OBBBA Effective Dates Caution

Often, the effective date for tax legislation is for tax years beginning after 12/31/xx with xx being the year the legislation was enacted. So, provisions often start the year after the law is enacted. That doesn't give much time for planning or for the IRS to issue needed guidance. For example, the Tax Cuts & Jobs Act was signed into law on December 22, 2017 with most provisions effective 1/1/18.

The House's 5/22/25 and Senate's 6/28/25 versions of the One Big Beautiful Bill (H.R. 1) have varying effective dates both within the bill and between these versions for similar provisions. Also, some provisions in the House are temporary and most in the Senate are permanent.

But I want to highlight a few changes that would repeal provisions for individuals this year that were supposed to be in the law through 2032! 

These provisions were set to expire after 2032 per changes made by the Inflation Reduction Act of 2022.

Residential energy credits of Sections 25C and 25D (§25D was to phase out for 2033 and 2034):

  House and Senate bills - these credits end for property placed in service after 12/31/25.

Used clean vehicle credit of Section 25E:

  House bill - must acquire (take possession) by 12/31/25

  Senate bill - must acquire by 9/30/25

New clean vehicle credit of Section 30D:

  House bill - ends after 2025 but for 2026, limited to vehicles for which manufacturer produced no more than 200,000 vehicles.

   Senate bill - must acquire by 9/30/25

So, it's important to watch for the effective date in the final bill. But, if someone is eligible and really wants the clean vehicle credit, best to assume it ends 9/30/25. And if you really want the solar panel credit of §25D (or other items it covers) or energy efficient doors, windows and other items of §25C, best to act now to be sure it is all installed by 12/31/25. While it is unlikely the new termination date will be later than 2025 for the residential energy credits given current versions of OBBB, you never know.

What do you think?

We have tax reform!

Today (12/22/17), President Trump signed H.R. 1, the Tax Cuts and Jobs Act (the name we all know it by, but its real name is something else*) (P.L. 115-97). This is a big deal because there are lots of changes and many will have impacts on other provisions. There is too much to cover in this post, but I'll offer a few observations for individuals to get ready.

• To know if your taxes are going up or down, you need to run your own numbers. Just because a friend will have a tax decrease or increase doesn't mean you will. Variables include your income level, age of your children, how many itemized deductions you are losing (see next), whether you have a business, and more.
• No personal or dependency exemption starting in 2018. Instead, you get a $2,000 credit per child under age 17; $500 credit for other dependents. The phase-out threshold is raised ($200,000 if single and $400,000 if married filing jointly).
• The standard deduction is increased.
• Key changes to itemized deductions are that interest on home equity debt is no longer deductible starting in 2017, for 2017 and 2018 the medical deduction AGI threshold will be 7.5% for both regular tax and AMT, no casualty or theft loss unless from a federally-declared disaster, no miscellaneous itemized deductions subject to the 2% of AGI threshold, and state tax deduction can't exceed $10,000.  Charitable deductions mostly remains the same except the income threshold for cash donations increases from 50% to 60% and there is no deduction for seating rights at the university athletic stadium. The limitation on itemized deductions for high income taxpayers is repealed starting 2018. Note: No deduction allowed in 2017 for prepayment of 2018 state and local income or property taxes.
• Tax rates change. The top rate will be 37% rather than today's 39.6%.
• The capital gain rate structure mostly stays the same.
• The individual AMT remains but with higher exemption amounts.
• No alimony deduction or income for agreements entered into after 2018.

Tax reform will warrant some new thinking. For example, many individuals who have itemized in the past might find their standard deduction amount is higher. Fewer people will be subject to AMT. The reason is that common adjustments that caused many individuals to owe AMT are gone or diminished. Home equity debt interest expense and miscellaneous itemized deductions subject to the 2% of AGI threshold are no longer deductible for regular tax. So they won't cause you to owe AMT. Also, your state tax adjustment can't be any larger than $10,000 because that is all you're allowed to deduct for regular tax purposes.

There is a lot to get used to!

Most items go into effect for 2018.  Most individual changes expire after 2025 and we go back to the law as it is today.  One exception to that is that the penalty for an individual not having insurance coverage goes away permanently, starting in 2019 (not 2018). Also, the use of a less favorable inflation index is a permanent change.

Many people will see a tax cut for 2018 and perhaps beyond (at least through 2025).  Here is one example with an explanation of how the tax savings comes about.

