Tax reform: What advisers need to know about the House bill

The proposed meaure leaves 401(k) plans alone, but makes sweeping changes in many other areas, including mortgages, property taxes, pass-through income and charitable deductions

Nov 2, 2017 @ 1:22 pm

By Greg Iacurci and Mark Schoeff Jr.

Republican members of the House Ways and Means Committee released their long-awaited tax-reform bill on Thursday. Here are the highlights so far for financial advisers.

Tax rates

The plan would reduce the number of marginal income-tax rates to four: 12%, 25%, 35% and 39.6%. The plan preserves the current top rate, but the top rate would affect fewer households than it does currently.

Here are the breakdowns of the income ranges:

12% bracket: For single filers, this rate applies starting at $12,000 of taxable income. For those married filing jointly, it begins at $24,000.

25%: Begins at $45,000 for single filers; $90,000 for married joint filers.

35%: Begins at $200,000 for single filers; $260,000 for married joint filers.

39.6%: Begins at $500,000 for single filers; $1 million for married joint filers.

(Currently, there are seven marginal rates: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The top rate, in 2017, applies at $418,000 for singles, and $470,700 for married couples.)

401(k) plans

No change to the pre-tax limit of 401(k) contributions.

Pass-throughs

A portion of net income distributed from a pass-through business to an owner would be treated as business income and taxed at a 25% rate instead of the current individual tax rates.

Estate tax

The plan would double the estate-tax exemption beginning in tax-year 2018. The tax would be completely repealed after six years, beginning in 2024.

The federal estate tax, levied at death, is currently 40%. It applies to estate values exceeding $5.49 million ($10.98 million for married couples). The plan also preserves the step-up in basis, which passes assets to a beneficiary at fair market value upon death.

Gift tax

The top rate for the gift tax would be reduced to 35%, from the current 40%. The lifetime gift tax exemption would, similar to the estate tax exemption, double to almost $11 million.

AMT

The alternative minimum tax would be repealed.

Roth IRA conversions

Taxpayers may currently "recharacterize," or undo, a conversion from a traditional (or pre-tax) IRA to a Roth IRA. This plan would repeal these conversions.

State and local tax deduction

Individuals would not be allowed an itemized deduction for state and local income and sales taxes. However, they would be allowed deductions for state and local taxes on business income. Taxpayers can continue to claim an itemized deduction for property taxes, with a cap of $10,000.

Mortgage deduction

The plan halves the cap on mortgage interest deduction. It caps the deduction on mortgages up to $500,000, down from the current $1 million limitation. Interest would be deductible only a taxpayer's principal residence.

Charitable deduction

Several changes are made, including adjusted gross income limits for cash contributions, college athletic event seating rights and charitable mileage rate adjusted for inflation.

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