TAX LAW UPDATES - NEW TAX BILLS FROM THE HOUSE AND THE SENATE BEFORE DEC 21,2017
Here’s a look at 21 issues that could affect you and your pocketbook—some of which seem to be done deals, others that are still up in the air. And note this: Many of the changes in the Senate bill would expire after 2025, and, unless a future Congress acts to extend them, the rules would revert to current law.
Every taxpayer needs to pay attention over the next few weeks.
I will update you on the new Tax Law once it gets approved!!
A hallmark of the House and Senate tax plans is to nearly double the standard deduction, which would not only make more income tax-free but also simplify the system. Congressional analysts say bulking up the standard deduction would let more than 30 million taxpayers avoid the hassle of itemizing write-offs on their tax return because the bigger standard deduction would exceed their qualifying expenses.
The House and Senate would raise the standard deduction to $12,000 on single returns, $18,000 for head-of-household filers and $24,000 on joint returns—up from $6,350, $9,350 and $12,700 now. As under present law, the Senate (but not the House) would also give a higher standard deduction to seniors (age 65 or older) and blind people.In exchange for the bigger standard deductions, the Senate and House bills get rid of the $4,050 deduction for each exemption claimed on the return. So a married couple with four kids would lose $24,300 in exemptions in exchange for the $11,300 boost in their standard deduction.
The House plan calls for squeezing the current system of seven income tax brackets down to just four brackets. Proponents say it simplifies the law, but few taxpayers actually use the brackets to figure their bill (they use software or, for those with taxable income less than $100,000, pick a number off a table). But where the new tax brackets start and end will have a lot to do with what you owe. The plan calls to replace the current 10% bracket with a 12% bracket. That might sound like a punishment for lower-income earners, but proponents say they’ll be okay because more of their income will be tax-free. At the other end of the scale, after much debate, House tax writers decided to leave the top rate at 39.6%, but that rate would kick in at a much higher taxable income level: $1 million, versus $470,700 on a joint return under today’s rules. On the joint return, taxing the $529,300 difference at 35% instead of at 39.6% would save the couple nearly $25,000. On the other hand, the House proposal would effectively create a fifth, 45.6% bracket for some high-income taxpayers. The goal is to claw back the benefit of having any of their income taxed at the 12% rate. The 6% surcharge would apply to taxable income starting at $1 million on individual returns and $1.2 million on joint returns. It would apply until the extra 6% levy offsets the amount of savings produced by having the first $45,000 on a single return or $90,000 on a joint returned taxed at 12% instead of 39.6%. After those savings are wiped out, the rate would fall back to 39.6%. The House also proposes new tax brackets for head of household filers as well as for married couples who opt to file separate returns.
2. Tax-Bracket Bingo: Senate Version
The Senate has very different ideas about tax brackets. Its plan would continue to have seven tax brackets, but with different rates and different break points. (The Senate plan does not include a bubble bracket.) Not only would the Senate bill lower the top marginal rate, but like the House bill, the top rate would kick in at higher levels. Although reducing the number of rates is sometimes hailed as a way to simplify tax return preparation, in fact few taxpayers ever see these tax rate schedules. They either hire someone to do their return or use tax software that automatically determines their tax bill. And, for those who still use pen and paper and have taxable income under $100,000, only a single calculation is needed regardless of their top tax bracket.
The Senate also proposes new tax brackets for head-of-household filers, as well as for married couples who opt to file separate returns. Similar to the House proposal, the Senate would alter inflation indexing of various tax breaks, including the tax brackets. It’s a hidden tax hike that over time would nail nearly all individual filers. Currently, the federal income tax brackets, standard deductions and many other tax items are adjusted annually based on the government-calculated Consumer Price Index. Economists have argued that the now-used CPI tends to overstate actual inflation because the formula doesn’t account for how people change their spending patterns as prices rise. They claim that a “chained” index is a far better measure of inflation. A chained CPI would result in lower inflation adjustments than the current index. As a result, there would be smaller annual increases in tax brackets and other breaks.
3. Homeowners Lose Tax Breaks
The Senate bill would continue to allow homeowners to deduct the interest on up to $1 million of mortgage debt used to buy or improve a principal residence and a second home. But the Senate would eliminate the deduction of interest on up to $100,000 of debt. The House bill would limit the deduction of interest paid on new mortgages of $500,000 or less. In addition to repealing the deduction on home-equity lines of credit, the House would also prohibit homeowners from deducting mortgage interest on a second home.
