Tax Changes Are Coming, Where to Focus Now

By Laura Saunders Features Dow Jones Newswires

Even though the Senate and House of Representatives have passed tax bills with a host of differences, many Americans should start to examine how they will adjust their paychecks.

Continue Reading Below

In the short term, lawmakers in Congress have a lot of work to do. Following the Senate's passage of its sweeping revisions to the U.S. tax code last week, it is now up to a small group to reconcile the two bills.

Most provisions in both tax bills take effect Jan. 1, which means many people will need to adjust withholding to avoid underpayment penalties. Some tax changes are almost certain, such as the repeal of state and local income-tax deductions. Other parts of the two bills are far apart.

It is these gaps that American taxpayers need to keep in mind now, on issues ranging from nursing-care deductions to education benefits to the alternative minimum tax.

Alternative Minimum Tax. In a surprise, the Senate bill retains the alternative minimum tax (AMT) for individuals. This levy could sting many, as it is projected to raise $133 billion over 10 years. The House bill repeals the AMT.

The AMT is a parallel tax system that rescinds the benefit of some tax breaks, such as for property taxes or medical expenses.

Continue Reading Below

Joe Rosenberg, an analyst with the Tax Policy Center, estimates that the Senate's lower tax rates alone could propel some couples earning between $300,000 and $750,000 into the AMT. These taxpayers wouldn't be using the tax breaks that normally trigger the AMT, and they might be taking the standard deduction.

Pass-through proposals. The two bills have fundamentally different approaches for businesses such as partnerships and S corporations that pass income through to owners' tax returns, says Dustin Stamper a director with Grant Thornton. Some in the Trump administration favor the Senate's approach because it costs less and is easier to administer.

The House bill has a complex regime that taxes a portion of income at 25%, but it is not available to many service professionals such as accountants, architects, or doctors. It also cuts the rate for some lower-earning small-business owners.

The Senate bill allows pass-through owners to deduct 23% of business income, and it is available to some service professionals. It has complex limits, however.

Mortgage-interest deductions. The Senate bill preserves current law, which allows interest deductions on a total of $1 million of mortgage debt on up to two homes.

The House bill allows home buyers who take out mortgages after Nov. 2, 2017, to deduct interest only on $500,000 of debt, and only for a first home. It appears to prohibit mortgage-interest deductions for all second homes. Taxpayers could continue to deduct interest on existing mortgage debt of up to $1 million for a first home.

Child tax credit. Many differences here: the House credit is $1,600 per child under 17, plus $300 for each parent and non-child dependent. The income phaseout begins at higher income than under current law -- $230,000 for joint filers and $115,000 for singles.

The Senate bill has a $2,000 credit for each child age 18 and under, plus a $500 credit for non-child dependents. The income phaseout begins far higher than under current law -- $500,000 for both joint filers and single filers. This could change.

Medical expense deductions. The House bill repeals the deduction for medical expenses, which is a blow to people paying out of pocket for nursing homes and other custodial care not covered by insurance.

The Senate bill retains the deduction and expands it. The current threshold is expenses greater than 10% of income, and the Senate bill shrinks that to 7.5%. The lower threshold would apply for 2017 as well.

Education. The House bill eliminates several education benefits that the Senate doesn't.

The House bill would repeal an exemption for certain university tuition waivers, and they would count as taxable income to recipients. This would affect many graduate students whose tuition is waived in return for teaching classes or performing research. According to the American Council on Education, nearly 145,000 graduate students received tuition waivers in 2011-12.

The House bill also repeals an exemption for education assistance that employers provide to employees. Under current law, up to $5,250 of education assistance isn't taxable.

It also eliminates the current deduction for up to $2,500 of interest paid on federal student loans for most singles with income below $80,000 and couples earning below $160,000.

The House bill slightly expands the American Opportunity Tax Credit, which is for many the most useful tax benefit for college. But it eliminates other education benefits, such as the Lifetime Learning Credit.

First-in first-out stock sales. Unlike the House bill, the Senate version has a provision requiring individual investors selling part of a holding in a taxable account to sell their oldest shares first.

This means investors could no longer identify which shares they are selling to minimize taxes. The provision would apparently consider each account separately, according to tax specialists.

Alimony. Unlike the Senate bill, the House proposal repeals the current treatment of alimony, in which the payer gets a deduction and the recipient claims it as income, for divorce agreements signed after 2017.

Individual mandate. Unlike the House bill, the Senate version repeals the individual mandate requiring most Americans to pay a penalty tax if they don't have health insurance.

Write to Laura Saunders at laura.saunders@wsj.com

(END) Dow Jones Newswires

December 04, 2017 16:08 ET (21:08 GMT)