John Moore and I were in Washington, D.C. this week attending meetings with one of our favorite professional associations, Kingdom Advisors. One of the highlights was a legislative update with members of the executive branch staff. The timing was remarkable, as the legislative update occurred just hours after the House of Representatives released the framework for the proposed tax reform. The changes are significant. Of the dozens of proposed tax changes, here are a few that we believe will impact the families we serve:
Larger Standard Deduction
Currently, the standard deduction is $6,350 for individuals and $12,700 for married couples. The proposed bill presents a dramatic increase: $12,000 for individuals and $24,000 for couples. This is especially beneficial if you typically do not have enough deductions to itemize. This will simplify tax filing for millions of families who will no longer need to record deductions on a schedule A. This may be the most impactful part of the proposed tax reform.
The tradeoff of the higher standard deduction is the elimination of the personal exemption. Tax payers will now receive a $300 credit for the primary tax filer, plus a spouse. For small families, this could still be a net benefit. Large families may be negatively impacted since they will no longer have the personal exemption for all family members.
Fewer Tax Brackets
The number of tax brackets is reduced. Whereas there are currently seven tax brackets, the proposed bill reduces these to four—12%, 25%, 35%, and 39.6%. The 12% bracket applies to married couples with up to $90,000 income. The 39.6% bracket applies to married couples with income over $1,000,000. In combination with the increased standard deduction, the new brackets could benefit middle class families, as well as those with taxable income from $150,000—$400,000, since they will be in a lower tax bracket.
Larger Child Credit
The current child tax credit is $1,000 per child. This will increases to $1,600 per child.
Medical & Student Loan Deductions
Medical expenses and student loan interest are no longer deductible. While this seems like a huge negative, I think it will likely be a wash with the new standard deduction. Keep in mind, medical deductions currently apply only on expenses exceeding 10% of income, and student loan interest is subject to a restrictive income limit.
The tax reform bill proposes no deduction at all for state income tax, and limits the deduction for property tax to $10,000. This is a big negative for high-income taxpayers in states such as California and New York. It also hurts people with high property values in states with no income tax, such as a Texas or Washington. Low income and middle class families who pay property and state income tax will no longer itemize due to the higher standard dedication.
There is so much more to the proposed tax reform bill, including changes to corporate tax, estate tax and gifting rules. Check back soon for more details as this proposal evolves. The Senate will have its own bill that could very well stop the House of Representatives’ bill from moving forward. The fastest this could advance would be a House vote the week of Thanksgiving, with something on the President’s desk around mid-December.
Not sure if you and your investments are prepared for potential tax reform? The team at John Moore Associates will be staying abreast as this evolves, and are happy to answer questions about how the proposed changes may impact your investments. Call John Moore Associates today at (888)815-5100 and talk to one of our financial advisors.
The information provided has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Brian Cochran and not necessarily those of Raymond James. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Raymond James financial advisors, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection of or use of information regarding any website’s users and/or members.