WHAT 2015 TAX REFORM COULD LOOK LIKE
Back in February` 2014, House Ways and Means Committee Chairman, Dave Camp, drafted the Tax Reform Act of 2014. On December 11, 2014, Congressman Camp officially introduced H.R. 1, the Tax Reform Act of 2014. The bill was provided the designation of H.R. 1 to signify the importance of the legislation in the 2015 Congress. As we saw with the Affordable Care Act, the devil is in the details.
According to Congressman Camp: “At its core, the Tax Reform Act of 2014 is about making the tax code simpler and fairer for hardworking taxpayers…” After all the lies and deception we experienced with the Affordable Care Act, can the aforementioned statements be trusted?
This article will review some of the income tax provisions relating to individuals. Next month I will explore some of the business provisions.
Simplification of individual income tax rates. These new provisions would reduce the current seven tax brackets down to three brackets: 10%, 25%, and 35%. The 35% bracket would replace the 39.6% bracket. The new 25% bracket would begin at $71,200 for joint filers. The new 35% bracket would begin at $450,000 for joint filers.
The special rate structure for net capital gain would be repealed. Instead, non-corporate taxpayers could claim an above the line deduction equal to 40% of adjusted net capital gain. Adjusted net capital gain would equal the sum of net capital gain and qualified dividends, reduced by net collectible gain.
Standard Deduction. The basic and additional standard deductions would be consolidated into a single standard deduction of $22,000 for joint filers. Single filers with at least one qualifying child could claim an additional deduction of $5,500. The standard deduction and itemized deductions would phase out for joint filers with income in excess of $517,000.
Increase of child tax credit. The child tax credit would be increased to $1,500. A reduced credit of $500 would be allowed for non-child dependents. The credit would be refundable to the extent of 25% of the taxpayer’s earned income. The credit would begin to phase out until modified adjusted gross income exceeds $413,750 for joint filers.
Repeal of deduction for personal exemptions. Under the provisions of the new Act, the deduction for personal exemptions would be repealed. Currently, taxpayers may deduct $3,900 for each personal exemption. The rationale is that the higher standard deduction will factor in the loss of this exemption. You lose if you itemize your deductions.
Repeal of various tax credits. The following tax credits would be repealed: adoption expenses; dependent care credit; credit for nonbusiness energy property; credit for residential energy efficient property; credit for qualified electric vehicles; alternative motor vehicle credit; alternative fuel vehicle refueling property credit; credit for new qualified plug-in electric drive motor vehicles; credit for health insurance costs of eligible individuals; and the first time homebuyer credit.
Exclusion of gain from sale of a principal residence. Under the Act, a homeowner would have to own their principal residence for five out of eight years to exclude up to $500,000 of gain, rather than two out of the last five years.
Charitable Deductions. There would be many changes to charitable deductions. Most notably, the 50% and 30% AGI limitations for cash contributions and capital gains property would be consolidated to 40%.
Denial of deduction for expenses attributable to the trade or business of being an employee. The miscellaneous itemized deduction for expenses attributable to the trade or business of performing services as an employee would be repealed.
Repeal of deduction for taxes not paid or accrued in a trade or business. Under the Act, individuals would only be allowed a deduction for State and local taxes paid or accrued in carrying on a trade or business or producing income. You mean we can no longer deduct those high income taxes we pay to the State of California??
Repeal of deduction for tax preparation expenses. Since under the Act it will be so easy for everyone to prepare their own taxes, you will no longer get a deduction to have a professional prepare your return.
Repeal of deduction for medical expenses. Under the Act, you will not be able to itemize any medical expenses.
Repeal of deduction for alimony payments and corresponding inclusion in income. Under the Act, alimony payments would not be deductible by the payor and would not be included in the income of the payee. Effective for decrees entered into after the Act is passed. Better hurry up and finalize those divorce proceedings if you are going to be paying alimony!! Of course there are many additional provisions, but the space for this article is limited.
This is not a passed bill yet, and has not even been voted on yet. But, it is the opening shot at tax reform. Who knows what the final legislation will look like after the conference meetings between the House and Senate and the special interests get involved, but this is the first step to talking about tax reform. Major tax reform will be a significant challenge which is why we have not seen it since 1986.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or jwh@caloneandharrel.com