By Sabrina Greninger and Blake Harrison

Executive Summary:

  • The Tax Cuts and Jobs Act made more changes to the tax code than any bill since 1986, but not all the rumored changes actually passed.
  • Key proposals were left out of the final legislation, including the repeal of the Estate and Gift Tax and other major policies affecting businesses and individuals.

At the end of 2017, we were met with the largest tax reform bill since 1986. Before it passed, there were several proposed bills from the House of Representatives and Senate that changed multiple times. In addition to the formal proposals, there were numerous media articles written and discussions about speculated changes to the existing tax law. With many still accessible by Google search, it can be difficult to decipher what made it in the Tax Cuts and Jobs Act (TCJA) and what did not. Here are a few changes that were proposed and revised but didn’t actually get signed into law on December 22, 2017.

Repeal of the Estate Tax

One of the promises made numerous times was the repeal of the estate tax. Although the estate tax was not altogether eliminated, there were some changes that will benefit those affected by the estate tax. The TCJA temporarily doubled the lifetime exemption amount to $11.2 million per individual, so a married couple has an increased estate tax exemption of $22.4 million. This new amount is good for tax years between 2018 and 2025, meaning if there is no further congressional action, the exemption amount would revert to $5 million (indexed for inflation) in 2026. Related to that, the annual gift exclusion has increased to $15,000 per recipient for 2018, up from $14,000.

Requirement of FIFO Stock Sales

The proposed requirement that sales of stock be recognized on a FIFO basis was removed from the final bill. The first-in-first-out method would have required individual investors to sell their oldest shares of a given stock first, which would have eliminated the flexibility to choose which lot to sell when investors have acquired multiple blocks of shares over time. With the flexibility to choose which lots of shares to sell, there are tax planning opportunities to limit or even offset capital gains by selling higher basis shares first.

Private Foundations’ Flat Excise Tax

At the end of 2017, there was some talk about getting rid of the current system of tiered excise tax for private foundations and having one flat excise tax rate of 1.4%. This did not pass, so private foundations are still encouraged to make distributions that exceed the average payout rate of the foundation over the preceding five years to lower their tax rate from 2% down to 1%. The lower excise tax was intended to ensure that the tax savings be used for additional charitable expenditures and not just pocketed by the foundation.

Loss of HELOC Interest Deductions

At times, the deduction of interest on home equity lines was rumored to be eliminated completely.  While that did not come to fruition, there were several changes made to mortgage interest deductions. The new law states that the deduction can only be made on interest related to the first $750,000 of qualified residence loans, including a home equity line of credit, if used to buy, build, or substantially improve the taxpayer’s home. The $750,000 limit only applies to loans made after 12/16/17, with existing loans being grandfathered in at the old limit of $1 million. The new limits apply to the combined amount of loans used to buy, build, or substantially improve the taxpayer’s main home and second home. For taxpayers who have been deducting HELOC interest in the past, the limit for married filing jointly had been $1.1 million for existing mortgage and HELOCs, but for 2018 and forward that limit will be $1 million.

Repeal of Medical Expense Deduction

For some time, there was uncertainty surrounding the continuation of the medical expense deduction. The medical expense deduction was preserved under TCJA; however, the floor for these deductions has been modified. The floor for medical expenses is 7.5% of adjusted gross income (AGI) for all taxpayers for tax years 2017 and 2018, which is decreased from the prior law for taxpayers under 65 years old. For tax years after 2018, the floor will return to 10% of AGI.

Taxing Free Tuition and Deduction for Tuition and Fees

The TCJA did not make changes to the rules for scholarships, fellowships, and grants. For some time, it seemed tuition discounts or grants would be taxable income for the recipient. The proposal that would have included these items in taxable income was removed in the final bill. While scholarships, fellowships, and grants remain tax exempt, tuition and fees are no longer allowed to be deducted in the calculation of income for federal tax purposes. While the deduction is no longer allowed, taxpayers can still benefit from the Lifetime Learning Credit and the American Opportunity Credit.

Loss of Student Loan Interest Deduction

Early drafts of the tax reform legislation eliminated the deduction for student loan interest, but the final bill allowed it to remain. The student loan interest deduction allows taxpayers to reduce their taxable income by up to $2,500. It is based on the amount of qualified student loan interest paid during the year, and it has income level phaseout for high-income taxpayers. The TCJA did not make any changes to the student loan interest deductions, so taxpayers can still get benefit from paying student loan interest if their adjusted gross income falls within certain limits.

The tax professionals at LBMC can help minimize the tax burden and provide crucial information on an ongoing basis to assist in day-to-day operations. Keep up-to-date on the current happenings on our Federal Tax Reform Resource Center.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.