Monday, December 4, 2017
MAKING ONE BILL OUT OF TWO
So, the Senate passed its version of the Tax Cuts and Jobs Act. It now must be reconciled with the House version in conference committee.
Considering the importance of this development I have postponed the regular Monday BUZZ for a day. This week’s installment will be posted tomorrow (Tuesday).
Whenever I talk about the GOP tax plans I feel I must make these preliminary comments –
(1) It is NOT as good as Republicans tout and NOT as bad as Democrats insist. The bills have BOTH good and bad in them.
(2) It is NOT a MASSIVE tax cut for the middle class.
(3) It most certainly IS a MASSIVE tax cut for arrogant arsehole Donald T Rump and his family.
Let’s discuss the items of difference in the two bills that affect most 1040 filers. In this analysis I am not considering the “appropriateness” or potential economic effects of the changes in the bills.
In the interests of full disclosure, I must state that the below discussion is not based on a personal reading of the official texts of the passed Senate or House legislation, but on what I have read in a multitude of online news articles, analyses and blog posts from reputable and credible sources.
The House version has 4 tax brackets going from 12% to 39.6%, with a “phantom” 5th bracket that apparently “phases-out” the effect of the 12% bracket. The Senate version has 7 brackets from 10% to 38.5% period.
Obviously, I prefer 4 brackets to 7 – keep it simple, stupid. But without any convoluted phase-out. If I had my druthers I would make the bottom rate 10% and the top rate 38.5%, but would accept the 12% and 39.6% rates.
There is a minimal difference in the amounts in the 2 bills, with the House being $200 for Single, $300 for Head of Household, and $400 for Married Filing Joint more. From the point of view of my clients, I would prefer the higher numbers, but would accept the Senate amounts.
Child and Family Tax Credits:
The House child credit is $1,600, maintaining the current age 17 as the cut-off and beginning the phase-out for joint filers at AGI of $230,000, and the “family” credit for the taxpayers and other dependents is $300. The Senate credit for a child is $2,000, but raises the cut-off age to 18 and begins the phase-out for joint filers at $500,000, with a $500 credit for all others.
I would want the higher numbers for both of the credits, and the higher age cut-off for the child credit. I would accept a compromise on the AGI phase-out levels, perhaps somewhere in the middle. I would want the family credit to include the taxpayer and spouse.
The House does away with the itemized deduction for medical expenses. The Senate keeps it and reduces the AGI exclusion threshold back to 7.5% for 2017 and 2018.
Most of my clients do not receive any federal tax benefit for their medical expenses, due to the AGI exclusion. However, a few do benefit, some consistently and some occasionally, and those that benefit consistently are retired seniors. I could accept the repeal of this deduction if it meant keeping preferred options in other areas.
Both versions allow for a deduction for real estate taxes paid up to a $10,000 maximum, not limited to the taxpayer’s one primary personal residence. And both maintain a deduction for interest on acquisition debt, at least in the House version limited to a taxpayer’s one primary personal residence, and do away with the deduction for interest on new home equity debt. But the House reduces the maximum acquisition debt principle to $500,000, while the Senate keeps the current $1 Million.
I would want both the property tax and acquisition debt mortgage interest deductions limited to one primary personal residence, and would prefer the lower House limitation on acquisition debt principle.
The House does away with the $250 adjustment to income for the qualified out of pocket expenses of K-12 teachers, aides and administrators. The Senate keeps the adjustment and doubles the amount to $500.
Both bills do away with the deduction for employee business expenses. This adjustment is an employee business expense. I have always had issues with this item. Why are teachers singled out for this minor deduction? What about other public service employees – police officers, fire fighters, emergency medical technicians, nurses? I support the House bill’s repeal of this item.
As I understand it, the House bill does away with the Lifetime Learning Credit, but the American Opportunity Credit remains and is available for a 5th year of post-secondary education at half the rate that applied for the first 4 years, with up to $500 being refundable. I also think the income phase-out range has been increased. I have seen nothing yet about the education credit(s) available in the Senate version.
