Your taxes will go up/down. The national debt will increase/decrease. This is good/bad for the US economy. Depending on the political tendencies of your news sources, it’s nearly impossible to understand the new House and Senate tax bills without reading the 700+ pages of the “Tax Cuts and Job Act.”
The goals of the bills are reasonable – encourage investment, create jobs, reduce complexity, and put more money into the pockets of the middle class. The real question is whether the bills will have the desired effect. I won’t guess the answer or get political, but I will highlight a number of items in the two plans that may impact Bach, James, Mansour & Company clients. Please also read the disclaimer below.
- Tax rates are changing. By how much is still anyone’s guess. The House plan has four brackets, and the Senate bill retains seven brackets – for now. Every return has so many variables that there’s no way to project impact until the law passes.
- Standard deduction doubles, but personal exemptions are eliminated. If passed, the new standard deduction would (almost) double to $12K filing individually, or $24K filing jointly, but the personal exemption would go away. An increase in the child tax credit would make up some of the difference for families claiming children.
- Your Georgia state taxes may increase. Under current Georgia law, when you claim itemized deductions or the standard deduction on your federal tax return, you have to do the same in Georgia. Even though the federal standard deduction will be higher, the GA standard deduction stays the same, which could mean higher state taxes if you take the federal/state standard deduction route
- Mortgage interest deduction is reduced. Under the House plan, you’ll be able to deduct interest on (up to) a $500K loan amount, vs. $1MM today, which is retained in the Senate plan. There are factors that still need to be negotiated, including limits to home equity lines and second home mortgage interest deductions.
- Alternative Minimum Tax (AMT) is repealed. AMT brings chills to taxpayers and CPAs alike. Too many people in lower tax brackets are forced to pay AMT, and it’s too complicated for an individual to calculate.
And for businesses:
- Corporate tax rates are reduced from 35 to 20%. Exceptions apply, especially for professional service organizations (like attorneys, architects, and CPAs) that tend to pass through income to business owners. Some of our income will be taxed at 25%, but the rest is at higher rates.
- Deduct 100% of capital expenditures in the first year. With some exceptions and requirements, businesses would be able to deduct capital expenditures of up to $5MM under the House plan (up to $1MM under the Senate plan) in the same year that those expenditures occurred, rather than depreciating over time. Would you rather save now or save later?
Good question. As I mentioned above, the House and Senate still have a lot of wrangling to do before they can vote on a final bill, and even then passage is not a given. It’s also pretty late in the year, so I question whether this will be passed in time to impact 2017 tax returns. The IRS will need plenty of time to incorporate any changes into 2017 tax forms.
Here’s the official disclaimer
This is my opinion based on extensive research. Assume that the details will change as the House and Senate negotiate and pass the final bill for presidential signature.
Neal Bach, CPA