• Reconciliation Update: 2017 Tax Reform Bill Individual Effects
  • January 15, 2018 | Authors: Van R. Mayhall; Van R. Mayhall; Saul Reinaldo Newsome
  • Law Firm: Breazeale, Sachse & Wilson, L.L.P. - Baton Rouge Office
  • With Christmas only a week away, Congress is trying its best to make it on taxpayer's "nice list." Last week, the House and the Senate reconciled their tax-reform bills. On the morning of December 19, 2017, the House passed the final bill, but later that afternoon, the Senate parliamentarian determined that three provisions violated Senate rules. The House will have to remove those provisions and vote again. The final bill proposes a lower tax rate for nearly everyone. If enacted, the current individual income tax brackets and rates will change. Many deductions will be eliminated in favor of a higher standard deduction. We will continue to monitor the changes as the bill progresses.

    Personal Income Tax Rates: Generally, the final proposed tax reform bill would keep or lower the tax rates for all individuals reporting net taxable income below $157,501 annually and nearly all couples regardless of their net taxable income. The final proposed bill would raise taxes by four percent for individuals reporting net taxable income between $157,501 and $195,450 annually and two percent for individuals reporting net taxable income between $200,001 and $424,950 annually. Those couples reporting net taxable income between $400,000 and $424,951 would have a two percent tax rate increase. The most notable difference between the final proposed bill and the previous Senate and House bills is the highest tax bracket. At 37%, it is lower than the current highest rate and both previous versions of the tax reform bill. Additionally, the final bill removes the "claw back" provision that was intended to remove the 12% marginal rate from Americans in the highest tax bracket. Sadly, the final bill only makes the rate changes effective through 2025. Afterward, the previous rates "snap-back" into place. For more details, see the charts below.

    Individuals

    Current Tax Rates for 2018

    Final Proposed Rates

    10%

    Up to $9,525

    10%

    Up to $9,525

    15%

    Over $9,525

    12%

    Over $9,525

    25%

    Over $38,700

    22%

    Over $38,700

    28%

    Over $93,700

    24%

    Over $82,500

    33%

    Over $195,450

    32%

    Over $157,500

    35%

    Over $424,950

    35%

    Over $200,000

    39.6%

    Over $426,700

    37%

    Over $500,000

    Married Filing Joint Returns

    Current Tax Rates for 2018

    Final Proposed Rates

    10%

    Up to $19,050

    10%

    Up to $19,050

    15%

    Over $19,050

    12%

    Over $19,050

    25%

    Over $77,400

    22%

    Over $77,400

    28%

    Over $156,150

    24%

    Over $165,000

    33%

    Over $237,950

    32%

    Over $315,000

    35%

    Over $424,950

    35%

    Over $400,000

    39.6%

    Over $480,050

    37%

    Over $600,000

    Personal Exemption: The final proposed bill eliminates the current $4,050 per person exemption for individuals, their spouses, and their dependents.

    Standard Deduction: The current standard deduction amounts are $6,350 for individuals and $12,700 for married couples filing jointly. The final proposed bill nearly doubles the standard deduction to $12,000 for individuals and to $24,000 for married couples filing jointly.

    Mortgage Interest Deduction: Currently, the mortgage interest deduction is capped at $1 million. The final proposed bill reduces the mortgage interest deduction to $750,000 and eliminates home equity loan interest deductions. Generally, the provision only applies to new loans, not existing debt.

    State and Local Tax Deductions: Current law allows taxpayers to deduct state and local taxes and property tax from their income. The final proposed bill now only allows an itemized deduction for state and local taxes and property taxes up to a combined $10,000.

    Child Care Tax Credit: The current child tax credit is $1,000 per child, but the final proposed bill seeks to increase it to $2,000. Under the final proposed bill, only $600 would not be refundable. The bill proposes a new $500 credit for non-child dependents. Furthermore, the threshold of families eligible for the child tax credit is increased to $200,000 for individual and $400,000 for those filing joint returns.

    Alternative Minimum Tax: The final proposed bill preserves the alternative minimum tax (AMT), but increases the amount of income exempt from the AMT.

    529 Plans: The final proposed bill expands the use of 529 saving plans for K-12 education expenses, including home-schooling and private schools.

    Estate Tax: The lifetime unified credit exemption equivalent amount for 2017 is $5,490,000 per person. The final bill preserves the estate tax, but doubles the exemption to $11 million per person.

    Individual Insurance Mandate: Significantly, the final bill repeals the individual mandate to purchase health insurance under the Affordable Care Act. This change is permanent and does not expire in 2025.

    Capital Gains: By and large, capital gains tax will remain the same. The final bill will lower the threshold for the 20% rate only for individuals reporting more than $424,950 in taxable income.

    Louisiana Impact: Because Louisiana's personal income tax "piggybacks" on federal income tax, any changes to a Louisiana taxpayer's federal tax liability will affect his or her state income tax liability. A Louisiana taxpayer's taxable income is equal to the taxpayer's federal adjusted gross income minus the taxpayer's excess federal itemized deductions and federal income tax.

    Overall: In addition to lowering the highest income tax bracket to 37%, the reconciliation process also brought back the medical expense deduction. Unfortunately, the reconciliation process could not solve every problem. The final bill only temporarily reduces taxes. Nearly all of the individual taxpayer changes, including the lower rates, will expire at the end of 2025. However, the bill can no longer be changed. The final version has passed the House and will be voted on by the Senate sometime today or tomorrow. If enacted, this would be the first major U.S. tax overhaul in over thirty years. We will continue to monitor the bill as it progresses. Look for our companion update addressing the reconciliation process's effect on business tax reform.