Senate Proposal: Deductions

November 16th, 2017 Posted by Tax Planning No Comment yet

When the Senate Finance Committee released its tax reform proposal, it included a new business deduction, changes to the standard deduction, and changes to itemized deductions.  For a discussion of how the tax proposal would affect tax rates, please read our last post.

Business “Pass-through Income” Deduction

The Senate’s proposal included a brand new tax deduction for pass-through income.  If you operate your business as a partnership (including LLCs opting to be taxed as a partnership), S-corporation, or sole proprietorship, you may be eligible for this deduction.  This deduction is equal to 17.4% of your “domestic qualified business income”.

There are two significant limitations placed upon this deduction.  First, the deduction cannot be more than 50% of the taxpayer’s allocable share of the business’ W-2 wages.  However, this limitation does not apply if the taxpayer has taxable income under $250,000 ($500,000 if married and filing a joint tax return).

The second limitation is based upon the type of business the taxpayer operates.  If the business is a specified service business (e.g., lawyer, doctor, accountant, consultant, financial advisor, etc.), it would not be eligible for the deduction.  However, again this limitation does not apply if the taxpayer has taxable income under $250,000 ($500,000 if married and filing a joint tax return).

Standard Deduction

This tax reform proposal would nearly double the current standard deduction.  For 2017, the standard deduction is $6,350 for single individuals, $9,350 for heads of households, and $12,700 for married couples choosing to file a joint tax return.

Under the Senate’s proposal, the standard deduction would be $12,000 for single individuals, $18,000 for heads of households, and $24,000 for married couples choosing to file a joint tax return.

Taxpayers typically elect to take the standard deduction unless their total itemized deductions are greater.

Itemized Deductions

Itemized deductions are currently made up of 5 categorizes of deductions.  Those are: qualified medical expenses, taxes, interest, charitable contributions, and miscellaneous itemized deductions.

Medical Deductions

Image from irs.com

Medical

Unlike the House proposal, the Senate would not make any changes to medical deductions.

Taxes

The Senate’s proposal calls for the complete elimination of the deduction for state and local taxes.  This means that state income taxes would no longer be deductible.  It also means that property taxes would no longer be deductible.

However, when the taxes are being paid in connection with a trade or business (i.e., when the deduction would be reported on Schedule C or E), it is still deductible.

Interest

Under current law, an individual is allowed to deduct interest on home acquisition indebtedness of up to $1,000,000 (i.e. a $1 million dollar mortgage), and home equity indebtedness of up to $100,000 (i.e. a $100,000 home equity line of credit).

The Senate proposal would not make any changes to the mortgage interest deduction for home acquisitions.  It would, however, repeal the deduction for home equity interest.

Charitable Contributions

An individual is currently allowed to to deduction the value of their charitable contributions.  However, the amount deducted may not be greater than 50% of their adjusted gross income.  Any excess amount is carried forward to future years for up to 5 years until they are used.

This proposal would increase this amount to 60% of the taxpayer’s adjusted gross income.

Miscellaneous

The Senate’s tax proposal would eliminate most miscellaneous itemized deduction such as: tax preparation fees, professional dues, union dues, hobby expenses, tools and supplies used for work, etc.

The Senate’s proposal would also remove the overall limitation currently imposed upon the total amount of itemized deductions a taxpayer may claim.

Personal Exemptions

In addition to the changes listed above, the proposal would eliminate personal exemptions.

AMT

Finally, like the House of Representatives the Senate would repeal the Alternative Minimum Tax.

Click here to compare this proposal to the House of Representative’s proposal.

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