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December 20, 2017

Breaking Down the Conference Committee's Reconciliation of the Tax Reform Bill: Part 2: Individual, Estate, Trust, and Gift Provisions

CBIZ keeps you up to date on tax reform.The conference committee’s reconciliation of the tax reform bill, formerly the Tax Cuts and Jobs Act (TCJA), passed by Congress on December 20, includes significant changes to the taxation of individuals, as well as changes impacting estates, trusts, and gifts. For individuals, it is more difficult to state that these changes will provide significant tax benefits, particularly for low and middle-class workers, and especially if the act’s temporary provisions are allowed to expire. Although there are few provisions directly affecting the taxation of trusts, it is clear that fewer individuals will be burdened with estate and gift taxes due to increased exemption amounts. In this second part of our tax reform plan series, we will focus on provisions for individuals and for estates, trusts, and gifts. Our final upcoming article will feature international changes.

Individual Tax Rates

The first major change on the individual side is a reduction in tax rates, though these new rates are set to expire after 2025. For taxable years beginning after Dec. 31, 2017, the new rates and brackets for married couples and single individuals are:

Married Filing Jointly and Surviving Spouses:

Single Individuals:

10% (Taxable income not over $19,050)

10% (Taxable income not over $9,525)

12% (Over $19,050 but not over $77,400)

12% (Over $9,525 but not over $38,700)

22% (Over $77,400 but not over $165,000)

22% (Over $38,700 but not over $82,500)

24% (Over $165,000 but not over $315,000)

24% (Over $82,500 but not over $157,500)

32% (Over $315,000 but not over $400,000)

32% (Over $157,500 but not over $200,000)

35% (Over $400,000 but not over 600,000)

35% (Over $200,000 but not over $500,000)

37% (over $600,000)

37% (Over $500,000)

There are also categories for married filing separately and head of household. These rates and brackets are:

Married Filing Separately

Head of Household:

10% (Taxable income not over $9,525)

10% (Taxable income not over $13,600)

12% (Over $9,525 but not over $38,700)

12% (Over $13,600 but not over $51,800)

22% (Over $38,700 but not over $82,500)

22% (Over $51,800 but not over $82,500)

24% (Over $82,500 but not over $157,500)

24% (Over $82,500 but not over $157,500)

32% (Over $157,500 but not over $200,000)

32% (Over $157,500 but not over $200,000)

35% (Over $200,000 but not over $300,000)

35% (Over $200,000 but not over $500,000)

37% (Over $300,000)

37% (Over $500,000)

These rate and bracket charts also show shifting priorities as the legislation emerged from the conference committee. The final tax bracket structure does not embrace the simplification efforts that were first championed by Speaker of the House Paul Ryan (R-WI), where the conference report keeps the current number of tax brackets. Also, the merged TCJA contains a significant marriage penalty for wealthy individuals, with the highest 37 percent rate bracket for single individuals beginning at $500,000, but beginning only slightly higher at $600,000 for married couples filing joint returns. Finally, the House’s plan to phase-out the benefit of certain lower rate brackets for wealthy individuals was eliminated. The capital gains rates under current law will remain at 0 percent, 15 percent, and 20 percent, and the Net Investment Income tax together with the 0.9 percent Additional Medicare Surcharge will remain as well. The capital gain thresholds for single filers will be $38,600 ($77,200 for married couples) for the 15 percent rate, and for single filers will be $425,800 ($479,000 for married couples) for the 20 percent rate.

One critical item concerning these rate brackets is a change in the measure of inflation to be used for the income thresholds, from traditional CPI to chained CPI. Previously, traditional CPI was used to make inflation adjustments year to year. The traditional inflation rate from 2000 through 2014 for urban consumers was 2.26 percent. The Congressional Budget Office calculated that chained CPI on average grows at a rate that is roughly .25 percentage points less, and the chained CPI inflation rate for this same period grew at 1.99 percent. Using these averages in 2025 (the last year of these reduced rates), it is possible to project an estimate of how the difference in these rates will affect the tax brackets. A single filer’s $500,000 tax bracket threshold (subject to the 37 percent rate) would increase to $597,883 under traditional CPI modeling, whereas chained CPI modeling would drop this threshold to $585,370; a decrease of over $10,000. Most estimates predict that this will cause most individuals to actually see tax increases (over prospective application of present law) as soon as 2026, because chained CPI will still be used after 2025 and will not compare to traditional CPI if the tax rate cuts are allowed to expire after 2025.  

Individual Deductions and Child Tax Credit

The increased standard deduction amounts from the earlier Senate bill were adopted. For taxable years beginning after Dec. 31, 2017, the new amounts are therefore set at $24,000 for married individuals filing jointly, $18,000 for head of household and $12,000 for single individuals. The enhanced standard deductions for the elderly and the blind are also preserved. Again, chained CPI will be used as the inflation measure for these amounts. These increases expire after 2025, though the chained CPI inflation adjustment will remain.

Personal exemptions for individuals are eliminated, as was proposed in both bills previously. An increased child tax credit instead is provided in their place. The new credit amount is $2,000, of which up to $1,400 is refundable. The credit will begin to phase out at an income threshold of $400,000 for married couples filing joint returns ($200,000 for all other taxpayers). This threshold is not adjusted for inflation. Taxpayers will be able to claim a $500 nonrefundable credit for each non-child dependent. All of these provisions will expire with the individual tax cuts in 2025.