Both the Senate and House bills would throw a curve ball at some homeowners planning to cash in on tax-free home sale profit. Currently, the law allows you to shelter up to $250,000 of such profit, or $500,000 if you’re married, as long as you have owned and lived in the house for two of the five years before the sale. The proposals making their way through Congress would stretch the ownership and occupancy requirements to five of the eight years leading up to the sale. In addition, the House bill would phase out the exclusion for single taxpayers with average modified adjusted gross income of more than $250,000, or $500,000 for married couples in the year of the sale and the two preceding tax years.
4. Deduction for State and Local Taxes
One of the most valuable tax deductions allowed for individuals—the write off for what they pay in state and local income, sales and property taxes—is on the block.
Originally, the Senate plan called for eliminating all of these deductions, but, in the end, it included a break for property taxes. The House’s plan wipes out the write-off of income and sales taxes, but allows the deduction of up to $10,000 a year in property taxes.
5. Casualty Losses
The Senate bill would eliminate deductions for casualty losses, unless the loss occurs in a presidentially declared disaster area. The House bill would scrap this deduction entirely, although it carves out an exemption for victims of hurricanes Harvey, Irma and Maria.
6. Estate Taxes R.I.P. (Sort of)
The House would increase the exemption from estate taxes — $5.49 million in 2017 — to $10 million and phase the tax out entirely by 2023. The Senate doubles the amount that can be passed to heirs tax-free to $11.2 million for an individual and $22.4 million for a married couple, but that plan does not drive a stake through the tax’s heart completely.
7. Medical Deductions in Jeopardy
The House bill calls for axing the itemized deduction for unreimbursed medical expenses that exceed 10% of a taxpayer’s adjusted gross income. The Senate would go the other way: retaining the write-off for two years and lowering the income threshold to 7.5%.
The Senate bill preserves a deduction for ex-spouses who pay alimony under a divorce decree.The House plan would get the tax law out of such financial arrangements. For any divorce decree executed (or altered) after the end of this year, alimony payments would be tax-free to the recipient, and the paying spouse would not get a deduction.
The Senate bill would double the $250 tax deduction teachers can claim for using their own money to buy classroom supplies. The House bill would eliminate the deduction.
10. Changes to Commuter Benefits
Both the House and Senate would eliminate the rule that allows employers to deduct up to $260 a month per employee for the cost of transportation-related fringe benefits, such as parking and transit passes. Employees would be allowed to use pre-tax money to cover such expenses.
The Senate bill goes further, eliminating the federal bike commuter benefit that allows employers to provide employees up to $20 a month tax-free to cover bike-related expenses.
11. Say Hello to a Higher Child Tax Credit and a New Family Tax Credit
The Senate and House both propose to increase the amount of the child tax credit, as well as the income thresholds for qualifying for the credit. The House would hike the current $1,000 credit to $1,600 per child under the age of 17, and the Senate would increase it to $2,000 and change the qualifying age to 17 and younger.
In addition to the enhanced child tax credit, the House bill provides for a new, five-year credit of $300 for a taxpayer, spouse and nonchild dependents. The Senate would give a credit of $500 for each dependent who is not a child. These credits would disappear for high-income earners.
12. Tax Breaks for Students Could Be Erased
The House bill would abolish the $2,500 deduction for interest on student loans. The Senate bill would retain it. The Senate bill would also preserve the tax treatment of tuition benefits earned by graduate students. Currently, those benefits aren’t taxed as income. The House would tax those benefits.
The Senate bill would continue to allow parents to put aside pre-tax money in dependent care flexible savings accounts for child care costs. The House bill at first abolished this tax break, but now says it will keep it until 2023.
14. No More Roth Do-Overs
Both the Senate and the House bill would make it more difficult to convert a traditional individual retirement account to a Roth. Currently, you can reverse a conversion—and eliminate the tax bill—as long as you recharacterize the conversion by the tax-filing date, including extensions, in the year in which you convert. The tax bill would repeal this provision.
