Key takeaways

• House Republicans released a tax proposal, another step in the tax reform process, but still far from a final change in tax law.
• The proposal calls for new individual, corporate, and pass-through tax rates.
• Contribution limits and tax treatment for major retirement accounts remain unchanged, but the proposal would significantly change many other deductions.

House Republicans released a proposed tax plan that offers the first detailed look at the most ambitious tax reform proposal since 1986. The plan calls for changes to income tax rates, estate taxes, deductions, and some retirement rules—and if even parts of the proposal become law it would be a significant event for investors.

“The House proposal is sweeping, and could mean major changes for businesses and individuals,” says Jim Febeo, senior vice president in Fidelity’s government relations team. “While this is a major step, the proposal is far from finished law. Investors should be cautious about making planning decisions based on a proposal, and in general should not make investing decisions based primarily on tax law.”

Adjusted tax brackets

The tax proposal includes changes to the income tax brackets. The new proposed system would reduce the number of brackets from 7 to 4, and raise the maximum income limits for the lower brackets, while retaining the same top tax rate.

New corporate tax rate and pass-through tax rate

Corporate tax rates would be cut to 20%, while businesses conducted as sole proprietorships, partnerships, and S-corporations would be taxed at a rate of 25%. However, professional services, like doctors, lawyers, accountants, designers, and consultants, wouldn’t qualify for the reduced rate.

Keeping retirement savings opportunities

The proposal made no change to the existing retirement savings incentives, preserving the favorable tax treatment and contribution limits for 401(k)s, IRAs, and other retirement savings accounts. The proposal also left the rules for health savings accounts intact.

“We are pleased the House is supporting retirement savers by maintaining current pre-tax retirement savings incentives while considering other changes to the tax code that would enhance opportunities for investors, businesses, and all Americans saving for their financial futures,” says Febeo.

The proposal does call for ending the Roth IRA recharacterization option. Recharacterization allowed taxpayers to undo a Roth IRA conversion for a limited time, and was often useful if the value of the converted investments fell.

The phaseout of the federal estate tax

The proposal would double the federal estate tax exemption to $11 million per person ($22 million per couple), and remove the tax completely by 2024. Beneficiaries would still get a step up in basis, meaning there would be no capital gains tax due on inherited assets at the time of the transfer, and the cost basis—the value used to compute tax liability—would be reset at that date.

It is important to note that state level estate tax exemptions are often much lower than the federal level and are unaffected by this proposal.

“While further reduction in the estate tax will help some families avoid this tax at the federal level,” says Kevin Ruth, head of wealth planning and personal trust, “it remains important for all households to have a current estate plan that helps ensure their wishes are carried out and reduces the cost of transferring assets as part of an estate.”

The elimination of the alternative minimum tax (AMT)

The AMT was designed to prevent high-income individuals from avoiding income tax by piling up deductions. It is essentially a parallel method for calculating your income tax liability. The proposal eliminates this tax system.

New higher standard deduction

The proposal calls for the combination of the personal exemption and standard deduction into a single higher standard deduction of $12,200 per individual and $24,400 per family for 2018. The proposal calls for increasing the child tax credit from $1,000 to $1,600 and a new tax credit for other dependents of $300. Eligibility for a portion of this credit will not require that the filer pay taxes.

The plan also changes the balance between itemized and standard deductions. Higher standard deductions mean fewer people will qualify for itemized deductions—so deductions like charitable gifts, medical expenses, margin interest, and home mortgage interest will all face a higher threshold before they become useful.

In addition, the proposal directly changes or limits a large number of deductions and credits. Those changes include:

• Mortgage: The deduction would be limited to $500,000 worth of debt instead of the $1 million today, and restricted to the primary residence—taxpayers would no longer be able to deduct mortgage interest for a second home. (Note: For existing mortgages or purchases under contract prior to November 2, the existing rules would still apply.)
• State and local tax deduction: The deduction for state and local property tax would be capped at $10,000 and no deduction would be permitted for state and local sales tax.
• Medical expense deduction: The proposal would repeal the medical expense deduction.
• Adoption expense tax credit: This would be eliminated.
• Electric vehicle tax credit: This would be eliminated.

Changes in education incentives

The House proposal would overhaul the credits and incentives for education. First, it would eliminate the Hope Scholarship, Lifetime Learning Credit, and deduction for qualified expenses, consolidating them all in the American Opportunity Tax Credit.

No new contributions would be permitted to Coverdell accounts; instead, those accounts could be rolled into 529 plans, which could be used for elementary and high school expenses, in addition to qualified higher education expenses.

The student loan interest deduction and the exclusion of interest paid upon the redemption of eligible U.S. savings bonds for higher education (EE and I bonds issued after 1989), would also be repealed.