EXAMPLE - Married couple, no children, rents an apartment, salary $150,000

	2018 Pre-Tax Reform	H.R. 1
W-2 earnings	$150,000	$150,000
Standard deduction	-13,000	-24,000
Personal exemptions	-8,300	--
Taxable income	$128,700	$126,000
Tax	$23,483	$19,599
Tax reduction under H.R. 1		$3,884
Marginal tax rate	25%	22%

Explanation for tax savings under HR 1:

• Deductions are $2,700 more resulting in savings under HR 1 
• Under both current law and HR 1, the first $19,050 is taxed at 10%
• The next $58,350 is taxed at 15% under current law and at 12% under HR 1 for savings of $1,751
• The balance of $51,300 under current law is taxed at 25% ($12,825) while the balance under HR 1 of $48,600 is taxed at 22% ($10,692) for a savings of $2,133

  Total savings = $1,751 + $2,133 = $3,884

Will this couple have any costs associated with tax reform? Arguably, yes. Repeal of the insurance mandate for individuals starting in 2019 will mean fewer people purchase health insurance resulting in higher insurance costs for others. (See CBO 's 11/8/17 report on repeal.) Also, this couple's share of the $1.5 trillion debt embedded in H.R. 1 is $1,008/year as spread among all individual filers (see 11/24 post). And perhaps the couple's employers will offer fewer fringe benefits due to law changes. It is also possible that if the employer has tax savings under H.R. 1, it might increase employee wages.

What do you think?

*Final title of H.R. 1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.

Tax reform and alimony

KPIX 5 December 20,2017 story by Mark Sayre

H.R. 1, Tax Cuts and Jobs Act, or per its new catchy title at 12/20/17 - ‘‘An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year
2018," changes the tax treatment of alimony effective for divorce and separation agreements entered into after 2018. So, going forward for new instruments entered into after 2018, the payor of alimony gets no deduction and the conference report states that the recipient does not pick up income. Also, H.R. 1 removes "alimony and separate maintenance payments" from IRC 61(a) where it is currently listed as an example of gross income.

This has been proposed before, such as in H.R. 1 (113rd Congress), the Tax Reform Act of 2014 by former House Ways and Means Chairman Dave Camp.

This won't affect many taxpayers. Per IRS stats, less than 1% of individual returns report alimony received.

I was interviewed 12/20/17 for a news clip for KPIX-TV (CBS) by Mark Sayre, about this. You might enjoy it, don't miss my first statement.

What do you think about this change?

H.R. 1 - Tax Reform in the 113th Congress

House Majority Leader John Boehner has announced that H.R. 1 is being reserved for tax reform legislation (see 2/26/13 Ways & Means website).  Apparently this means it is a key agenda item for House Republicans.

A 2/28/13 article in the Wall Street Journal, "The GOP Takes Back Tax Reform," notes that House leaders want tax reform to be revenue neutral and to address both corporate and individual taxes.

I think this is all good news.  Tax reform is needed to reduce the complexity of the federal income tax that is bogged down with over 200 special rules many of which do not need to be there. A tax system with a broader base and lower rates is more likely to meet the principles of good tax policy such as equity, certainty, neutrality, transparency, minimum tax gap and simplicity.

It is also good for reform to cover all aspects of income taxes - those relevant to corporations and other taxpayers. For example, if only the corporate base were broadened and the rate lowered, most businesses would still face a complex system and a higher tax. There are advantages to the system of having the top income rate be the same for individuals and businesses. That is not entirely possible though due to the Section 1411 Medicare tax of 3.8% that applies to high-income individuals and differences in the tax structure and timing for net capital gains.

It won't be easy though. Revenue neutral tax reform, which is a good thing (rather than deficit enlarging tax reform), means cutting back and eliminating special tax rules ("tax expenditures"). These rules are mostly like spending, only buried in the tax law.  For example, instead of giving a family a child credit or a business an energy credit, a government agency could just write these taxpayer a check. The effect to the government fisc is the same.  However, this tax system spending goes unchecked and isn't subject to spending cuts. For example, the sequestration that will kick in on March 1 which means spending cuts, won't cut back the spending in the tax law. It should though because it is all some type of spending.

We'll see how the House Republicans expect to lower the corporate rate to their desired 25% rate and how they expect to lower the individual tax rate as well.

What would you suggest?