Tax Cuts and Jobs Act Update

The full text of the Tax Cuts and Jobs Act was released on November 2nd . Although the changes have not been finalized, the following are some of the highlights that might affect you if it passes as currently written:

  • The Act would reduce the number of tax brackets from 7 to 4:
    • For married filing jointly 12% (0-$90,000), 25% ($90,000-$260,000), 35% ($260,000-$1,000,000), 39.6% (greater than $1,000,000).
  • Elimination of the personal exemption.
  • Elimination of state and local income taxes. Caps property tax deduction at $10,000.
  • Mortgage interest deduction – the Act would retain the home mortgage interest deduction on debt up to $1,000,000 for mortgages that existed before November 2nd, 2017. However for newly purchased homes, the deduction will be limited to debt of $500,000.
  • The Act would repeal the alimony deduction. This applies for any divorce or separation agreement executed after 2017 or to any modifications after 2017. Therefore for those couples contemplating divorce, this could have a critical impact if the divorce is finalized in 2018.
  • Most itemized deductions would be repealed including medical expenses, tax preparation, employee business expenses, and casualty losses.
  • The Alternative Minimum Tax would be repealed.
  • “Back door” Roth IRA’s would be eliminated. This is the provision that currently allows an individual to re-characterize a contribution to a traditional IRA as a contribution to a Roth IRA.
  • Roth re-characterizations have been eliminated. In the past, taxpayers could convert a traditional IRA to a Roth IRA, which is taxable, but then change their minds after reviewing the impact on the personal tax return. This provision would be effective for tax years beginning after 2017.
  • Exclusion for gain on sale of principal residence – the current rule which allows a $250,000 exclusion to individuals and $500,000 to married taxpayers if they occupy their residence 2 of the 5 years before the sale has been changed to 5 of the 8 years before the sale. In addition, an exclusion will only be available for one sale every 5 years, versus 2 years under the old rule.
  • The estate tax exemption would double to approximately 11 million—up from the present 5.49 million. The estate tax and generations skipping tax will be repealed in 2024.
  • “Small business” income tax rate falls to 25%. However, this does not apply to certain service businesses including attorneys and CPAs

Keep in mind that these are the initial proposals, which could change. However, you should review these and take into consideration the impact these might have on your tax situation and if you should take action before the end of the year. Also, it is not known at this time which changes, if any, that California will conform to.