(Editor’s note: Information in this article was accurate at the time of publication on 12/19/2017.)
The details of the proposed tax reform bill, the biggest in 30 years, were made public last week as the Senate and House reconciled the differences between their versions.
Until a final bill is signed, the specifics are still subject to change, but it’s looking like new legislation may have some impact on investors’ taxes.
Most provisions are set to take effect in 2018; many of those are set to expire, or sunset, in 2025. Here’s the latest on what the current proposed changes could mean for tax rates, deductions, mortgages, and more.
1. Reductions in individual tax rates. The bill retains the current structure of seven investor tax brackets, but lowers five of them. It also includes the sunset provision, meaning it’s a temporary arrangement from 2018 to 2025. Investors may want to consult tax experts if the bracket changes affect them before making adjustments to their long-term plans.
Here’s the breakdown of the possible new versus current marginal tax rates:
|Current Marginal |
|Proposed Marginal |
|Income Level |
|Income Level |
(Couples Filing Jointly)
|10%||10%||$0 – $9,525||$0 – $19,050|
|15%||12%||$9,525 – $38,700||$19,050 – $77,400|
|25%||22%||$38,700 – $82,500||$77,400 – $165,000|
|28%||24%||$82,500 – $157,500||$165,000 – $315,000|
|33%||32%||$157,500 – $200,000||$315,000 – $400,000|
|35%||35%||$200,000 – $500,000||$400,000 – $600,000|
|39.6%||37%||$500,000 and up||$600,000 and up|
2. Standard deductions increasing nearly 90%. For married couples filing jointly, standard deductions rise to $24,000 from $12,700; for single filers, they would move to $12,000 from $6,350. This could lead to a drop in the number of filers who choose to itemize.
Taxpayers who don’t currently itemize would enjoy an instant benefit. But if you currently itemize, this increase could change your decision on whether or not to itemize. If you expect your deductions to be near or below the new standard, you might decide that itemizing is not worth the time and effort.
3. Many changes to itemized deductions. These vary, and some might have more impact than others for individual investors.
- Personal exemption ending, but child tax credit increasing. The bill would end the personal exemption of $4,050 for you, your spouse, and your dependents. It would double the child tax credit to $2,000 per dependent child under age 17.
- Estate and gift tax exemption rising. The bill ups the exemption for estate and gift taxes to $10 million from $5 million per person.
- Limits to state and local taxes (“SALT”). Under the bill, you may only deduct up to $10,000 in state and local taxes, including sales, income, and property taxes. This deduction was not previously subject to limitation.
- Caps on mortgage interest. The bill allows mortgage interest deductions for current homeowners, but caps the interest deduction at $750,000 in mortgage debt for homes bought in 2018 and beyond, down from the $1 million limit in place now. It would eliminate deductions for interest on home equity loans, as well as deductions for moving expenses and employer-provided expense reimbursements (except for members of the military).
- Expands medical deductions. Current law allows for the deduction of medical expenses over 10% of adjusted gross income (AGI). The bill lowers the threshold to 7.5%.
4. Changes to estate planning. As noted, the bill doubles the estate tax exemption to $10 million, but it’s also indexed for inflation after 2011. The bill calls for doubling the value threshold on the 40% levy on estates worth nearly $11 million for individuals and $22 million for couples. The estate tax exemption also has the sunset provision, meaning that the bill calls for a reversion back to current exemption amounts in 2026.
5. Your charitable deduction decisions may change. Although the current tax deductions stay in place, the doubling of the standard deduction to $24,000 essentially raises the threshold on deductibility. Taxpayers must itemize donations to get the benefit. Making extra charitable donations this year or creating a donor-advised fund might help you reap the deduction benefits if you’re less likely to itemize next year. You might also want to consider “bunching” your contributions every other year; this would allow you to itemize one year, while taking advantage of the larger standard deduction in the other year.
6. Roth recharacterizations. Under current law, if you convert a traditional Individual Retirement Account (IRA) to a Roth IRA, you can later choose to convert back to a traditional IRA. The bill takes away the re-characterization provision, so, once you've converted from traditional to Roth, there's no turning back; you're stuck paying the taxes in the year you made the conversion. On the other hand, lower income taxes and changes in the tax brackets might make it wise to wait until next year for a conversion. As with any tax considerations, you should always consult a tax professional before making a decision.
7. No switch to FIFO in the selling of securities. The first-in, first-out provision that was part of the original Senate bill has since been removed, and some investors may be breathing a sigh of relief. Under the provision, investors wanting to sell a portion of an investment would have been required to sell the shares they’ve held the longest. In many cases, they would have had to take a hefty capital gains tax hit on the appreciation.
8. No changes to Coverdell Savings Accounts. The bill originally proposed eliminating the ability to open new accounts, contribute to existing Coverdell accounts, or roll over Coverdells into 529 plans after 2017. These revisions are no longer included in the current tax reform proposal.
Although the House and Senate bills have been reconciled, the bill still has a long way to go before becoming law. Both houses of Congress must approve the reconciliation before the bill is sent to the President (who has set a target date of Christmas). It’s important to note that, until that point, specific details, such as exact rates and effective dates, may continue to change.
Before making any financial or tax decisions based on the proposed tax bill, it’s a good idea to meet with your tax professional as well as your financial advisor if you have one.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.