Q: Assuming tax reform — with different tax brackets and rates — is enacted this year, will it be retroactive for 2017 or effective starting in 2018?
A: I don’t know the answer. Nor do I know anyone who does.
Here are the figures to know if there aren’t changes for 2017:
Tax Brackets
The American Taxpayer Relief Act of 2012 (ATRA) extended individual marginal tax brackets of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent for most taxpayers. However, beginning in 2013, a 39.6 percent rate applies to high earning taxpayers. Here are the taxable income ceilings for 2017:
- Joint filers and surviving spouses: up to $18,650 taxed at 10 percent rate; $18,650 up to $75,900 at 15 percent; $75,900 up to $153,100 at 25 percent; $153,100 up to $233,350 at 28 percent; $233,350 up to $416,700 at 33 percent; $416,700 up to $470,700 at 35 percent; over $470,700 at 39.6 percent.
- Heads of household: up to $13,350 taxed at 10 percent rate; $13,350 to $50,800 at 15 percent; $50,800 to $131,200 at 25 percent; $131,200 to $212,500 at 28 percent; $212,500 to $416,700 at 33 percent; $416,700 to $444,550 at 35 percent; over $444,550 at 39.6 percent.
- All other single taxpayers: up to $9,325 taxed at 10 percent rate; $9,325 to $37,950 at 15 percent; $37,950 to $91,900 at 25 percent; $91,900 to $191,650 at 28 percent; $191,650 to $416,700 at 33 percent; $416,700 to $418,400 at 35 percent; over $418,400 at 39.6 percent.
- Married individuals filing separately: up to $9,325 taxed at 10 percent rate; $9,325 to $37,950 at 15 percent; $37,950 to $76,550 at 25 percent; $76,550 to $116,675 at 28 percent; $116,675 to $208,350 at 33 percent; $208,350 to $235,350 at 35 percent; over $235,350 at 39.6 percent.
Capital Gains
In 2017, the top rate for long-term capital gains (LTCG) taxes is 20 percent for taxpayers in the 39.6 percent bracket. The 15 percent rate applies to taxpayers in the 25 percent through 35 percent tax brackets. Taxpayers in the 10 percent and 15 percent tax brackets pay no LTCG taxes.
Exception: Gains on sales of artworks (and other so-called collectibles) held long term remain taxable at the 28 percent maximum rate. Unrecaptured gain on a sale of real property continues to be subject to a 25 percent maximum rate.
The gain on sales of capital assets held short term (one year or less) is taxed in the regular tax brackets.
Medicare Surtax
Treasury regulations on the 3.8 percent Medicare tax give guidance under Internal Revenue Code Section 1411 for taxable years beginning after Dec. 31, 2012. The regulations can affect individuals, trusts and estates.
- Individuals. In 2017, in addition to any other tax, a 3.8 percent tax is imposed on the lesser of: (1) the individual’s net investment income for the taxable year, or (2) the excess (if any) of (i) the individual’s modified adjusted gross income (AGI_ for the taxable year, over (ii) the threshold amount. The threshold amount(s) are: (1) for a taxpayer filing a joint return or as a surviving spouse, $250,000; (2) for a married taxpayer filing a separate return, $125,000; and (3) in any other case, $200,000. For most taxpayers, modified AGI is their AGI.
“Modified” applies only to taxpayers living abroad and using the foreign earned income exclusion. These threshold amounts aren’t indexed for inflation. - Estate or trusts. In 2017, a tax, in addition to any other tax for each taxable year, is imposed equal to 3.8 percent of the lesser of: (1) the estate’s or trust’s undistributed net investment income, or (2) the excess (if any) of: (i) the estate’s or trust’s AGI for the taxable year, over (ii) the dollar amount at which the highest tax bracket in IRC Section 1(e) begins for the taxable year.
Translation: That threshold amount for 2017 is $12,500 (indexed for inflation). - Charitable remainder trusts. Although charitable remainder unitrusts and charitable remainder annuity trusts aren’t subject to the 3.8 percent Medicare surtax (IRC Section 1411), annuity and unitrust distributions may be net investment income to the noncharitable recipient beneficiary. Treasury Regulations Section 1.1411-3(d)(2) provides that net investment income is categorized and distributed based on the IRC Section 664 category and class system.
