By Rep. Tim Wadsworth
House District 14
Early Saturday morning the United States Senate along party lines passed a “Tax Bill” as promised by President Trump. As with any tax bill there are winners and losers. Only your accountant or tax lawyer can tell you the full impact on your particular tax situation. The tax bill affects, individuals, C – Corporations, estates, small businesses and pass through entities such as S – Corporations and partnerships. The bill is 479 pages long and somewhat complicated. Simple tax bill was not achieved. Since the US. Senate tax bill will go to conference committee with the US House, the differences will be ironed out and resolved.
As soon as the tax bill was passed, immediately some pundits stated that it will raise our debt by $1.5 trillion dollars over 10 years. That means to me that more money will be returned to the taxpayers. The purpose of the bill is to give businesses and individuals tax relief from excessive income taxes. The United States has one of the highest corporate tax rates in the industrialized world. We need tax breaks to help grow our economic and create jobs. We need tax relief for the individuals who pay taxes. We have corporations that deposit their profits in tax haven countries so that they don’t have to pay the high US tax rates. If they never bring their dollars home, then no factories or investments can be made in the US. It is my belief that the tax cut will increase jobs and stimulate economic growth.
Below are several changes to the current law that were in the Senate Tax Bill.
1. The standard deduction for a single individual goes up from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing a joint return . This means that you do not itemize unless you have more than $24,000 in itemized deductions.
2. State and local income tax deduction will be eliminated. This provision affects higher income tax rate states such as New York more than Alabama. The elimination of the deduction will have no impact on most Alabamians if you don’t itemize. However, it will affect higher earners who pay more Alabama income tax.
3. Real Estate taxes on your personal home continue to be deductible but only to the extent of $10,000 a year. However, in Alabama in the highest property tax county it would take a house valued at $1,218,818 to be affected and in the lowest property tax county, you would need a $6,000,000 house to be affected. Businesses’ real estate and people that rent property will still be able to deduct 100% of their property taxes as an ordinary business expense.
4. The maximum C- Corporation rate would drop from 35% to 20%. The maximum flow through entity tax would drop to 29%. The House bill is at 25%. Service based businesses that earn less than $500,000 would get the benefit of the tax change but service based businesses greater than $500,000 in net income would not get the benefit. There is a 9% rate for flow through entities that have less than $75,000 in income. Its very complicated but it will take further study to understand the full impact. The purpose of the reduction is to create jobs and stimulate the economy. Individual rates would drop. See end of article for details.
5. Currently money earned overseas is being held in tax haven countries and cannot be used for growth in the US. The bill allows corporations overseas to bring untaxed dollars back to the United States at rate of 14.5% rate instead of 35% rate. The purpose of the change is to bring dollars to the US for growth in our economy which would creates jobs.
6. Medical expenses will be deductible if you itemize to the extent of 7.5% of adjusted growth income. Currently, it is limited to 10% of adjusted gross income. Given the increase in standard deduction, this will help only people that pay extremely high medical bills due to some illness, high income earners and people that itemize.
7. The individual mandate penalty will be eliminated if you don’t have health insurance. If you don’t have health insurance you will not pay a penalty. The full impact of this provision is not known since it affects health insurance. Further study is required.
8. Alternative minimum tax exemption is raised so that less people will be charged these AMT taxes. This provision needed to be have been changed several years ago.
9. Moving expense deduction will be eliminated and this will impact people who pay moving expenses. However, if your company pays for your move, then there would not be impacted.
10. Child tax credit is doubled from $1,000 to $2000 a child and the age of the child to qualify is raised from 17 to 18 years old. Currently the phase out of credit starts at $110,000. The phase out begins with $500,000 under the Senate bill. The additional $1,000 is not a refundable credit which means if you don’t owe Federal income taxes you would not receive the benefit of the $1000 increase per child. Dependents who are not children will qualify for a $500 tax credit.
11. Personal exemptions for you, your spouse and children are eliminated. If you have less than 2 children then this could impact your negatively. However, with the earned income credit that currently exists, there may not be too much of an impact. But it depends on income, and number of children.
12. Mortgage interest deduction allowed only up to $1,000,000 mortgage and note. High mortgage homes only would be impacted. Home equity loan interest deduction is eliminated. This would have a negatively impact if you itemize.
13. Teachers will be able to deduct $500 a year instead of $250 in supplies.
14. Companies will be able to write off most of their expenses for new buildings at a faster rate such as non residential property to 25 years instead of 39 years. The write off of tangible personal business property including vehicles is at a faster rate. Further study is necessary to confirm all changes.
15. A pass through entity such as S-Corporation will be allowed to take a 17.4% of net income deduction off taxable income from the S-Corporation This will benefit all small businesses that have less than $500,000 in income.
16. Estate taxes would only apply for $11,000,000 estates if single and $22,000,000 if married and full martial deduction is utilized. This will help large estates and hurt tax lawyers who do estate planning.
17. 529 College Savings Plans will be usable for K-12 education expenses including private schools and home schooled students.
18. Currently college endowments greater than $500,000 pay no income tax. They will have to pay an excise tax.
19. Gains from the sale of the residence require the taxpayer to hold the home as a primary residence for greater than 2 years to be tax exempt on the sale.
20. Even though the estate tax exemption is going up to $11,000,000, inherited property still receives a step up basis. The step up basis allows people that inherit their property to sell immediately the property at no gain or loss since their new basis is the fair market value at date of death. This maintenance of step up basis is great for all.
21. Capital gain rates are aligned with the New Senate Tax bill. Under the new bill and current law, no capital gains tax is paid on long term capital gains for people in the 10% and 15% tax bracket. That means if the total income including capital gains are $77,400 or less then the long term capital gain rate is 0% for married couples filing jointly. Single individuals are about one half the amount.
Senate Bill Individual Tax Rates
Currently, there are seven bracket in today’s tax code: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The Senate bill calls for seven brackets but the rates change. 10%, 12%,22%, 24%, 32%, 35% and 38.5%. The areas of where tax rates apply, has changed, for example, the top rate of 38.5% applies for individuals over $500,000 while now it hits the top rate of 39.6% at $418,400. For couples, the top rate applies to $1,000,000 or more while the current top rate applies to $470,700 for couples. The new lower rates apply to higher income. You will have to look at your taxable income and compare it to the new rates to see what impact the bill has for your particular tax situation.
The Senate Tax Bill is not perfect. It has many special interest finger prints on it. However, it reduces taxes by $1.5 trillion over 10 years if the projections are correct. Each person can look at the bill and find something wrong or something right that affects them. Overall, if you pay taxes your taxes will probably be reduced. Contact your accountant or tax lawyer to see what impact this bill has on your particular tax situation.
My brief presentation is not intended to be tax advice and I make no representation that I am offering any form of tax advice. Your tax accountant or tax lawyer can serve that purpose. I am providing a brief partial summary of some of the provisions. Hope this information is informative an helpful. Transparency in our government is a must. If there are problems with the bill DON’T BLAME ME FOR THIS ONE, I AM IN THE ALABAMA HOUSE NOT US SENATE OR US HOUSE. However, you are always welcome to contact your Alabama House members including me for information.
Representative Tim Wadsworth
House District 14
(Serving Winston, Walker and Jefferson Counties)