I would certainly hope that the final conference committee bill includes the same enhancements to the AOC as the House bill. While I oppose using the Tax Code to deliver government tax benefits, if doing away with the education tax credit(s) is not replaced by corresponding increased direct student financial aid I would prefer that at least the AOC, with the House enhancements, remain.
ACA Individual Mandate:
The Senate version makes the penalty for not having “sufficient” health insurance for the entire year $0. The House makes no change to the current law.
I have always opposed the individual mandate penalty. While the government should encourage universal health insurance coverage, and provide financial assistance to help pay for premiums via the advance premium credit, it should not financially penalize those who do not have “sufficient” insurance for all household members for the entire year.
Alternative Minimum Tax:
The House totally repeals the dreaded AMT, but the Senate merely raises the current exemption amounts by about 40%.
The AMT must be destroyed! I do not want any individual Alternative Minimum Tax included in the final legislation sent to idiot Trump for signature.
Pass-Through Business Income:
Both versions add much complexity to the Tax Code and would provide much agita for tax professionals.
I would prefer, and could support, a 70% wage equivalent - 30% dividend equivalent allocation of net income (with no option for a different allocation based on “facts and circumstances”), instead of the flat percentage deduction in the Senate bill, for sole proprietors filing Schedule C and general partners receiving a Form K-1, with only 30% subject to a lower income tax rate and only 70% subject to the self-employment tax. And I actually could accept a lower maximum rate on sub-S pass-through business income. The lower rate would be comparable to the current lower tax rates for qualified dividends.
Both versions allow a full current expensing of all machinery and equipment purchases for 5 years; the Senate version phases out this deduction over a second 5 years. The House increases the Section 179 expensing deduction to $5 Million with the phase-out beginning at $20 Million of total purchases. The Senate increases 179 expensing to $1 Million with the phase-out starting at $2.5 Million.
I would go with the House for the 5-year limit for full expensing and the Senate for the increased Section 179 numbers. I do, however, oppose the idea of full expensing of all machinery and equipment purchases.
Both versions currently substantially increase the exemption, $10 Million in the House and double in the Senate. The House bill totally repeals this tax after 6 years. The House version maintains a consistent full step-up in basis for all inherited assets.
While I oppose the “death tax” on a philosophical level, I would accept a $10 Million exemption, with current “portability” intact, while not totally repealing it. My main concern is insisting on the consistent full step-up in basis for all inherited assets.
International Business Income:
I have absolutely no knowledge of or experience with the issues of international business income and repatriation that are covered in the two bills. These issues do not affect, and never have affected, any of my clients. So, I cannot intelligently comment on these components of the legislation. Anyway, they do not directly affect the filing of the Form 1040.
The individual tax cuts in the Senate bill expire in 2026. The corporate rate reduction is permanent, but does not take effect until 2019. In the House version the $300 per taxpayer/spouse "family credit" expires in 2023.
I have always been against temporary tax law, except in the case of tax relief related to natural disasters, or tax law changes that “sunset” after 10 years. Any changes to tax law must be permanent. If Congress wants to change things in the future they can do so via new legislation. I could accept the later beginning date for reducing the corporate tax rate.
I have done additional reading on the Senate tax bill provisions. Here are some more comments -
In the Senate bill personal casualty and theft losses are only deductible if attributable to Presidentially-declared disaster areas. I think the House bill does away with the deduction altogether going forward.
I would prefer the Senate version and allow for a deduction for disaster-area casualty losses.
The Senate bill reduces the recovery period (the depreciable life) for residential real estate from 27.5 years to 25 years, and for nonresidential real property (commercial buildings) from 39 years to 25 years. I do not think the House version makes any change.
Those of you who have read my tax reform proposals know that I oppose the deduction for depreciation of real estate, and capital improvements thereto, PERIOD. I certainly do not want the depreciable life of real estate, regardless of the use of the property, to be shortened, and oppose the Senate changes.
The Senate version does away with the ability of taxpayers to “recharacterize” ROTH IRA contributions as traditional IRA contributions. I do not think the House makes this change (though I am not certain).
I oppose doing away with recharacterization.
There you have my 2+ cents on the reconciliation of the two tax bills. So, what do you think?