatic, and you may want to change how you file for certain deductions — including medical, mortgage, and estate deductions — in order to claim those deductions and ease your burden on 2018 taxes.
On the other hand, it’s also important to remember that the plan is likely to change before actually becoming law, if this plan is even passed at all. That may mean you should develop a plan, but refrain from acting on it until you know what will actually become law.
We strongly recommend that you talk to your financial advisers, especially if either you have an estate plan in place or in the process of creating one.
The current tax reform plan will be one of the most dramatic changes to tax law in decades, and while it won’t directly impact the taxes you’re preparing to pay now, 2018 tax planning will help you keep your footing.