- Pooled income funds. Pooled income funds are subject to the 3.8 percent tax, under Treas. Regs. Section 1.1411-3. A pooled income fund distributes all its income to the fund’s income beneficiaries. Thus, that income doesn’t subject the fund itself to the 3.8 percent tax. High net investment income beneficiaries may be subject to the 3.8 percent tax under the rules on an individual’s net investment income.
Additional 0.9 percent Medicare Tax
In 2017, an individual is liable for a 0.9 percent additional Medicare tax if his wages, compensation or self-employment income exceed the threshold amount for the individual’s filing status.
| Filing Status | Threshold Amount |
| Married filing jointly |
$250,000 |
| Married filing separately |
$125,000 |
| Single |
$200,000 |
| Head of household (with qualifying person) |
$200,000 |
|
Qualifying widow(er) with dependent child |
$200,000 |
|
These threshold amounts aren’t indexed for inflation. |
Personal Exemptions
The exemption for the taxpayer, a spouse and dependents is $4,050 each. In 2017, the personal exemption begins to phase out for taxpayers with AGI over $313,800 (married filing jointly and surviving spouses), $287,650 (heads of households), $261,500 (single taxpayers) and $156,900 (married filing separately). The exemption is completely phased out when AGI reaches $436,300 (married filing jointly and surviving spouses), $410,150 (heads of households), $384,000 (single taxpayers) and $218,150 (married filing separately).
The Standard Deduction
Joint filers and surviving spouses, $12,700; heads of household, $9,350; singles, $6,350; married individuals filing separately, $6,350; additional amounts for the elderly and blind, $1,250; for each category, $1,550 if the taxpayer is single and not a surviving spouse.
Unified Gift and Estate Tax Exemption.
ATRA permanently provides for a unified gift and estate tax exemption at an annual inflation-adjusted amount of $5 million. For 2017, the exemption amount is $5.49 million per person and $10.98 million per couple. As a result of ATRA, the top tax rate for estates has been permanently raised to 40 percent. For 2017 the executor of a deceased spouse’s estate can transfer any unused exemption to the surviving spouse without creating a credit shelter trust. This is called “portability,” which has been made permanent by ATRA.
In 2017, for gifts of present interests, the annual gift tax exclusion is $14,000 per donee. With “gift-splitting,” spouses can transfer a total of $28,000 per donee each year without gift tax. Present interest gifts to a non-citizen spouse qualify for an annual exclusion of $149,000 in 2017.
Generation-Skipping Transfer Tax
The generation-skipping transfer (GST) tax imposes a flat rate tax on transfers in which assets or benefits are shared by individuals who are two generations or more below the transferor’s (for example, grandchildren) and on direct transfers that skip generations. For 2017, the GST exemption is the same as the gift and estate tax exemption, $5.49 million, and the tax rate is 40 percent. Portability isn’t available.
Health Insurance Costs
Self-employed taxpayers who had a net profit for the year can deduct 100 percent of eligible costs in 2017.
Social Security Benefits
The maximum taxable earnings in 2017 are $127,200. Individuals who continue to work after reaching their normal retirement age (66 in 2017, increasing to 67 by 2027) won’t have their Social Security benefits reduced, no matter how much they earn.
An earnings test is imposed for Social Security recipients ages 62 to 66. The maximum amount those recipients may earn without reduction of benefits is $16,920 in 2017. If a recipient earns more than that, $1 in benefits is withheld for every $2 earned over $16,920. In the year an individual reaches full retirement age, $1 in benefits will be deducted for every $3 above $44,880, but only counting earnings before the month the individual reaches full retirement age. Starting with that month, there’s no limit on earnings.
Monthly Social Security benefits increased 0.3 percent in 2017.
© Conrad Teitell 2017. This is not intended as legal, tax, financial or other advice. Check with your advisor on how the rules apply to you.