BY KENT KRAMER, CFP®, AIF®, Chief Investment Officer at Foster Group
It appears that federal income tax reform is right around the corner. But, as former Indiana football coach and ESPN celebrity Lee Corso says when referring to pregame predictions, “Not so fast!” Having been a part of tax reform efforts while in the Iowa Legislature, I’m hopeful that some tax changes will ultimately be passed, but they may end up being something far less than sweeping simplification and reform. I would expect most high earners and business owners to still need a qualified CPA when this is all over.
Among the many provisions being considered, here are four potentially high-impact portions of the tax bill to watch:
- The so-called “SALT” (State And Local Income Tax) deductions. Under current law, U.S. taxpayers can deduct SALT from their gross income when computing their tax liability. Both the House and Senate versions seek to eliminate SALT as a deduction. Both bills also limit to $10,000 property taxes that may be claimed as a deduction. For high income earners and high property tax payers, this will create higher taxable incomes. A possible compromise may allow taxpayers to deduct up to $10,000 of combined SALT and/or property taxes.
- Estate tax changes. The House bill would permanently eliminate estate taxes by 2024. The Senate bill maintains a permanent estate tax, though raising the amount that could pass tax-free from $5.49 million per person to $11 million ($22 million per married couple). However, this higher threshold would sunset in 2026. A similar sunset provision caused significant confusion for planning in 2010.
- Corporate and pass-through business tax changes. Both bills significantly lower the corporate tax rate from 35 percent to 20 percent, though the Senate delays the new rate until 2019. Owners of pass-through businesses (e.g., Sub S, LLCs) get some relief in each version, though the calculations would prevent the word “simplification” from appearing in the title of either proposal.
- Mortgage interest deduction potentially reduced. While the House bill grandfathers current mortgages, new mortgages would be capped at $500,000 for the purpose of interest deductibility, and would be limited to primary residences. The Senate bill maintains the present $1 million limitation.