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BY BILL BISCHOFF

How Trump’s tax bill will impact America’s middle class

Everything you wanted to know about the tax bill by MarketWatch’s Tax Guy

Until now, we’ve just had an outline of the GOP tax reform proposal. With Thursday’s release of the actual text of the new Tax Cuts and Jobs Act, we now have specifics. Here are the most important provisions for individual taxpayers, along with some commentary and analysis. The proposed changes in the GOP bill wouldn’t take effect until next year. So your 2017 federal income tax return would be filed under the current rules.

Individual tax rates
For 2018 and beyond, the GOP bill would reduce the number of individual tax rates from the current seven to four: 12%, 25%, 35%, and 39.6%. The last rate is the same as the highest rate under current law. The proposed rate brackets are as follows, based on taxable income (gross income minus allowable write-offs).

Married joint-filers

• $0 to $89,999: 12% bracket. Under current rules, income in this range would be taxed at 10%, 15%, and 25%. So looking just at tax rates without considering the impact of other changes, there would be very few losers in this income range.

• $90,000 to $259,999: 25% bracket. Under current rules, income in this range would be taxed at 25%, 28%, and 33%. So looking just at tax rates without considering the impact of other changes, there would only be winners in this income range.

• $260,000 to $999,999: 35% bracket. Under current rules, income in this range would be taxed at 33%, 35%, and 39.6%. Some folks currently in the 33% bracket would be bumped into the 35% bracket. So looking just at tax rates, there would be some losers in this income range, but mostly winners.

• $1,000,000 and higher: 39.6% bracket. Only winners here, because the threshold for the 39.6% rate would be much higher than under current law. Yikes! A tax cut for the “rich.”

Heads of households

Previous versions of the GOP plan proposed eliminating HOH filing status, which is more beneficial than single filing status for unmarried folks with dependents who live with them. However, the current bill retains HOH filing status with the following rate brackets.

• $0 to $67,499: 12% bracket. Under current rules, income in this range would be taxed at 10%, 15%, and 25%. Looking just at tax rates, there would be very few losers in this income range.

• $67,500 to $199,999: 25% bracket. Under current rules, income in this range would be taxed at 25%, 28%, and 33%. Looking just at tax rates, there would only be winners in this income range.

• $200,000 to $499,999: 35% bracket. Under current rules, income in this range would be taxed at 33%, 35%, and 39.6%. Some folks currently in the 33% bracket would be bumped into the 35% bracket. Looking just at tax rates, there would be some losers in this income range, but mostly winners.

• $500,000 and higher: 39.6% bracket. Only winners, because the threshold for the 39.6% rate would be higher than under current law.

Singles

• $0 to $44,999: 12% bracket. Under current rules, income in this range would be taxed at 10%, 15%, and 25%. Very few losers.

• $45,000 to $199,999: 25% bracket. Under current rules, income in this range would be taxed at 25%, 28%, and 33%. Only winners.

• $200,000 to $499,999: 35% bracket. Under current rules, income in this range would be taxed at 33%, 35%, and 39.6%. Some folks currently in the 33% bracket would be bumped into the 35% bracket. Some losers but mostly winners.

• $500,000 and higher: 39.6% bracket. Only winners.

Married filing separately from spouse

• $0 to $44,999: 12% bracket. Under current rules, income in this range would be taxed at 10%, 15%, and 25%. Very few losers.

• $45,000 to $129,999: 25% bracket. Under current rules, income in this range would be taxed at 25%, 28%, and 33%. Only winners.

• $130,000 to $499,999: 35% bracket. Under current rules, income in this range would be taxed at 33%, 35%, and 39.6%. Some folks currently in the 33% bracket would be bumped into the 35% bracket. Some losers but mostly winners.

• $500,000 and higher: 39.6% bracket. Only winners here, because the threshold for the 39.6% rate would be much higher than under current law.

Analysis: These rate brackets would benefit most taxpayers (probably the vast majority), including the “rich.” For instance, folks with modest incomes who are currently in the 10% and 15% brackets would be in the new 12% bracket and probably better off. Many middle-income folks who are currently in the 28% and 33% marginal brackets would be in the new 25% bracket and definitely better off. However, some upper-middle-income folks who are currently in the 33% marginal bracket would find themselves in the 35% bracket under the GOP bill.

Anyone who is currently in the 39.6% bracket would be better off, because the threshold for the 39.6% bracket would be higher (much higher for married joint-filers and those who used married filing separate status). However, the 12% rate would be phased out for joint-filers with taxable income above $1.2 million and for others with taxable income above $1 million. So the maximum effective marginal rate for these folks would be higher than the advertised 39.6%.

Tax rates on long-term capital gains and dividends
For 2018 and beyond, the GOP bill would retain the existing three tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. The rate brackets for 2018 would be as follows, based on taxable income (gross income, including capital gains and dividends, minus allowable write-offs).

