Sensible Perspectives

How Will Proposed Tax Reform Affect Me?

Posted by on December 13, 2017

The US House and Senate are considering extensive income tax reform. The table below outlines current law and the bills for each chamber as they were at the close of business on Monday, December 4, and provides indications of the bill that has emerged as the “final deal” on Wednesday, December 13. While this “final deal” has been announced, it has not been ratified. Details are sparse, and nothing will be certain until the President has signed a bill.

The two chambers’ tax reform bills differ from each other, but both propose significant changes from current law, and they are very similar in many respects. The shading in the table highlights some of the strongest similarities (one might suspect that these are likely to survive in the final bill).

What are the clearest implications of the proposed tax reform?

Current Law
House Bill
Senate Bill
“Final” deal
Individual Brackets10%, 15%, 25%, 28%, 33%, 35%, 39.6%12%, 25%, 35%, 39.6%10%, 12%, 22%, 24%, 32%, 35%, 38.5%Top rate 37%
Standard Deduction$6.5k single, $13k married$12.2k single, $24.4k married$12k single, $24k married$12k single, $24k married
Personal exemption$4.05k$0$0?
State and local tax deductionProperty taxes, state and local income taxesProperty taxes only up to $10k (but business owners can deduct state and local income taxes as business expense)Property taxes only up to $10k (but business owners can deduct state and local income taxes as business expense)$10k of property taxes or income and sales taxes
Mortgage Interest deductionFor interest on up to $1.1M principal ($1M primary, $100k one other)Only up to first $500k of principal for new mortgages, existing mortgages grandfatheredFor interest on up to $1M principal, but only for purchase debt, not home equity debtInterest on up to $750k principal (new mortgages?)
Medical deductionMedical expenses over 10% of AGIEliminatedOver 7.5% of AGI, but only for the next two yearsDeduction retained
Tuition waivers for graduate studentsUntaxedTaxedUntaxedUntaxed
Child tax credit$1k (incomes up to $75k single, $110k married)$1.6k (incomes up to $75k single, $110k married)$2k (incomes up to $500k single, $1M married)$2k (refundability uncertain)
Personal Alternative Minimum TaxThere is oneRepealRetained, but with larger exemptionRetained, threshold is $500k single, $1M married
Estate TaxExemption $5.49M single, $10.98 marriedExemption $10.98M single, $21.96 married, repeal after 2023Exemption $10.98M single, $21.96 marriedExemption $10.98M single, $21.96 married
ObamaCare individual mandateAmericans who can afford health insurance but don’t purchase it must pay a fine or a feeNo changeRepealRepeal
Pass through incomeTaxed as ordinary incomeTaxed at 25% except for professional servicesAllowed a 23% deduction except for professional services (expires 2025)20% deduction
Roth conversion re-characterizationsPermittedNot PermittedNot Permitted?
Capital gain tax rulesTaxpayers can specify tax lots when realizing gainsNo changeRequires first in, first out approach?
Corporate tax rate35%20% starting in 201820% starting in 201921% starting in 2018
Corporate tax baseWorldwide incomeUS profits onlyUS profits onlyUS profits only
Corporate AMTExistsRepealRetainRepeal

Important tax reform caveats:

  1. The tax reform bills have now been reconciled (a “final deal” has been struck), but details are limited as of this writing, and the “final deal” has not been ratified by both houses.
  2. The provisions (and changes to the provisions) interact. You probably won’t know whether your taxes will go up or down until you file.
  3. Taxpayers and tax advisers will require time to figure out the most advantageous approaches to minimize taxes – the impact on each person will take time to emerge.

We’ll update you as we know more.

Rick Miller is the founder of Sensible Financial Planning and Management. To ask Rick or another member of our team about planning for your financial future, please get in touch!