The House and Senate Tax Cuts and Jobs Act Conference Committee unveiled its tax reform package on December 15. The Committee, after a week of intense negotiations, blended the House and Senate versions of the Tax Cuts and Jobs Act (H.R. 1) into one legislative package. GOP leaders predict that Congress will pass this final version of H.R. 1 before lawmakers leave for their holiday recess. The Conference agreement generally tracks the overall framework for tax reform released by the GOP earlier this year and the House and Senate versions of H.R. 1. This final bill carries a January 1, 2018, effective date for most provisions.
The Conference bill would impact virtually every individual and business on a level not seen in over 30 years. As with any tax bill, however, there will be “winners” and “losers.” The bill calls for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, enhancing the child tax credit, boosting business expensing, and more. The bill also impacts the Affordable Care Act (ACA), effectively repealing the individual shared responsibility requirement.
President Trump has signaled his support for tax legislation before year-end. Few possible roadblocks to ultimately getting a bill to the President’s desk before year-end remain. Prior Senate hold-outs have now signaled their support of the Conference bill, while support in the House appears to be holding steady Nevertheless, some still-hidden parliamentary hurdle or sudden public concern should not be discounted until all the votes are in.
The Conference Committee version of H.R. 1 proposes temporary tax rates of 10, 12, 22, 24, 32, 35, and 37 percent after 2017. Under current law, individual income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent.
Conference Agreement Brackets
|Rate||Joint Return||Individual Return|
|10%||$0 - $19,050||$0 - $9,525|
|12%||$19,050 - $77,400||$9,525 - $38,700|
|22%||$77,400 - $165,000||$38,700 - $82,500|
|24%||$165,000 - $315,000||$82,500 - $157,500|
|32%||$315,000 - $400,000||$157,500 - $200,000|
|35%||$400,000 - $600,000||$200,000 - $500,000|
|37%||Over $600,000||Over $500,000|
Under the Conference bill, income levels would be indexed for inflation for a “chained CPI” instead of CPI. Both the original House bill and the Senate bill called for a chained CPI. In general, this change would result in a smaller annual rise in rate brackets, which the Joint Committee of Taxation estimates, when combined with using the chained CPI for all other inflation-adjusted tax amount, would bring $128 billion more into the U.S. Treasury over the next ten-year period. The chained CPI is permanently applied to almost all amounts subject to annual inflation adjustment, even the permanent amounts that would apply if provisions are allowed to expire after 2025.
The Conference bill calls for a near doubling of the standard deduction. It increases the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation (using chained CPI) for tax years beginning after 2018. All increases are temporary and would end after December 31, 2025. Under current law, the standard deduction for 2018 had been set at $13,000 for joint filers, $9,550 for heads of households, and $6,500 for all other filers. The additional standard deduction for the elderly and the blind ($1,300 for married taxpayers, $1,600 for single taxpayers) is retained.
Deductions and Credits
The Conference bill makes significant changes to some popular individual credits and deductions. Many of the changes, however, are temporary, generally ending after 2025, in order to keep overall revenue costs for the bill within budgetary constraints.
Mortgage interest deduction. The Conference bill limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), in the case of tax years beginning after December 31, 2017, and beginning before January 1, 2026. For acquisition indebtedness incurred before December 15, 2017, the Conference bill allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately).
The Conference agreement also allows taxpayers to continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.
Some homeowners dodged a bullet when the Conference bill rejected the additional limitation in both the House and Senate bills to increase the holding period for the homeowners’ capital gain exclusion to a five-out-of-eight year principal-residence test.
State and Local Taxes.
The Conference bill limits annual itemized deductions for all nonbusiness state and local taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayer filing a separate return). Sales taxes may be included as an alternative to claiming state and local income taxes.
Miscellaneous Itemized Deductions
The Conference bill repeals all miscellaneous itemized deductions that are subject to the two-percent floor under current law.
The Conference bill follows the Senate bill in not only retaining the medical expense deduction, but also temporarily enhancing it. The Conference bill lowers the threshold for the deduction to 7.5 percent of adjusted gross income (AGI) for tax years 2017 and 2018.
The Conference bill temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child. Up to $1,400 of that amount would be refundable. The Conference bill also raises the adjusted gross income phaseout thresholds, starting at adjusted gross income of $400,000 for joint filers ($200,000 for all others).
The child tax credit is further modified to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children.
The Conference agreement retains the student loan interest deduction, as proposed in the Senate bill. It also modifies section 529 plans and ABLE accounts. The Conference bill does not overhaul the American Opportunity Tax Credit, as proposed in the House bill. The Conference bill also does not repeal the exclusion for interest on U.S. savings bonds used for higher education, as proposed in the House bill.
The Conference bill repeals the deduction for alimony payments and their inclusion in the income of the recipient.
The Conference Committee version of H.R. 1 generally retains the current rules for 401(k) and other retirement plans. However, the Conference bill would repeal the rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions to unwind a Roth conversion. Rules for hardship distributions would be modified, among other changes.
Federal Estate Tax
The Conference bill follows the Senate bill in not repealing the estate tax, but rather doubling the estate and gift tax exclusion amount for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. The generation-skipping transfer (GST) tax exemption is also doubled.
Alternative Minimum Tax
The Conference Committee version of the bill retains the alternative minimum tax (AMT) for individuals with modifications. The Conference bill would temporarily increase (through 2025) the exemption amount to $109,400 for joint filers ($70,300 for others, except trusts and estates). It would also raise the exemption phase-out levels so that the AMT would apply to an income level of $1 million for joint filers ($500,000 for others). These amounts are all subject to annual inflation adjustment.
Affordable Care Act
The Conference bill repeals the Affordable Care Act (ACA) individual shared responsibility requirement, making the payment amount $0. This change would be effective for penalties assessed after 2018.
Under the Conference bill, the holding period for longterm capital gains is increased to three years with respect to certain partnership interests transferred in connection with the performance of services.