Interpreting the GOP Tax Reform Plan -- Part 3
We discussed the various business provisions of the Tax Cuts and Jobs Act released by the House Ways and Means committee in Parts 1 and 2 of this series on the Trump Administrations proposals for tax reform.
In this third article of my five-part series, we will elaborate on the individual tax provisions, including tax credits and reduction of the tax brackets to four from seven.
TAX BRACKETS & ENANCEMENT OF THE STANDARD DEDUCTION
The current seven tax brackets would be consolidated and simplified into four brackets: 12 percent, 25 percent, 35 percent, and 39.6 percent, in addition to an effective fifth bracket at zero percent in the form of the enhanced standard deduction.
- For married taxpayers filing jointly, the 25 percent bracket threshold would be $90,000, the 35 percent bracket threshold would be $260,000, and the 39.6 percent bracket threshold would be $1 million.
- For unmarried individuals and married individuals filing separately, the bracket thresholds would be half the thresholds for married taxpayers filing jointly, except that the 35 percent bracket threshold for unmarried individuals would be $200,000.
- For single parents filing as head of a household, the bracket thresholds would be the midpoint between the thresholds for unmarried individuals and married taxpayers filing jointly, except that the 39.6 percent bracket threshold for heads of household would be $500,000.
These income levels would be indexed for chained CPI instead of CPI, a slightly different measure of inflation, beginning for periods after 2022.
For high-income taxpayers, the provision would phase out the tax benefit of the 12 percent bracket, measured as the difference between what the taxpayer pays and what the taxpayer would have paid had the income subject to the 12 percent bracket instead been subject to the 39.6 percent bracket. This tax benefit is phased out at a rate of $6 of tax savings for every $100 of adjusted gross income in excess of $100,000 for single filers or $120,000 for joint filers. These thresholds are adjusted for chained CPI in tax years after 2017.
The standard deduction would be increased to $24,000 for joint filers (and surviving spouses) and $12,000 for individual filers. Single filers with at least one qualifying child could claim a standard deduction of $18,000. These amounts would be adjusted for inflation based on chained CPI. For example, the standard deduction for joint filers would be $24,400 in 2018.
SUBTITLE B — SIMPLIFICATION AND REFORM OF FAMILY AND INDIVIDUAL TAX CREDITS
The child credit would be increased to $1,600. Alternatively, a credit of $300 would be allowed for non-child dependents. In addition, a family flexibility credit of $300 would be allowed with respect to the taxpayer (each spouse in the case of a joint return) who is neither a child nor a non-child dependent. The family flexibility credit and the non-child dependent credit would be effective for taxable years ending before January 1, 2023.
As under current law, the refundable portion of the child tax credit would be limited to $1,000. That $1,000 amount would be indexed for inflation based on chained CPI and over time would rise to match (but not exceed) the $1,600 base child tax credit. Neither the $300 credit for nonchild dependents nor the $300 credit for other taxpayers would be refundable.
The phase out for the combined child credit, the non-child dependent credit, and the credit for other taxpayers would be increased from $110,000 (for joint filers) under current law to $230,000 (for joint filers), and from $75,000 (for single filers) to $115,000 (for single filers). This increase in the phase-out would eliminate the marriage penalty in the credit.
REPEAL OF NON-REFUNDABLE TAX CREDITS
- The credit for individuals over age 65 or who have retired on disability is to be terminated.
- The adoption credit will be repealed.
- The tax credit associated with mortgage credit certificates will end.
- The credit for plug-in electric drive motor vehicles would be repealed.
The provision repealing qualified plug-in electric drive motor vehicles would be effective for vehicles placed in service for tax years beginning after 2017. The other provisions would be effective for tax years beginning after 2017.
SUBTITLE C — SIMPLIFICATION AND REFORM OF EDUCATION INCENTIVES
The current education credits would be changed to the enhanced American Opportunities Tax Credit (AOTC). The new AOTC, like the current AOTC, would provide a 100 percent tax credit for the first $2,000 of certain higher education expenses and a 25 percent tax credit for the next $2,000 of such expenses. Like the current AOTC, expenses covered under the credit include tuition, fees and course materials. The AOTC would also be available for a fifth year of post-secondary education at half the rate of the first four years, with up to $500 of such credit being refundable.
New contributions to Coverdell Education Savings Accounts after 2017 (except rollover contributions) would be prohibited, but tax-free rollovers from Coverdell accounts into section 529 plans would be allowed. Elementary and high school expenses of up to $10,000 per year would be qualified expenses for section 529 plans. Qualified expenses would also be expanded to cover expenses associated with apprenticeship programs. The provision provides that an unborn child may be treated as a designated beneficiary or an individual under section 529 plans. An unborn child means a child in utero, which means a member of the homo sapiens species who is carried at any stage of development in the womb.
In Part 4 to be released later this week, we will discuss other provisions of the bill that affect individual taxpayers.
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Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...