Tax Cuts and Jobs Act appears poised to become law

Late Friday the legislative branch released its conference tax reform bill, The Tax Cuts and Jobs Act, for which voting is set to begin Tuesday, with the goal of having President Donald Trump sign it by Christmas. Realistically, this bill will almost certainly be law. The bill itself is over 500 pages, with an additional commentary section following the main text totaling about the same. Key provisions on the personal, business and international front, along with a few planning concepts, are addressed herein.

On the personal front, the conference bill keeps seven tax brackets but the rates change to: 10, 12, 22, 24, 32, 35 and 37 percent. Thus the top personal income tax rate is reduced from 39.6 percent. The standard deduction is raised to $12,000 for individuals, $18,000 for heads of households and $24,000 for married couples filing jointly. Other standard deductions and personal exemptions go away.

The mortgage deduction is now capped at $750,000 (purchase price). However, for mortgages taken out before Dec. 15, 2017, the limit is $1 million. This change expires in 2026, meaning that the number then will be $1 million again. The deduction for interest on home equity, having to do with home improvements, is eliminated in 2018 but returns in 2026.

The state and local tax deduction is capped at $10,000. Seemingly, pre-payment of these taxes in 2017 will not successfully get a deduction. The medical expense deduction remains, with a lower floor of 7.5 percent for 2017 and 2018 (a retroactive change). The charitable donation deduction stays essentially the same, with upward adjustments on limits for cash gifts. Miscellaneous deductions exceeding 2 percent of adjusted gross income are eliminated. Regarding above the line deductions, those for student loan interest, tuition and fees remain. The alimony deduction is repealed, effective 2019, but only for separation agreements executed or modified after Dec. 31, 2018. Some, but not all, fringe benefits remain.

The child tax credit, a last minute issue, will double to $2,000 per child and is refundable up to $1,400, but with phase-outs. A temporary $500 nonrefundable credit for other non-qualifying dependents is also added. Up to $10,000 of 529 savings plans can be used for public, private, religious and home elementary and secondary schools.

The capital gains tax remains at current rates, but with new brackets for when the different levels apply. The first in, first out rule for stock sales is not in the final bill. The exclusion of capital gains from the sale of a home remains the same (individuals can exclude up to $250,000 and couples can exclude $500,000 if they've lived there for two of the past five years).

There is no penalty for not having the minimum (Obamacare) health care coverage. The alternative minimum tax is repealed for corporations but remains in place for individuals, though it kicks in at a higher rate.

The estate, gift and generations skipping exclusion amounts rise to $10 million, which is indexed for inflation back to 2011. Thus the exclusion will be approximately $11.2 million in 2018. However, these provisions end in 2026 and the exclusion amounts will then revert back to the lower levels of the current law.

The corporate tax will be reduced to 21 percent, effective in 2018. Pass through entities ("taxpayers other than corporations") will be taxed at individual rates with a 20 percent deduction for business-related income. Certain wage and other limitations do apply in calculating the applicable business-related income total. Services businesses will only benefit from this deduction up to a certain income level. The phase-out for them starts at $157,000 for individuals and $315,000 for married taxpayers filing jointly.

The international tax structure moves to a territorial one, with a one-time tax on profits overseas. The latter tax is 15.5 percent on cash and 8 percent on illiquid assets.

Practically speaking, the plan is vague to unclear in parts, and a tax lawyer's dream. It's also full of individual provisions set to expire in 2026, but also open to being extended. The tax base has arguably been expanded, with rates lowered, which in the past has led to gradual creeping rate increases (with the deductions removed rarely coming back). Changes done today might not be advantageous for clients in a few years should the sunset provisions not be extended or the Democrats regain control of our federal governing bodies and repeal or replace these new code provisions.

At a higher level, this plan benefits corporations but to what end is not clear. Already, our larger corporations as a group are doing well, but still not hiring domestically or increasing wages. Taxpayers in service businesses and high tax states will find that their hard work is less rewarded than is the work of other categories of individuals. And the provisions related to international tax are murky, with numerous challenges that will keep professionals working hard to protect their clients' interests. This plan creates so many tax opportunities, but challenges as well.