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Tax Proposal Changes: Tax Cuts and Jobs Act on the Chopping Block

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Kim Ciccarelli Kantor , CFP®, CAP®

The November 3rd general election is rapidly approaching. Although the Covid-19 pandemic is still a major issue in the fiscal policy debate, all eyes are also on the Tax Cuts and Jobs Act (TCJA) which could have major changes. Some provisions of the TCJA are scheduled to expire at the end of 2025 but could be impacted much sooner if there is a change of administration. To fully understand the extent of the proposed changes it is helpful to compare them to the TCJA provisions under the current administration.

Income Taxes

Current position:  the tax brackets include 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Proposed changes: would raise the top tax bracket back to 39.6% from 37% for taxable income >$400,000 as well as make some small changes to the other six brackets.

Capital Gains

Current Position: 20% + 3.8% Medicare surtax = 23.8%. The 23.8% rate applies to individuals with taxable income greater than $441,500.

Proposed Changes: eliminate the 20% tax rate on long-term capital gains and apply the top ordinary income tax rate (39.6% rate + 3.8% Medicare surtax) for individuals with taxable income >$1,000,000.

Itemized Deductions

Current Position: The standard deduction was increased to $12,000 for single filers and $24,000 for married couples filing jointly in 2018 and indexed for inflation. For 2020, the standard deduction is $12,400 for single filers and $24,800 for married couples filing jointly.

Proposed Changes: Cap full itemized deductions for single filers and married couples filing jointly to those with blended tax rates of up to 28%. Individuals would receive full itemized deductions if the blended tax rate is < or = 28%. For blended rates >28%, itemized deductions will be gradually lowered

Step-Up in Basis at Death

Current Position: full step-up in basis at death on non-retirement-based assets.

Proposed Changes: repeal the step-up in basis at death.

Estate and Gift Tax

Current Position: estate tax exemption amount is $11,580,000 per individual, indexed for inflation. Gift tax exemption amount is $11,580,000 per individual, indexed for inflation.

Proposed Changes: estate tax exemption may be lowered to either the pre-TCJA exemption of $5,600,000 or the pre-2010 exemption of $3,500,000. The Gift tax exemption may be lowered to either the pre-TCJA exemption of $5,600,000 or the pre-2010 exemption of $1,000,000.

Pease Limitation

Current Position: tax law has repealed the Pease limitation

Proposed Changes: tax proposal would reinstate the Pease limitation for individuals with taxable income >$400,000. The Pease limitation was enacted in 1992 to limit the amount of itemized deductions available for high-income earners. It starts reducing taxpayers’ itemized deductions once they reach a certain threshold adjusted gross income (AGI) amount. Itemized deductions are lessened by 3% for every $1 above the threshold amount. The reduction is limited to 80% of your total itemized deductions.

The election is still five weeks away and it is not clear which presidential candidate and which political party will be setting the tax laws but it is never too early to start evaluating what could change. Our team will continue to monitor tax legislation and will keep you up-to-date as information unfolds. 

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

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