Stock Sales in Senate Tax Bill

The Senate proposal only allows investors to determine the basis of stock sold using the oldest shares first which will generally produce larger capital gains in a rising stock market. This method is termed the first in first out method or FIFO. The other method currently allowed is to direct the broker to sell shares purchased on a certain date or the specific identification method. The Joint Committee on Taxation believes the elimination of the specific identification method will generate an additional $2.7 billion more in taxes over a 10 year period. For taxable mutual funds, the use of the average cost method will still be allowed under the Senate proposal. The change would take effect January 1, 2018.

Senate Tax Bill

The Senate tax bill came out with some differences with the House bill which I discussed last week. Listed below are the significant differences:

1. The state and local tax deduction is completely repealed.
2. The corporate tax rate change to 20% is delayed to 1/1/2019.
3. The medical expense deduction is maintained.
4. The mortgage interest deduction loan cap is maintained at $1 million.
5. The estate tax is not repealed in 2024.
6. There are 7 income tax brackets.
7. The top income tax rate for individuals is 38.5%.
8. Pass through businesses would get a 17.4 percent deduction for non-wage income. Many types of service businesses would not qualify for this deduction.

If both the House and Senate pass their proposals, then these differences would have to be reconciled before the bill is presented to President Trump for signing into law.

Tax Cuts and Jobs Act (TCJA) Proposed House Bill

This proposed bill may be bigger in impact than any changes in the tax code since 1954. It may go for a vote in the House next week and then be sent to the Senate for their changes and approval. The President wants to sign the tax bill before Christmas. Most of the changes are effective January 1, 2018. Some of the more important changes are listed below:
1. Change in the corporate rate to 20% from 35%
2. Repeal of the alternative minimum tax
3. Increase of the estate exclusion to $10 million from $5.6 million
4. Repeal of the estate tax on 1/1/2024
5. Change in gift tax rate to 35% from 40% on transfers over $10 million
6. Increase in the child credit to $1,600 from $1,000 for each qualifying child
7. 100% bonus depreciation deduction for the cost of qualifying property placed in service after 9/27/2017
8. Used property will now qualify for 100% bonus depreciation.
9. Like kind exchanges will not include personal property.
10. Two year carryback period of net operating losses is eliminated. Carryforward period will be indefinite.
11. Repeal of the domestic production deduction
12. No deduction allowed for client entertainment expenses
13. 25 percent max rate for business income from passthrough entities from a passive business activity subject to further limitations
14. The 25 percent max rate does not apply to most service businesses such as health, law, engineering, architecture, accounting, financial services, consulting, etc.
15. Section 179 expensing limitation goes to $5 million from $500,000.
16. The top individual rate of 39.6% applies to joint tax returns at the $1 million level of taxable income up from $480,050.
17. The lowest tax bracket increases to 12% from 10%.
18. The personal exemption deduction is repealed.
19. All itemized deductions are repealed except for charitable contributions, property taxes up to $10,000, and mortgage interest. Mortgage interest deductions on new loans up to $500,000 would only be allowed.
20. No new home equity mortgage interest is deductible.
21. The standard deduction goes to $24,000 for joint returns and $12,000 for single returns.
22. Alimony is no longer deductible or taxable.
23. Repeal of the tax credit for adoption
24. Repeal of the additional standard deduction for the elderly
25. $300 child credit for any dependent who is not a qualifying child