15. Limiting Investor Control Over Tax on Capital Gains
The Senate bill would restrict the flexibility investors have to control the tax bill on their profits. Currently, investors who have purchased stock and mutual fund shares at different times and different prices are allowed to choose which shares to sell in order to produce the most favorable tax consequences. You can, for example, direct your broker to sell shares with a high tax basis (basically, what you paid for them) to limit the amount of profit you must report to the IRS or, if the shares have fallen in value, to maximize losses to offset other taxable gains. (Your gain or loss is the difference between your basis and the proceeds of the sale.)The Senate plan would eliminate the option to specifically identify which shares to sell and instead impose a first-in-first-out (FIFO) rule. The oldest shares would be assumed to be the first sold. Because it is assumed that the older shares likely have a lower tax basis, this change would trigger the realization of more profit sooner rather than later. Scorekeepers think that would boost investors’ tax bills by nearly $3 billion over 10 years. Although the FIFO rule would apply to stock holdings, mutual fund owners would continue to have the option of using the “average basis” method for determining gain or loss on the redemption of shares. That allows you to average the cost of all shares purchased over time.
16. 0% Capital Gains Rate Survives
Both the House and Senate bills retain the favorable tax treatment granted long-term capital gains and qualified dividends, imposing rates of 0%, 15%, 20% or 23.8%, depending on your total income.
Although it’s unclear exactly what the final tax brackets and rates will be, it appears that the income thresholds for the various rates would be the same as under current law, indexed for inflation in the future. That would mean, for example, that the 0% rate for long-term gains and qualified dividends would apply for taxpayers with taxable income under about $38,000 on individual returns and about $76,000 on joint returns.
17. Tax-Free Municipal Bonds Safe, Mostly
Although interest from most tax-free muni bonds would remain tax-free, the House bill would strip the exemption from newly issued private-activity bonds issued to finance projects including non-profit hospitals, airports and sport stadiums. Interest from such bonds is currently tax-free, except for taxpayers subject to the alternative minimum tax. Current bonds would maintain their tax exemption. The Senate bill does not include this change.
18. Like-Kind Exchanges Survive ... But Only for Real Estate
Generally, an exchange of property is a taxable transaction, just like a sale. But the law includes an exception when investment or business property is traded for similar property. Any gain that would be triggered by the sale of such property is deferred in the case of a like-kind exchange.
This break applies to assets such as real estate and tangible personal property such as heavy equipment and art work. Both the House and Senate bills would restrict its use in the future to like-kind exchanges of real estate, such as trading one rental property for another. It’s estimated that the change would cost affected taxpayers more than $30 billion over the next ten years.
19. Future of the AMT
Originally, both the Senate and the House bills called for eliminating the alternative minimum tax, a parallel tax system developed more than 40 years ago to ensure that the very wealthy paid some tax.
Currently, taxpayers who may fall into the AMT zone have to calculate their taxes twice to determine which system applies to them. In a last-minute change, though, the Senate legislation was amended to retain the AMT, but limit the number of taxpayers ensnared by it.
20. Tax Relief for Passthrough Businesses
Regular corporations (sometimes referred to as “C corporations”) are now subject to a maximum federal income tax rate of 35%. Under the House and Senate bills, that rate would fall to 20%. Individuals who own pass-through entities—such as S corporations, partnerships and LLCs -- which pass their income to their owners for tax purposes, as well as sole proprietors who report income on Schedule C of their tax returns, would also get relief under the House and Senate proposals. They won’t get a 20% top rate, but they’ll generally be better off taxwise than they are now.
The proposed changes to the taxation of passthrough businesses are some of the most complex provisions in the tax bills. That’s in part because both the House and Senate versions contain lots of limitations and antiabuse rules. They’re needed to help prevent gaming of the tax system by some taxpayers trying to have income taxed at the lower passthrough rate rather than the higher individual income tax rate.
Details are still in flux and will be ironed out by House and Senate negotiators, but this is what we can tell you: At the end of the day, most individuals who are self-employed or own interests in partnerships, LLCs or S corporations will be paying less tax on their passthrough income than they do now.
21. Credits and Deductions (That Lots of People Take) on the Chopping Block
The Senate bill would eliminate a popular deduction for moving expenses. The deduction, which is available to itemizers and non-itemizers, allows you to deduct the cost of moving yourself and your household goods to a new area as long as it’s at least 50 miles from your old home. Members of the military would still be able to claim it. The House bill also scraps the deduction, with an exception for members of the military.
Both the Senate and House bills would repeal miscellaneous itemized deductions for tax preparation fees, unreimbursed business expenses, and investment fees. The Senate bill retains the credit for the elderly and the disabled, which can be worth up to $1,125 to qualifying low-income taxpayers and the credit for plug-in electric vehicles, which is worth of up $7,500. The House will would scrap both of these credits.
