The Tax Planning Environment in 2017

November's election left us with a Republican administration in the White House as well as Republican control of both houses of Congress. President Trump campaigned, in part, on the promise of large-scale tax reform. In fact, he listed tax reform among the top priorities for his first 100 days in office.

It remains to be seen, however, where tax legislation ultimately fits into what is shaping up to be an ambitious and contentious first year of the new administration. The situation is further complicated by the fact that Republicans in the Senate lack the needed 60 votes to overcome a Democratic filibuster. Furthermore, Republicans themselves are not in complete agreement when it comes to some of the key details around potential tax policy. So while we're likely to see changes, the specifics, scope, and timing of the provisions will likely take some time to unfold.

What tax reform could look like

In 2016, House Republicans published a tax reform "blueprint," a summary of policies that could well form the basis of new legislation in 2017 (abetterway.speaker.gov). Although the Trump campaign initially proposed tax reforms that diverged from those policies, the candidate's proposals moved closer to the House Republican plan toward the end of the election cycle.

Because it's too early to know what any new legislation will look like, it may make sense to focus on some of the general provisions common to both the policies articulated by the Trump presidential campaign and those reflected in the House Republican blueprint:

• Reducing the number of income tax brackets (potentially from seven brackets to three — 12%, 25%, and 33%)
• Increasing standard deduction amounts and limiting the use of itemized deductions
• Repealing the federal estate tax, the alternative minimum tax (AMT), and the 3.8% net investment income tax
• Lowering the business tax rate from 35% (potentially to either 15% or 20%)

Efforts to move ahead with tax reform will take place in a polarized political environment. Even when Republicans coalesce around a single plan, initial indications suggest that there's little reason to expect bipartisan cooperation in enacting lasting tax reform. Without 60 votes in the Senate, it's possible that Republicans may attempt to pass tax reform through budget reconciliation, which requires only a simple majority vote.

What's new?

Medical expense deductions — Individuals claiming a deduction for qualified medical expenses on Schedule A of Form 1040 are generally able to deduct the expenses to the extent that they exceed 10% of adjusted gross income (AGI). However, individuals age 65 or older have generally been subject to a lower 7.5% AGI threshold. Starting in 2017, the 10% AGI floor will apply to all individuals, regardless of age.

ABLE accounts — Created by The Tax Increase Prevention Act of 2014, ABLE accounts are tax-advantaged vehicles designed to help individuals with disabilities and their families save and pay for disability-related expenses. These accounts first became generally available during 2016.

What's expired?

The following deductions, credits, and exclusions expired at the end of 2016.

Deduction for qualified higher-education expenses — An above-the-line deduction was allowed in prior years for qualified tuition and fees (for yourself, your spouse, or a dependent) in a degree or certificate program at an accredited post-secondary educational institution. The deduction could reach up to $4,000, subject to adjusted gross income limitations.

Credit for nonbusiness energy property — A 10% credit was available for the purchase of certain energy-efficient improvements, including qualifying insulation, roofing, windows, and doors; specific credit amounts applied for the purchase of high-efficiency equipment including furnaces and hot water systems. A $500 lifetime cap applied (no more than $200 for the purchase of windows).

Deduction for mortgage insurance premiums — Premiums paid or accrued for qualified mortgage insurance associated with the acquisition of a main or second home could be treated as deductible qualified residence interest on Schedule A of Form 1040, subject to adjusted gross income limitations.

Discharge of qualified personal residence debt — Taxpayers were able to exclude up to $2 million of forgiven home mortgage debt ($1 million if married filing separately) that was incurred to acquire, construct, or substantially improve a principal residence. Refinanced qualified principal residence debt that was discharged could also qualify for the exclusion.

Last major tax legislation

Even though more than 15 major pieces of tax legislation have been enacted into law since 2000, the current tax planning environment has been heavily shaped by the American Taxpayer Relief Act of 2012, which passed in January 2013, and the Protecting Americans from Tax Hikes Act of 2015, which passed in late 2015.

Together, these legislative acts made permanent a number of significant tax provisions (commonly referred to as "tax extenders") that had previously existed only in temporary form, and introduced new rates and limitations that target high-income individuals.

Extenders that were made permanent

These provisions are now part of the permanent tax landscape.

• There are seven federal income tax brackets for individuals: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%; dollar limitations for each bracket are adjusted annually for inflation.
• Special maximum tax rates generally apply to long-term capital gains and qualified dividends (0%, 15%, or 20% depending on a taxpayer's federal income tax bracket).
• Higher alternative minimum tax (AMT) exemption amounts are in effect and adjusted for inflation; the AMT is essentially a parallel federal income tax system with its own rates and rules, and the higher exemption amounts and other related provisions significantly limit the reach of this tax.
• Personal and dependency exemptions phase out at higher incomes, and itemized deductions may be limited.
• "Marriage penalty" relief is now permanent in the form of an increased standard deduction for married couples and an expanded 15% federal income tax bracket.
• Expanded tax credit provisions apply to the dependent care tax credit, the adoption tax credit, and the child tax credit
• Increased limits and more generous rules apply to certain education provisions, including Coverdell Education Savings Accounts, employer-provided education assistance, and the student loan interest deduction.
• Individuals age 70½ or older can make qualified charitable distributions (QCDs) from their IRAs and exclude the distribution from gross income (up to $100,000 in a year); QCDs count toward satisfying any required minimum distributions (RMDs) that would otherwise have had to be made from the IRA.
• Individuals who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of the deduction for state and local income taxes.
• The maximum amount that can be expensed by a small-business owner under IRC Section 179, rather than recovered through depreciation deductions, is $510,000, reduced by the amount by which the cost of qualifying property placed in service during the year exceeds $2,030,000 (2017 figures; will be adjusted for inflation in future years).

Other "tax extender" provisions