The Tax Cuts and Jobs Act of 2017 (H.R. 1) is intended to be comprehensive tax reform that reduces taxes and stimulates the economy to create jobs. Initially proposed in the House, the Senate released its own version of the bill. What will happen in the Conference Committee, and whether a final measure will be enacted is uncertain. Also unclear is when final action will be taken, which could impact the effective date of various provisions (most are scheduled to begin at the start of 2018). The following is a roundup of some of the new rules impacting individuals, what old rules would be eliminated, and what old rules would be retained.

New Rules

The linchpin of the bill is a cut in the individual tax rates. Under the House version, the current seven tax rates would be replaced with four rates of 12 percent, 25 percent, 35 percent, and 39.6 percent. The top rate would apply to married couples with taxable income above $1 million, and for singles and heads of households with taxable income above $500,000. The Senate's version would retain the current seven rates (10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent) but reduce the top one to 38.5 percent. (Special tax rules for owners of pass-through entities are not discussed here; they will be included in a future article on the proposed tax changes for businesses.)

Both bills would essentially double the standard deduction amounts. Under the House version, the standard deduction for joint filers would be $24,400 (up from $12,700). For singles it would be $12,200, or $18,300 if the person has a qualifying child (up from $6,350). The amounts under the Senate version are slightly lower. No tax return would be required unless gross income for the year exceeded this applicable amount.

It would retain the favorable capital gains tax rates on long-term capital gains and qualified dividends (0 percent, 15 percent, and 20 percent). However, the proposal would create new taxable income thresholds for each of the rates.

The measure would also favorably modify the child tax credit, which is applicable to a taxpayer with a child under age 17 and who has income below set amounts. Under the House version, the credit would be increased to $1,600 (up from $1,000) per child; the Senate version is slightly higher. This dollar amount would be indexed for inflation. And the modified adjusted gross income limits for the full credit as well as the phase-out range would be increased from current limits (e.g., under the House version starting at $230,000 for joint filers; under the Senate version starting at $1 million). There would be a new nonrefundable credit of $300 to a taxpayer or couple and every dependent who is not a qualifying child. The credit for dependents would only run for five years.

Old Rules Eliminated

The House and Senate bills would repeal various provisions. The major change would be the repeal of the alternative minimum tax (AMT). Any unused minimum tax credit would entitle an individual to a 50 percent refund to the extent the credit exceeds the regular tax in 2019, 2020, and 2011; any remaining credits would be refundable in 2022.

Here is a listing of items targeted for elimination:

Exclusions and exemptions. The measure would repeal personal and dependency exemptions (which is $4,050 per individual in 2017), exclusions for employee achievement awards, employer education assistance, qualified tuition programs, dependent care assistance, qualified moving reimbursements, and adoption assistance. Contribution to Coverdell education savings accounts would be barred, but funds in existing accounts could be rolled over to 529 plans.

Deductions. Certain deductions from gross income as well as itemized deductions would be eliminated. Deductions from gross income set to be axed include the alimony deduction (for divorce or separation agreements entered into after Dec. 31, 2017, student loan interest (although the Senate version would retain this deduction), interest on U.S. savings bonds redeemed for higher education, the moving expense deduction, the deduction for contributions to Archer medical savings accounts, out-of-pocket educator expenses, and expenses of performing artists and certain government officials.

Itemized deductions on the chopping block include the medical expense deduction, state and local income or sales taxes, the casualty and theft loss deduction (except for casualty losses in federally-declared disaster areas), and miscellaneous itemized deductions for tax return preparation and unreimbursed employee business expenses.

Tax credits. The bill would repeal the credit for the elderly and permanently disabled, the credit for mortgage certificates, and the credit for plug-in electric vehicles.

The bill would eliminate the lifetime learning credit by consolidating it into the American opportunity credit. The credit would be available for five years of higher education (instead of four years), but the amount in the fifth year would half the usual maximum (including the amount eligible for the 40 percent refundable portion of the credit).

Old Rules Retained

Many of the current rules would be retained unchanged. For example, the rules for qualified retirement plans and IRAs would not be modified by the proposals. Various limits to benefits and other rules would continue to adjust annually for inflation. The only changes would be a bar on recharacterizing Roth IRA conversions to traditional IRAs (which currently can be done up to October 15 following the year of the conversion) and a reduction in the age at which a defined benefit plan could made in-service distributions (age 59½ instead of 62). The taxation of pensions, annuities, IRA distributions, life insurance proceeds, and Social Security benefits would not change. The rules for Health Savings Accounts (HSAs) would not be impacted by the proposed law. Similarly the rules for the additional Medicare taxes on earned income (0.9 percent) and on net investment income (3.8 percent) would not be changed.

Some of the old rules, however, would be retained in modified form. Under the House bill, the home mortgage interest deduction would be changed in three ways. (1) The cap on the amount of acquisition indebtedness for which interest could be deduction would be cut in half to $500,000 (from $1 million), or $250,000 (from $500,000) for married persons filing separately. (2) The deduction would only apply to a principal residence unlike current rules where it can also apply to a second home. (3) The deduction for interest on home equity debt would be eliminated. The Senate version would retain the current $1 million limit for acquisition indebtedness. The changes would apply to mortgages obtained after Nov. 2, 2017.

Under the House version, the deduction for real property taxes on a residence would continue to be deductible, but it would be capped at $10,000.

The charitable contribution deduction rules would also be changed. On the plus side, the adjusted gross income limit for cash contributions to eligible charitable organizations would increase to 60 percent (up from 50 percent). And the 14¢-per-mile rate (set in 1997) for driving for charitable purposes would be adjusted annually for inflation. But contributions to obtain seating rights at college athletic events would become nondeductible.

The home sale exclusion for gain on the sale of a principal residence would be retained; the cap on the exclusion of $500,000 on a joint return or $250,000 for singles would not change. However, to qualify for the exclusion, a homeowner would have to own and use the home as a principal residence for five out of eight years (the current rule is two out of five years).

The exclusion for employer-provided housing, which is currently unlimited in amount, would be capped at $50,000 annually ($25,000 for a married person filing separately).

Estate, Gift, and GST Tax Changes

Under the House bill, the estate and generation-skipping transfer tax would be repealed after 2023. Until then, the exemption amount would be $10 million indexed for inflation (it is $5.49 million in 2017). The present stepped-up basis rule for inherited property would not be changed. The Senate version would retain the estate tax, but doubled the exemption amount.

The gift tax rate would be decreased to 35 percent (down from 40 percent), but only for gifts made after 2023. The same lifetime exemption amount of $10 million would apply to gifts, but the annual exclusion amount would not be changed. It is $14,000 in 2017 and $15,000 in 2018; it is indexed annually for inflation.

Conclusion

Individuals thinking about year-end planning for 2017 should factor in the possibility of this new legislation (or at least parts of it) being finalized before the New Year. For example, those thinking of buying a plug-in electric vehicle may want to act before the end of the year in case the tax credit for the purchase is repealed. Most importantly, for many individuals it may be desirable to defer income deferral where possible (e.g., postponing the receipt of year-end bonuses where possible) on the assumption that it may be taxed in the future at a lower tax rate.

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company.