The New US Tax Plan - What to do now?
This past Friday, a furious day of adjusting, altering and hand writing tax legislation was followed by a late night/early morning vote. As you surely know, the Senate passed its version of tax reform at the end of a long day intra-party negotiating.
One of the obvious questions you might ask is 'what does this tax plan mean for me'? Good question! Anyone who can give you a definitive answer is lying and you should stop your conversation with them immediately. For starters, the tax reform bill passed by the Senate is not the same bill that was passed by the House. 'What does that mean'? Pat yourself on the back...that's another very good question! While I didn't graduate with a degree in political science and don't specialize in the minutiae of legislative branch process, I can tell you what I know.
When the House and Senate pass a different bill on the same topic, the bill the Senate passed can do a couple of things:
1) It can be sent back to the House as is and the House can vote on it. If it gets a majority vote in the House, it goes to the President for signature.
2) If the House doesn't think it will have the votes to pass the Senate bill or it wants to find middle ground on various issues, a process called 'reconciliation' occurs. In this process the House and Senate negotiate on the differences between their 2 bills and find some common ground. This revised bill then has to go through both the House and the Senate and receive majority votes in each to go to the President for signature. Option 2 is what is going on right now. However, if the process takes too long and particularly if the special election in Alabama starts getting closer, the legislative leaders can switch course, send the bill passed by the Senate to the House for a vote and try and get it passed (in other words, they can scrap Option 2 at any point and attempt Option 1).
Now that we have that out of the way (I wanted to provide some sarcastic 'you're welcome' here but I've yet to come up with an overly entertaining remark), let's get back to your first really good question...'what does this tax plan mean for me'. When the House passed it's bill a few weeks back, I wrote that there was nothing to do yet as the bill would likely change significantly before it finally, if ever, passed into law. I couldn't be happier that I saved you some time and anguish with that advice...you're welcome (perhaps this attempt at humor is a bit more successful than the previous). Even though the picture of what this final bill will look like is becoming a bit clearer, we still don't really know what it will entail when all is said and done. There are several big ticket items on which the House and Senate bills do not agree. I will summarize some of those below, but my advice in the here and now is this: don't bang your head against the wall trying to figure this all out and certainly don't make any major decisions based upon what the Senate has passed; it will likely change again. Your friendly tax professional should be doing some of the head banging for you as they start to sift through the various items on which the 2 bills do agree. If you ask, perhaps they'll even share their Spotify metal playlist with you.
One major item which will effect those in high tax states who also live in high real estate tax zones is the elimination of the SALT deduction. SALT is the acronym for state and local tax. This is a deduction that anyone who itemizes takes advantage of and allows you to deduct any state and local tax, including real estate tax, on your federal return, There is currently no cap as to what you can deduct...if you paid it, you can deduct it. That will change. The House and Senate bills agree that this will be eliminated, however, they will still allow a deduction for real estate taxes of up to $10k. This is an item that many folks in the NY-metro area, including NJ and CT, as well as high tax districts in California and elsewhere will need to pay particular attention to. It will likely require adjusting family budgets making sure the loss of these deductions are accounted for in overall cash flow. If a bill does pass, this will be in it. It is highly unlikely that this will change since both bills are in sync on this issue.
In this environment, year end planning meetings become increasingly important as adjustments will need to be made for 2018 once a final bill is passed. If your year end planning occurs before a final bill is passed, you should follow-up with your business advisor and tax professional early in 2018 to make whatever strategic maneuvers are necessary.
As promised, some of the items on which the House and Senate bills do not agree:
1) The Senate has 7 new tax brackets. The House has 4. So, we have no idea what tax rate anyone will have.
2) The House bill eliminates the deduction for student loan interest AND taxes tuition waivers for students and for those who receive reduced tuition due to family employment at the school. The Senate bill does not change the current rules.
3) The House eliminates the teacher classroom expense deduction. The Senate doubles the current $250 deduction max to $500. Good on ya, Senate!
4) The House and Senate both increase the child tax credit but the bills don't agree on how much, when and who the new version of the credit effects.
5) The House bill changed the current mortgage interest deduction from interest on $1 million of principle to $500k . The Senate keeps the $1M mark but does remove the ability to deduct an additional $100k of principle interest from an equity line as is currently allowed in the current tax code.
6) The Senate bill keeps AMT in the tax code but modifies it. The House eliminates AMT altogether.
7) For pass through entities (LLCs, S-corps), the House and the Senate do not agree on the new tax rates for pass through income, however, both plans do provide a reduction in tax for most businesses versus the current tax code. However, professional service providers, such as attorneys and accountants, will face limitations to the new tax rates.
8) The timing of the implementation of the new 20% corporate tax rate differs by 1 year between the 2 plans.
There are many other differences between the 2 bills. This partial list gives you an idea of what reconciliation will entail. There are differences, some major, and there are many special interests pushing their cause. I do not believe there are any items that will provide blockage to ultimate passing of the bill. As the future of the provisions in the tax reform bill become clearer, I will add new posts really digging into the code changes.
Adam Ditsky, CPA
President, Ditsky Strategic