Married joint-filers

• $0 to $77,199: 0% bracket (almost identical to bracket scheduled for 2018 under current rules).

• $77,200 to $478,999: 15% bracket (ditto)

• $479,000 and higher: 20% bracket (ditto)

Heads of households

• $0 to $51,699: 0% bracket (almost identical to bracket scheduled for 2018 under current rules).

• $51,700 to $452,399: 15% bracket (ditto).

• $452,400 and higher: 20% bracket (ditto).

Singles

• $0 to $38,599: 0% bracket (almost identical to bracket scheduled for 2018 under current rules).

• $38,600 to $425,799: 15% bracket (ditto).

• $425,800 and higher: 20% bracket (ditto).

Married filing separately from spouse

• $0 to $38,599: 0% bracket (almost identical to bracket scheduled for 2018 under current rules).

• $38,600 to $239,499: 15% bracket (ditto).

• $239,500 and higher: 20% bracket (ditto).

Analysis: Ignoring the impact of other proposed changes, no winners or losers here.

Personal and dependent exemptions and standard deductions
As threatened, the GOP bill would eliminate personal and dependent exemption deductions, which are scheduled to be $4,150 each for 2018 under current law.

For many taxpayers, this unfavorable change would be wholly or partially offset by increased standard deduction amounts: $24,400 for married joint-filers (versus $13,000 scheduled under current law for 2018), $18,300 for heads of households (versus $9,550 scheduled under current law), and $12,200 for other taxpayers (versus $6,500 scheduled under current law).

Analysis: Many individuals who currently itemize deductions will be claiming the standard deduction in future years if the GOP bill becomes law — especially those who would be affected by proposed cutbacks in itemized deductions (see below). Depending on the amount of your itemized write-offs under current law and the number of personal and dependent deductions that you claim under current law, you could gain a net benefit from these two changes. Or not.

For instance, if you are a married joint-filer with $15,000 of itemized deductions and four personal and dependent exemptions (amounting to $16,600 for 2018 under the current rules), the GOP bill would increase your taxable income by $7,200. Depending on your income level, that difference combined with the new rate brackets and other proposed changes might still reduce your tax bill compared with what it would be under current law. But that depends on your exact situation.

Other deductions
The GOP bill would eliminate itemized deductions except those for home mortgage interest, charitable contributions, and state and local property taxes. The property tax write-off would be subject to a $10,000 limit ($5,000 for those who use married filing separate filing status). Foreign real property taxes would be nondeductible

State and local income taxes would be nondeductible.

For principal residence mortgage loans taken out after 11/2/17, you could only deduct interest on up to $500,000 of mortgage debt (versus up to $1 million plus another $100,000 of home equity debt allowed under the current rules). The GOP bill would eliminate the current-law provision that allows you to deduct interest on up to $100,000 of home equity debt.

However, if you refinance a loan taken out before 11/3/17, the higher loan limits allowed under the current rules would continue to apply. Also, starting in 2018, you could only deduct mortgage interest on one qualified residence (versus two under the current rules). So no more deductions for interest on vacation home mortgages.

The maximum deductible cash contribution to an IRS-approved public charity would be increased from 50% of adjusted gross income to 60%.

The itemized deductions for medical expenses, personal casualty losses, tax preparation fees, and unreimbursed employee business expenses would be eliminated.

Current law allows above-the-line deductions (meaning you don’t have to itemize to benefit) for alimony payments and qualified moving expenses. The GOP bill would eliminate those write-offs too. In general, however, only alimony payments called for in divorce or separation agreements executed after 2017 would be affected.

The good news: The current phaseout rule that can eliminate up to 80% of the most popular itemized deductions for higher-income taxpayers would be eliminated.

Analysis: All in all, these changes certainly don’t amount to tax cuts for the “rich.”

Alternative Minimum Tax (AMT) eliminated
The AMT was originally intended to ensure that high-income taxpayers who claim lots of write-offs and other tax breaks pay at least some federal income tax. Over the years, however, the tax has morphed into something that mainly hits upper-middle-income taxpayers with big state income tax bills and/or lots of kids. The GOP bill would eliminate the AMT. For many taxpayers, that change would wholly or partly offset the negative impact of eliminating personal and dependent exemption deductions and deductions for state and local income taxes.

IRA and qualified retirement plan contributions unchanged
Thankfully, no changes here — except elimination of the rule that currently allows taxpayers to reverse contributions to Roth IRAs by recharacterizing them as contributions to traditional IRAs. That change would make Roth contributions somewhat less attractive by removing a nice element of flexibility that is allowed under current law.

