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Posted on December 6, 2017

December Monthly Newsletter: Tax Reform and Year-End Planning

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After several last-minute changes, the Senate voted 51-49 in the early hours of Saturday morning[1] to pass their version of tax reform. Only one Republican, Tennessee Senator Bob Corker, voted against the bill, concerned about the $1 trillion or more in budget deficits the plan is expected to create.[2] President Trump has been adamant about his desire to sign a final bill before Christmas. While we’re not quite there yet, the Senate’s vote Saturday morning crossed one potential roadblock and has made some form of tax reform by Christmas much more likely.

Next Steps

The Tax Cuts & Jobs Act has passed both the House and the Senate but there are some key differences between the two bills. House Ways & Means Committee Chairman Kevin Brady (R-Tex) congratulated the Senate on passing tax reform legislation but recognized there is still some work to do:

“[Saturday’s] vote is a major step forward for tax reform and the American people . . . Now it’s time to take the best of both the House and Senate bills, make them even stronger in a conference committee, and finalize one piece of legislation that will dramatically improve the lives of Americans for generations to come . . . I’m excited to work with my colleagues in the House and Senate on a plan we can send to President Trump this year.” [3]

The first step was achieved Monday night when the House voted to go to conference committee, where it will work to iron out the differences between its bill and the Senate’s.[4] Later that night, Speaker of the House Paul Ryan (R-Wis) and House Minority Leader Nancy Pelosi (D-Cal) announced their choices of conferees that will negotiate with Congressional leadership and committee staff to reconcile the differences between the bills to ensure the bill they present to the Senate for a final vote meets special Senate rules.[5] Specifically, in order to pass their bill with just 51 votes in the Senate, the bill produced cannot add to the deficit after 10 years.

Key Differences

For months, Republican leaders from the House, Senate and President Trump’s cabinet held weekly meetings to ensure the tax plans unveiled in the House and Senate would be largely unified, allowing the bills to move through Congress before the end of the year. After the dust settled, while substantially similar, there are some key differences between the House and Senate bills that will need to be reconciled. Below is a list of some of the provisions and how they would be treated under the House’s and the Senate’s bill:

 

Provisions

House

Senate

# of Tax Brackets Four Seven
Top Ordinary Tax Rate 39.6% 38.5%
Home Mortgage Interest Capped at $500,000 Capped at $1M
Medical Expense Deduction Eliminated Retained and lowered threshold to 7.5% of AGI
Child Tax Credit Expands to $1,600 and adds $300 credit for non-child dependents Expands to $2,000 and adds a $50 credit for non-minor child dependents
Standard Deduction $24,400 married/$12,200 single $24,000 married/$12,000 single
Estate Taxes Exemption doubled and fully repealed beginning in 2024 Exemption doubled; does not repeal estate taxes
Obamacare Mandate Preserved Repealed
Permanent Tax Cuts Yes – both corporate and individual Corporate tax cuts are permanent; individual tax cuts expire December 31, 2025
Alternative Minimum Tax Eliminated Retained with higher exemption
Corporate Tax Rate 20% Beginning in 2018 20% Beginning in 2019
Pass-Through Rate (Sole Proprietorships, partnerships, S Corps) Top rate of 25% Provides 23% deduction for some “pass-through” income; expires after 2025

While this list is not exhaustive, it highlights the fact the conferees have some work to do to reconcile the differences in the two bills before it lands on President Trump’s desk for his signature by Christmas.

Year-End Planning

Assuming some form of tax reform is passed by the end of the year, most individuals will see their ordinary income tax rates lowered in 2018. But if the standard deduction is doubled as proposed, many taxpayers who would otherwise have itemized deductions may not be able to do so. To put it simply, if tax reform is passed, two planning opportunities will potentially come into play for most people: (1) defer the recognition of income into 2018 and (2) accelerate payment of itemized deductions in 2017. Here are some specific examples:

  • If possible, defer income until 2018 when ordinary income tax rates may be lower
  • Accelerate 2018 planned charitable giving into 2017
  • Consider prepaying real estate taxes due in the first quarter and other state and local taxes before December 31, 2017
  • Pay your January 1st mortgage payment by December 31, 2017 as it includes interest for December
  • Pay 2017 4th quarter estimated tax payments by December 31, 2017
  • Generally speaking, harvest capital losses in taxable investment accounts in 2017 and apply net capital losses against ordinary income in 2017 up to $3,000
  • If you are self-employed, wait until January to send invoices for payments you typically receive in December

Because every situation is unique, contact your Advisor to discuss a specific strategy based on your situation, goals and objectives. In the meantime, we will keep an eye on the reconciliation process and will provide further guidance when a final bill has been presented.

 

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