Selected Individual and Estate Tax Provisions of the Tax Bill
Gibbons Corporate & Finance News - Legislative Tax Alert
December 21, 2017
This week the Senate and House approved the Joint Conference Committee tax bill and the President is expected to sign it into law shortly. This article highlights some of the key individual and estate planning provisions of the bill. These provisions are effective January 1, 2018, unless otherwise noted.
Individual Income Tax Rates
The Conference bill will reduce individual income tax rates and double the standard deduction through December 31, 2025. The 7 income tax brackets will be set at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The personal exemption will now be eliminated and there will be a near doubling of the standard deduction from $12,700 to $24,000 for those married filing jointly; from $9,350 to $18,000 for head of household; and from $6,350 to $12,000 for individuals. The standard deduction thresholds will be indexed for inflation after December 31, 2018.
Alternative Minimum Tax
Currently, an alternative minimum tax (“AMT”) is imposed on an individual, estate, or trust in an amount by which the tentative minimum tax exceeds the regular income tax for the taxable year. Under current law, an individual taxpayer’s taxable income for AMT purposes is reduced by certain exemption thresholds. These amounts are $54,300 for individual filers and $84,500 for joint filers. Current law further reduces these AMT exemption thresholds by $0.25 for every dollar of AMT taxable income over the exempt amounts until the AMT exemption is phased out when AMT taxable income reaches $120,700 for single filers and $160,900 for joint filers. While the Conference bill will retain the individual AMT, it will increase the exemption thresholds to $70,300 for single filers and $109,400 for joint filers. Further and more significantly, the Conference bill will raise the income threshold at which the AMT exemption phases out to $500,000 for single filers (up from $120,700) and $1,000,000 for joint filers (up from $160,900). The increases in the overall income thresholds at which the AMT exemption phases out means that fewer individuals will be subject to AMT.
Mortgage Interest Deduction
Currently, qualified residence interest (interest paid or accrued during the taxable year on both acquisition indebtedness and home equity indebtedness) is deductible on mortgages of up to $1,000,000 and home equity loans up to $100,000. A qualified residence means the taxpayer’s principal residence and one other residence of the taxpayer selected to be a qualified residence.
The Conference bill will restrict the deductibility of mortgage interest on acquisition indebtedness, dropping the cap from $1,000,000 under present law to $750,000, and will repeal any deduction for interest on home equity indebtedness. The bill will grandfather all existing mortgages in place by December 15, 2017 (but not for home equity indebtedness) – this will include taxpayers who enter into a binding written contract before December 15, 2017 to close on the purchase of a principal residence before January 1, 2018, and who purchase the principal residence before April 1, 2018. These deductibility restrictions will apply through December 31, 2025.
Deduction for State and Local Taxes
Currently, individuals are allowed an itemized deduction for the full amount of their state and local income taxes, as well as local property taxes. The Conference bill will provide for a combined maximum deduction for state and local income taxes, as well as property taxes, of $10,000. Further, the bill will expressly prohibit the prepayment in 2017 of state and local income taxes imposed for any future year. These deduction limits will apply through December 31, 2025. Taxpayers may wish to consider prepaying some portion of property taxes (subject to the effects of the AMT) since the Conference bill does not include a separate prohibition on that.
Currently, the Internal Revenue Code allows individual taxpayers to reduce their income tax liability by deducting contributions to charities and certain other organizations. For cash donations to public charities and some foundations, this is limited to 50% of adjusted gross income, subject to certain adjustments. Other donations are further limited in their deductibility.
The Conference bill will increase the income-based percentage limit from 50% to 60% for certain charitable contributions by an individual taxpayer of cash to public charities and certain other organizations.
Alimony and Separate Maintenance Payments
Effective for any divorce or separation agreement executed after December 31, 2018, alimony and separate maintenance payments will no longer be deductible by the payor spouse or included in income by the recipient spouse.
Affordable Care Act Individual Health Insurance Mandate Eliminated
Under present law, individuals must be covered by a health insurance plan that provides minimum health insurance coverage or pay a penalty for failure to maintain such coverage. Effective for health insurance coverage beginning after December 31, 2018, the Conference bill will do away with this penalty.
Estate, Gift, and Generation-Skipping Transfer Taxes
Currently, there is an exemption for estate transfers at death, gifts made during life, and generation-skipping tax (“GST”) transfers of $5,490,000. The Conference bill will increase the estate, gift, and GST tax exemption to $11,200,000 million per person as of January 1, 2018. While these exemption amounts will remain in place through December 31, 2025 (indexed for inflation), they will sunset on January 1, 2026 to current exemption amounts (indexed for inflation). For income taxation of estate and trusts, the maximum income tax rate will be reduced to 37% (from 39.6%).
Under current law, any portion of a decedent spouse’s estate exemption not fully utilized during the decedent’s life or at death passes to the surviving spouse (the concept of “portability”), and there is a stepped-up basis to fair market value at death for assets owned by a decedent. The Conference bill does not change these provisions. Therefore, portability between spouses for the estate and gift tax exemption and stepped-up tax basis on death remain in place.
If you have questions or concerns with how any of these provisions will impact you, please do not hesitate to contact us.