Child tax credit rules liberalized and new family tax credit
The maximum annual child tax credit would be increased from the current $1,000 per qualifying child to $1,600. The income levels at which the child tax credit begins to be phased out would be greatly increased to $230,000 for married joint-filers (versus $110,000 under current law) and to $115,000 for other taxpayers (versus $75,000 under current law for singles and heads of households and $55,000 for those who use married filing separate status).

A new $300 family tax credit would be allowed for the taxpayer ($600 for married joint-filing couples), and a $300 family tax credit would be allowed for certain dependents who are not qualifying children.

Analysis: The proposed changes would significantly increase the child tax credit and make it available to many more middle-income households. Those changes, along with the new $300 family tax credits, would for many households wholly or partially offset the elimination of dependent exemption deductions for children.

Education tax breaks streamlined — and some eliminated
The GOP bill would retain the American Opportunity Tax Credit which can be worth up to $2,500 per year per qualifying student. However, the credit would be allowed for the first five years of undergraduate education (versus only the first four years under current law).

The current-law Lifetime Learning Tax Credit for other post- secondary education expenses, worth up to $2,000 per household per year, would be eliminated.

Contributions to Coverdell Education Savings Accounts would be eliminated for 2018 and beyond. Current law allows annual contributions of up to $2,000 to these accounts. Balances in Coverdell accounts could be rolled over to Section 529 plan accounts.

• Up to $10,000 of annual tax-free withdrawals could be taken from Section 529 accounts for elementary and secondary school tuition, including tuition for private and religious schools.

• Tax-free withdrawals could be taken from 529 accounts to cover books, supplies and equipment to participate in a registered apprentice program.

• The existing deduction for up to $2,500 of annual student loan interest would be eliminated.

• The existing tax-free treatment for U.S. savings bond interest used for qualifying higher-education expenses would be eliminated.

• The existing tax-free treatment for tuition discounts offered to employees of educational institutions and their spouses and dependent children would be eliminated.

• Under current law, an employer educational assistance program can deliver up to $5,250 in annual tax-free benefits. The GOP bill would eliminate this break.

• Finally, the discharge of a student loan balance due to the student’s death or permanent disability would be tax-free.

Analysis: The existing education-related tax breaks are a confusing and often overlapping mess. These changes would be an improvement, although not everyone will come out ahead.

Home sale gain exclusion rules tightened
Under current law, you can exclude (pay no federal income tax on) up to $250,000 of gain from selling your principal residence or up to $500,000 if you are a married joint-filer. You must have owned and used the home as your principal residence for at least two years during the five-year period ending on the sale date.

The GOP bill would require you to have owned and used the home as your principal residence for five years out of the eight-year period ending on the sale date. Also, you could only take advantage of the gain exclusion once during any five-year period. Finally, the GOP bill would phaseout the exclusion dollar for dollar to the extent your average adjusted gross income during the year of sale and the two preceding years exceeds $250,000 or $500,000 for married joint-filers.

Analysis: These changes are the opposite of tax cuts for the “rich” and maybe a good reason to sell a highly appreciated home this year while the current more-favorable rules are still in effect.

Adoption credit — and plug-in electric vehicle credits — eliminated
Under current law the 2018 credit for qualified adoption expenses could be up to $13,840. The GOP bill would eliminate the adoption credit. Ditto for the current-law credit of up to $7,500 for purchasing a new plug-in electric vehicle.

Some tax-free employer-provided benefits eliminated
The GOP bill would eliminate:

Tax-free employer dependent care assistance programs, which can deliver up to $5,000 a year under current law.
Tax-free employer-provided adoption assistance programs, which could deliver up to $13,840 for 2018 under current law.
Tax-free employer moving expenses allowances.
Changes to estate and gift taxes and generation skipping tax
Under current law, there is a unified federal estate and gift tax exemption, which is scheduled to be $5.6 million for 2018. Estate values and cumulative gifts that exceed the exemption are taxed at 40%. The 40% generation skipping transfer tax (GSTT) hits gifts or bequests made to beneficiaries who are more than one generation below the giver and that exceed the GSTT exemption (also scheduled to be $5.6 million for 2018). The GOP bill would increase the exemptions for these two taxes to $10 million for 2018-2023 and would then repeal both taxes for 2024 and beyond.

For 2024 and beyond, there would be a $10 million exemption for gifts. Excess gifts would be taxed at 35%.

Analysis: To be sure, these are tax cuts for the “rich.” However, the valid counter-argument in defense of these changes is that individuals who would benefit from avoiding these transfer taxes have already paid federal income taxes on most or all the wealth that is involved.

The bottom line
The GOP bill would make big changes for individual taxpayers, and we now know the specifics. My informed guess is that the vast majority of taxpayers would benefit. However, there is always resistance to change, and some of the proposals will fall by the wayside. I would not be surprised to see the deductions for medical expenses and personal casualty losses restored, and the estate and gift tax changes made less-generous. Meanwhile, stay tuned for our digest of the proposed business tax changes.