House Budget Permits Tax Reform
A key issue for Republican Representatives from New York, California, New Jersey and Illinois was a plan to repeal the state and local tax deductions (SALT). While most of the SALT deductions benefit upper-income taxpayers, about 30% of Americans itemize and claim the deduction.
The Chairman of the House Ways and Means Committee is Kevin Brady (R-TX). He indicated that he plans to release a draft of the comprehensive tax reform bill on November 1.
The next step is for the full Ways and Means Committee to “markup” the bill over the next two weeks. If the bill passes the Ways and Means Committee, a vote by the House may take place before Thanksgiving.
Chairman Brady promised to permit all Ways and Means Committee Members an opportunity to submit amendments. He stated, “We obviously wanted to make sure that the minority has plenty of time to offer amendments, to make that case and engage in a positive way on tax reform if that is what they choose to do.”
Editor’s Note: There still are major provisions to finalize in the draft bill. Brady may include a fourth tax bracket for upper-income taxpayers. He has discussed a possible compromise on the state and local tax deduction. A compromise may allow a partial benefit that will probably be phased out for upper-income taxpayers. There have been discussions about changes to some of the rules that apply to 401(k)s and other retirement plans. It also is possible that the $1 million limit on mortgages qualifying for deductible interest may be changed. The markup process will include a large number of amendments by both parties. Even if the House passes a tax reform act by Thanksgiving, it will be difficult for the Senate to take action before 2018.
House Democrats Announce Tax Reform Principles
On October 25, House Ways and Means Committee Ranking Member Richard Neal (D-MA) published Democratic principles for the proposed tax reform bill. The seven principles generally focus on helping the middle class.
- Tax Relief – Continue the mortgage interest deduction without major changes. Expand the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).
- Education – Simplify and expand the American Opportunity Tax Credit for post-secondary education.
- Child Care – Expand the Child Care Tax Credit. Help taxpayers who are taking care of elderly parents.
- Retirement – Require automatic enrollment for employees in a 401(k) or other retirement plan. Increase the financial strength of Social Security and Medicare.
- Employee Training – Create a new tax credit to encourage employers to train all employees.
- Infrastructure – Expand the tax-exempt bond options for financing infrastructure projects.
- American Businesses – Create new tax incentives for manufacturing in America. Allow tax reductions for small businesses.
2018 IRA, 401(k) and Pension Limits
In Notice 2017-64, 2017-45 IRB 1 (19 Oct 2017), the IRS published the 2018 rules for contributions to IRAs, 401(k)s and pension plans. Each year the limits are adjusted for inflation. Because there was approximately a 2% increase in the price index, most of the limits remain the same or slightly changed from 2017 numbers.
The 2018 traditional IRA contribution limit will be $5,500. For employees covered by a workplace retirement plan, the IRA deduction is phased out for single taxpayers with modified adjusted gross income (MAGI) of $63,000 to $73,000. Couples filing jointly who have a workplace plan will have the benefit phased out between MAGI of $101,000 to $121,000. If an IRA contributor is married to a covered person, the phaseout is from $189,000 to $199,000.
A worker with earned income may also consider funding a Roth IRA with after-tax funds. The Roth IRA grows tax-free and the distributions will generally also be tax-free. Married couples filing jointly are permitted to fund a Roth IRA with a phaseout from $189,000 to $199,000 of adjusted gross income (AGI). Single taxpayers have a phaseout from $120,000 to $135,000 of AGI.
The 401(k) or 403(b) limits for employee contributions are $18,500. If the employee is age 50 or older, there is a “catch-up” provision. The catch-up provision of $6,000 allows senior employees to contribute up to $24,500 during 2018.
2018 Tax Table, Exemptions and Deductions
In Rev. Proc. 2017-58; 2017-45 IRB 1 (19 Oct 2017), the IRS published tax tables, exemptions and deduction limits for 2018. With a low rate of inflation for the mid-2016 to mid-2017 base period, most changes are modest.
The standard deduction will be $13,000 for couples filing jointly and $6,500 for unmarried individuals. The head of household standard deduction is up slightly to $9,550.
Itemized deductions for upper-income persons are subject to a reduced amount. The reduction is 3% of AGI over the floor, with a maximum 80% reduced amount. The floor for 2018 will be $320,000 for couples filing jointly, $293,350 for heads of households and $266,700 for unmarried individuals.
The personal exemption will be $4,050 in 2018. However, there is a phaseout of the exemption for upper-income persons. This phaseout will be completed by adjusted gross incomes of $442,500 for couples filing jointly, $415,850 for heads of households and $389,200 for unmarried individuals.
Each taxpayer must calculate both the regular and alternative minimum tax (AMT) amounts. The tax payable is the higher of the two numbers. The 2018 AMT exemptions are $86,200 for married couples and $55,400 for unmarried individuals. The AMT exemption is phased out for married couples with income over $164,100 or for unmarried individuals with incomes over $123,100. The AMT tax is 26% at the lower level and 28% over $191,500.
Cafeteria plans are available for medical reimbursement of qualified expenses. The flexible spending account (FSA) plan limit for 2018 is $2,650.
Charities are permitted to transfer token gift premiums to donors who make gifts above a specific level. In 2018, a donor who makes a gift over $54.50 may receive a premium with the logo or other identification of the nonprofit at a value of $10.90 or less. Donors who make larger gifts may receive a premium up to 2% of the value of the gift, with a limit of $109.
The estate tax applicable exclusion amount increases from $5.49 million to $5.6 million. A couple in 2018 may have an estate of $11.2 million with no transfer tax.
Special use agricultural land under Sec. 2032A may qualify for a value reduction of up to $1.14 million. If an estate qualifies for installment payments of the estate tax under Sec. 6166, the 2% interest amount is levied on $1,520,000.
Finally, the annual gift exclusion increases to $15,000. This is a per donor and per donee exclusion, so a person with a large family may make substantial transfers each year.
Applicable Federal Rate of 2.4% for November — Rev. Rul. 2017-21; 2017-46 IRB 1 (17 Oct 2017)
The IRS has announced the Applicable Federal Rate (AFR) for November of 2017. The AFR under Section 7520 for the month of November will be 2.4%. The rates for October of 2.2% or September of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here