If enacted, the tax reform bill proposed on November 2, 2017 will be the most sweeping change to our tax law since 1986. In our last post, we discussed what the tax rates would be under this proposal. Now, we are going to discuss how the proposal will change your taxable income.
To calculate your taxable income, you start with your adjusted gross income (essentially your income plus or minus certain adjustments. Next, you subtract from that the greater of your standard deduction or your itemized deductions. Finally, you subtract from that amount your personal exemptions.
Under this proposal, the same basic mechanism is in place but the components were modified.
First, the standard deduction has been nearly doubled. For married couples choosing to file a joint tax return, the standard deduction will increase from $12,700 to $24,400. For single individuals, the standard deduction is half that amount.
Next, what qualifies as an itemized deduction has changed. Under the current system there are 5 main categories of itemized deductions: medical expenses, taxes, interest, charitable contributions, and miscellaneous. This proposal will change each category in the following ways:
- Currently, medical expenses are only deductible if they exceed a certain threshold. Instead, medical expenses will no longer be deductible.
- Taxpayer can currently deduct the greater of their sales tax or state income taxes. Under this proposal, sales and state income taxes are no longer deductible.
- Property taxes will still be deductible, but only up to $10,000.
- Taxpayers can deduction their mortgage interest on loans up to $1.1 million. Mortgage interest will continue to be deductible, but only on loans up to $500,000.
- Charitable Contributions
- Currently, qualifying charitable contributions are entirely deductible, up to 50% of your adjusted gross income. This will increase up to 60% of your adjusted gross income.
- There are a number of “miscellaneous” itemized deductions that will no longer be deductible. These include: personal casualty losses, tax return preparation fees, and unreimbursed employee expenses.
- The current overall limitation on the amount of itemized deductions allowed will be removed.
In addition to the changes to the standard deduction and itemized deductions, this proposal eliminates personal and dependency exemptions.
Finally, it is worth noting that this proposal repeals the Alternative Minimum Tax (AMT). Basically, AMT is a calculation of how much tax the government believes you should be paying based upon your income. Its application results in certain itemized deductions becoming worthless. If this tax reform proposal passes, if a person qualifies to take itemized deductions they would simply get their itemized deductions without worrying about whether AMT makes the deductions worthless.
As a result of all of these changes, your taxable income will likely be different than it would be under the current system. Whether it will be higher or lower depends upon your particular circumstances. Even if your taxable income is higher you may end up paying less taxes due to the change in the tax rates and the other changes we will be discussing in the next post.