Definitions — Taxing changes

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Nothing changes if nothing changes and that’s true for tax law too, as evidenced by the latest proposed tax bill.

Here’s some information about potential changes.

 

The proposed bill would change the number of federal individual income tax brackets to four. How many brackets are there under present law?

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The proposed bill would change the number of federal income tax credits for education to one. How many education credits are there under present law?

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The proposed bill does not change the $500,000/$250,000 exclusion of gain on the sale of a principal residence. However, for home sales after 2017, the exclusion would be reduced above certain income levels, the ownership requirement to qualify for the exclusion would be lengthened, and the exclusion would only be available once every five years. What is the current ownership requirement to qualify for the exclusion?

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The proposed bill limits the itemized deduction for mortgage interest to loans of $500,000 or less, and only for loans on a principal residence. On how much mortgage debt can this deduction be currently taken?

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Proposed tax bill 2017

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Note: This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

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Right answer!

Current income tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

Proposed income tax brackets are 12%, 25%, 35%, and 39.6%.

Note that the proposal introduces a new 25% rate for passthrough business income, while retaining certain current rates, including the 20% tax rate for long-term capital gains and qualified dividend income, the 3.8% rate on certain investment income, and the 0.9% additional medicare tax.

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Current education credits are the American Opportunity tax credit, Hope Scholarship credit and Lifetime Learning credit.

The proposed bill provides a 100% tax credit for the first $2,000 of qualified education expenses and a 25% credit for the next $2,000 of qualified expenses, decreases the maximum refundable amount from $1,000 to $500, and allows an additional fifth year of credit eligibility, with the benefit for year five reduced by half.

The proposed law also allows section 529 plan distributions of up to $10,000 per year for elementary and high school expenses.

The proposed law repeals the above-the-line deductions for qualified student loan interest payments and qualified tuition and related expenses, U.S. savings bond interest when used to pay qualified education expenses, qualified tuition reduction programs, and employer-provided education assistance programs.

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Under current law, the exclusion is up to $500,000 for joint filers and $250,000 for other filers. The property generally must have been owned and used as a principal residence for two out of the previous five years, and the exclusion can be used once every two years.

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Under current law, an itemized deduction for mortgage interest paid with respect to a principal residence and one other residence is available on up to $1 million in acquisition indebtedness (for acquiring, constructing, or substantially improving a residence), and up to $100,000 in home equity indebtedness.

Note that the deduction for home equity indebtedness is currently disallowed under the alternative minimum tax. The proposed bill eliminates the alternative minimum tax.

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