Regardless of your political leanings, all sides agree that a major tax overhaul is unavoidable.
Don't be caught unaware, or worse, unprepared.
Top Tax Matters in 2016
There were no major tax law changes in 2016. This is a good news, meaning that taxpayers don't have to worry about how new laws might affect them. However, Congress did manage to make some relatively small tax changes.
There is also the continued implementation of prior tax measures, The increasing efforts of the IRS to stop tax identity theft and new tax deadlines, meaning that most taxpayers will encounter at least a few new tax matters in the new year.
Here are 10 tax topics to stay on top of in 2016.
1. Targeting of Identity Thieves
In response to the inroads that identity thieves have made into the U.S. tax system, the IRS convened a Security Summit in March 2015 to brainstorm ways to stop the crooks.
Seven months later, the agency, state tax officials and the private sector tax industry announced a series of steps to stem tax ID theft and related refund fraud, including the sharing of more taxpayer filing data.
Specifically, 20 new pieces of data will be used to validate tax returns in 2016. This information exchange should help validate the authenticity of taxpayers and the entries on tax returns in their names. IRS Commissioner John Koskinen says the added security measures shouldn't be a sea change for filers. However, the new process is likely to slow the IRS' processing of returns, and that could mean some delays in issuing refunds.
2. New Tax Deadlines
Mark your calendar.
The way the days fall in April 2016 means that the usual mid-month tax-filing deadline is a bit later. In 2016, the Washington, D.C., holiday Emancipation Day is celebrated on April 15. Federal law mandates that any holiday in the nation's capital also applies to offices there, and that pushes the usual due date for annual 1040 filings to Monday, April 18.
Taxpayers in Maine and Massachusetts will get one more day -- until April 19 -- to file their federal returns because offices there will be closed on the 18th for Patriots' Day, the holiday in those states that commemorates the first battles in the Revolutionary War.
3. Obamacare Tax Penalties, Credits
Have health insurance or be prepared to pay the price at tax-filing time as a result of the Affordable Care Act.The price keeps going up. The individual responsibility payment penalty for not having minimal essential medical coverage is based each month on the number of uninsured members of your family and your household income. An uninsured household of 3 or more during the 2015 tax year could face a maximum penalty of $975. The maximum penalty for the 2016 tax year skyrockets to $2,085.
There is a bit of good news on the Obamacare coverage front. The Supreme Court ruled in June 2015 that the federal premium tax credit is available to eligible taxpayers, regardless of whether they bought their coverage on the federal exchange or through state marketplaces. This government subsidy is available to eligible insurance exchange policy buyers to help them pay for part of their required coverage.
4. Same-sex State Tax Filing
In a historic ruling for same-sex couples, the U.S. Supreme Court in June 2015 approved same-sex marriage. No state can ban same-sex marriage, and states must recognize legal ceremonies performed elsewhere.
On the tax front, that means gay and lesbian married couples now can file joint tax returns on the state level, just as they already were required to do with their federal taxes.
This should simplify tax tasks for many same-sex couples, since state tax departments tend to use the federal filing as the basis for state returns. Same-sex couples also should check with their state tax departments about possibly amending prior-year returns that the partners had to file as single state taxpayers before the Supreme Court's ruling.
5. Harder to Hide International Money
Good tax havens are getting harder to find. The Foreign Account Tax Compliance Act, or FATCA, was enacted in 2010 after reports that foreign banks were encouraging U.S. taxpayers to hide assets abroad.
FATCA requires foreign financial firms to report account data for their U.S. account owners or face stiff penalties.
Seventy-nine countries, including the Holy See, have signed FATCA agreements with the IRS. And in October, the IRS announced that it had taken the next step in foreign account reporting. It now is automatically exchanging digital financial account information with tax authorities abroad.
The bottom line is that it's no longer easy for international account owners to fly under the IRS radar. If you try and are caught, you could face substantial penalties and possible criminal prosecution. To avoid that, the IRS recommends you come clean through its offshore voluntary disclosure program. Here, you can pay what you owe on your overseas money, and the IRS will back off on some of the potential penalties.
6. Providing Education Tax Break Eligibility
Do you depend on federal tax breaks to help pay for your higher education?
Starting with the 2016 tax year, you'll have to prove you're actually in class. A provision in trade legislation enacted in 2015 requires taxpayers to have in hand Form 1098-T to claim any educational tax benefits.