The individual state and local income and sales tax deduction was retained, despite high profile debates on the topic. However, a combined limitation covering state and local property taxes as well as income/sales taxes now applies in the amount of $10,000. Also, a provision was added to specifically prohibit a deduction for the prepayment of future state and local income taxes in 2017. Presumably, this limitation was added to prevent taxpayers from attempting to avoid the $10,000 limit in 2018.
The itemized deduction for medical expenses was preserved, with a decrease in the AGI threshold used to determine the amount of deductible medical expenses, from 10 percent to 7.5 percent in 2017 and 2018. All deductions for miscellaneous itemized deductions subject to the 2 percent floor are repealed for taxable years beginning after Dec. 31, 2017 and before Jan 1, 2026. This results in the elimination of the deductions for employee business expenses, tax preparation fees, and attorney fees, among others.
The overall limitation for itemized deductions (the “Pease” limitation), however, is suspended for 2018 through 2025. This will allow higher income individuals to claim itemized deductions, in contrast to current law which limits itemized deductions once an individual’s income exceeds certain thresholds.

Other Individual Provisions

The conference report generally preserved the other existing credits and deductions for individuals, though there are notable changes to these provisions. The following credits, deductions, and exclusions were wholly unhanged:

  • Adoption credit
  • Educator expense deduction
  • Education credits (American Opportunity and Lifetime Learning credits)
  • Earned Income Credit
  • Employer provided housing exclusion
  • Exclusion for adoption assistance programs

The Alternative Minimum Tax (AMT) for individuals is retained in the reconciled act, and features increases from the current exemption amounts. For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the AMT exemption amount is increased to $109,400 for married taxpayers filing a joint return ($70,300 for single filers), with a phase out threshold of $1,000,000 for married taxpayers filing a joint return ($500,000 for single filers).

The deduction for qualified moving expenses is also suspended for taxable years 2018 through 2025 for all taxpayers other than active duty members of the military, who must still meet the rules for military moves.

Other provisions that were changed in one or both chambers’ bill that made it into the conference report are:

  • The current law treatment for exclusion of gain on the sale of a principal residence was preserved, where the House bill would have allowed a reduced exclusion, but the ownership and use tests would have been extended from two of the last five years to five of the last eight years. The House bill also would have limited the exclusion to once every five years. The Senate bill mostly followed the House bill, but the final act does not include either provision.  
  • For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026, the mortgage interest deduction limitation is reduced to $750,000 for loans originating after Dec. 14, 2017, and through 2025. The deduction for interest on home equity indebtedness is suspended for the taxable years 2018 through 2025 as well.
  • The penalty for failing to maintain minimum essential health insurance coverage (the individual mandate) was reduced to $0 for months beginning after Dec. 31, 2018, effectively eliminating it.
  • The deduction for the living expenses of members of Congress is also eliminated.
  • The AGI limit for charitable deductions is increased from 50 percent to 60 percent until 2026. However, the 80 percent charitable contribution deduction for contributions made for university athletic seating rights has been eliminated.
  • The deduction for personal casualty losses has been significantly limited. The deduction is generally allowed only if the loss was the result of a federally-declared disaster. For instance, a taxpayer whose home was destroyed by flooding from a burst water pipe would not be allowed a deduction, whereas a taxpayer whose home was flooded as a result of Hurricane Irma would be allowed a deduction.
  • The limitation for gambling losses is expanded to include (in the definition of losses) all deductions incurred in carrying out wagering transactions (for example travel expenses).
  • The alimony expense deduction and corresponding inclusion in income for the recipient spouse is repealed for separation instruments executed after Dec. 31, 2018.
  • Elementary and high school expenses are now qualifying expenses for Section 529 plans, though a provision to allow contributions on behalf of unborn children was dropped as it did not comply with the budget reconciliation rules.
  • The Sinai Peninsula has been added to the list of areas eligible for the combat zone pay exclusion, for qualifying pay received for duty performed subject to hostile fire or imminent danger. The military has refused to designate the Peninsula as a combat zone for a number of years.
  • Discharge of indebtedness income from a student loan received as a result of the death or total permanent disability of the student will no longer be included in income.
  • The contribution limits for ABLE accounts are increased in specific situations, and the designated beneficiary can claim the saver’s credit for amounts contributed to ABLE accounts, and further, rollovers from 529 plans to ABLE accounts will be permitted in some situations.

Estates, Trusts, and Gifts

The changes to the estate, trust, and gift taxes are much less extensive than the individual tax changes, but are nevertheless significant. Elimination of the estate tax was not possible due to the potential effect on deficit restrictions under the budget reconciliation rules. Instead, the estate tax exemption was doubled to $11 million for individuals and $22 million for couples. This is paired with an identical increase in the exclusion for the generation skipping transfer tax. Because the estate tax exclusion is unified with the gift tax exclusion, the gift tax will also affect fewer individuals. The doubling of the exemption expires at the end of 2025, with many of the other individual tax changes. On the other hand, the annual exclusion amounts remain unchanged as does the estate tax rate.

In a change from the Senate bill, the 20 percent deduction for pass-through income will be allowed for trusts and estates. This is a change that will primarily affect certain family-owned businesses and clarifies some of the confusion regarding the deduction for beneficiaries of certain trusts that accompanied the Senate’s exclusion of estates and trusts from the deduction.

Coming Up

The next installment of our tax reform plan series will cover the changes the bill makes to the taxation of international entities and tax-exempt organizations. At publication time, the re-vote in the House passed and the bill now awaits signature by the President. In the meantime, please consult with your CBIZ MHM tax professional for information on how these changes affect you and your business.

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Copyright © 2017, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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