This statement, which is sent by schools to students and copied to the IRS, verifies that you paid what the IRS calls "qualified educational expenses" in the preceding tax year. These include tuition, any fees that are required for enrollment and required course materials.
If you don't get this official verification, you cannot claim the American opportunity or lifetime learning tax credits or the tuition and fees deduction. This reporting requirement was made after the Treasury inspector general for tax administration audits found that in 2011 and 2012, the IRS allowed billions of dollars in education tax credits for ineligible students.
The change won't affect any education claims made on 2015 returns filed in 2016. But if you're planning to claim them on the 2016 return you'll file in 2017, make sure you get your 1098-T first, or you won't get the education tax break.
7. Tax Prepare Regulation Effort Continues
In 2015, the IRS revived and revised its efforts to regulate tax preparers. After the courts threw out the agency's plans to require certain tax preparers to take classes and pass tests, the IRS set up a voluntary continuing education program for tax pros.
The Annual Filing Season Program remains in place for 2016. However, IRS Commissioner Koskinen wants more. He's continuing to lobby Congress for a law change that would give the IRS authority to establish the kind of oversight system it wants. There have been indications that the commissioner is gaining support in this area; a bipartisan bill to allow stricter regulation was drafted by members of the Senate Finance Committee but was pulled before reaching the full committee for consideration.
However, while Capitol Hill resistance might be easing, the IRS is again facing legal challenges to its tax preparer regulatory efforts. A lawsuit filed by the American Institute for CPAs aimed at ending the voluntary program is working its way through the federal court system.
8. Opening MyRAs and ABLE Accounts
Taxpayers in 2015 were introduced to 2 new tax-favored savings accounts that are designed for individuals who don't make a lot of money.
The starter retirement savings account known as myRA became available to all on Nov. 4, 2015. The myRA is aimed at lower-income earners, allowing them to open a retirement savings plan with minimal contributions and no fees. The accounts are patterned after Roth IRAs, which means there's no immediate tax benefit, but the account grows tax-free.
The Achieving a Better Life Experience, or ABLE, account option became available Jan. 1, 2015. This account resembles popular state-run 529 college savings plans and is designed to help people with disabilities and their families save and pay for disability-related expenses. Contributions to an ABLE account are not tax-deductible, but withdrawals for qualified expenses are free from federal taxation.
Advocates are hopeful that these 2 fledgling savings plans will help underserved tax constituencies and become more widespread as eligible taxpayers learn about them.
9. Fantasy Sports Fallout
Fantasy sports are a big business, but many question the games' legality. As the fantasy sports leagues morphed into daily games, several states -- most notably Nevada and New York -- declared them gambling enterprises and ordered the operations halted within their borders.
The tax stakes grow as states with casinos report losing millions in tax revenue to the online fantasy games. Capitol Hill has also weighed in, with some in Congress questioning whether the Unlawful Internet Gambling and Enforcement Act loophole that sanctions fantasy sports as games of skill should be closed. As the sports seasons roll along and fantasy sports participation grows, look for a more definitive designation of the game.
From a fantasy sports player's tax perspective, the IRS now considers the money made on fantasy sports as taxable hobby income. If the games are deemed gambling, that won't change the taxability of winnings. However, it will change how players are able to deduct any of their costs and losses against their winnings.
So, fantasy sports players, keep an eye on how state tax departments and Uncle Sam will ultimately deal with your hobby.
10. Persistent Tax Scams
The IRS' expanded efforts to stem tax identity theft and related false refunds are just part of the fraud fight. The agency reminds taxpayers that they have a critical role in staying alert for possible identity theft scams.
The IRS, state tax officials and the tax industry officially launched a public awareness effort on Nov. 19 to encourage taxpayers to be careful when it comes to their tax data.
"It's clear that when it comes to identify theft, we all have a part to play," said IRS Commissioner Koskinen in announcing the "Taxes-Security-Together" campaign. "With the public's help, this will greatly strengthen and improve the new tools being put into place by the IRS, states and industry."
The IRS, on its website, continues to issue warnings about tax scams, including fake IRS agent phone calls, email phishing and other identity theft attempts by criminals.
Although official and individual efforts against tax crooks do help, the criminals are creative. They are constantly tweaking their felonious attempts to steal information that they then use to file for false refunds. In addition, a new law that requires the IRS to use private bill collectors to track down some tax debts could be used as a hook by crooks looking for another way to con conscientious taxpayers out of their cash. So in 2016, remain diligent when it comes to protecting your tax data.