Less flexible rules for home sales

Homeowners have benefitted from rules that shelter capital gains on a primary residence. A married couple filing jointly could realize up to $500,000 in capital gains without taxation, if they had lived in the home for 2 of the previous 5 years. The proposal would limit this tax benefit to usage once every 5 years, and require residence for 5 of the previous 8 years.

The bottom line

The tax reform process took a major step with the release of this detailed proposal. But it is still far from a finished product. Investors should remember the fundamentals of tax planning and consider taking advantage of deductions, such as charitable giving, this year. But the story is far from complete, so be cautious making decisions based on a proposal. Consult a Fidelity advisor to discuss your strategy and consult a tax professional regarding your personal situation.

• FIDELITY VIEWPOINTS
• – 11/06/2017

WASHINGTON –The Internal Revenue Service today advised taxpayers about steps they can take now to ensure smooth processing of their 2017 #tax return and avoid a delay in getting their refund next year. This is the first in a series of reminders to help taxpayers get ready for the upcoming tax filing season. Additionally, the IRS has a special page on its website with steps to take now for the 2018 tax filing season.

Gather Documents

The #IRS urges all taxpayers to file a complete and accurate tax return by making sure they have all the documents before they file their return, including their 2016 tax return. This includes Forms #W-2 from employers, Forms 1099 from banks and other payers, and Forms 1095-A from the Marketplace for those claiming the Premium Tax Credit. Doing so will help avoid refund delays and the need to file an amended return later. Confirm that each employer, bank or other payer has a current mailing address.

Typically, these forms start arriving by mail in January. Check them over carefully, and if any of the information shown is inaccurate, contact the payer right away for a correction.

Taxpayers should keep a copy of their 2016 tax return and all supporting documents for a minimum of three years. Doing so will make it easier to fill out a 2017 return next year. In addition, taxpayers using a software product for the first time may need the Adjusted Gross Income (AGI) amount from their 2016 return to properly e-file their 2017 return. Learn more about verifying identity and electronically signing a return at Validating Your Electronically Filed Tax Return.

Renew Expiring #ITINs

Some people with an Individual Taxpayer Identification Number (ITIN) may need to renew it before the end of the year. Doing so promptly will avoid a refund delay and possible loss of key tax benefits.

Any ITIN not used on a tax return in the past three years will expire on Dec. 31, 2017. Similarly, any ITIN with middle digits 70, 71, 72 or 80 will also expire at the end of the year. Anyone with an expiring ITIN who plans to file a return in 2018 will need to renew it using Form W-7.

Once a completed form is filed, it typically takes about seven weeks to receive an ITIN assignment letter from the IRS. But it can take longer — nine to 11 weeks — if an applicant waits until the peak of the filing season to submit this form or sends it from overseas. Taxpayers should take action now to avoid delays.

Taxpayers who fail to renew an ITIN before filing a tax return next year could face a delayed refund and may be ineligible for certain tax credits. For more information, visit the ITIN information page on IRS.gov.

Refunds Held for Those Claiming #EITC or #ACTC Until Mid-Feb

By law, the IRS cannot issue refunds for people claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) before mid-February. The law requires the IRS to hold the entire refund — even the portion not associated with EITC or ACTC. The IRS expects the earliest EITC/ACTC related refunds to be available in taxpayer bank accounts or debit cards starting on Feb. 27, 2018, if direct deposit was used and there are no other issues with the tax return. This additional period is due to several factors, including the Presidents Day holiday and banking and financial systems needing time to process deposits. This law change, which took effect at the beginning of 2017, helps ensure that taxpayers receive the refund they’re due by giving the IRS more time to detect and prevent fraud.

As always, the IRS cautions taxpayers not to rely on getting a refund by a certain date, especially when making major purchases or paying bills. Though the IRS issues more than nine out of 10 refunds in less than 21 days, some returns require further review.

For a #Faster #Refund, Choose #e-file

Electronically filing a tax return is the most accurate way to prepare and file. Errors delay refunds and the easiest way to avoid them is to e-file. Nearly 90 percent of all returns are electronically filed. There are several e-file options:

• IRS Free File,
• Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs,
• Commercial tax preparation software, or
• Tax professional.

Use #Direct #Deposit.

Combining direct deposit with electronic filing is the fastest way for a taxpayer to get their refund. With direct deposit, a refund goes directly into a taxpayer’s bank account. There’s no reason to worry about a lost, stolen or undeliverable refund check. This is the same electronic transfer system now used to deposit nearly 98 percent of all Social Security and Veterans Affairs benefits. Nearly four out of five federal tax refunds are direct deposited.

Direct deposit saves taxpayer dollars. It costs the nation’s taxpayers more than $1 for every paper refund check issued but only a dime for each direct deposit.

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Every #Halloween, #children knock on doors pretending they are everything from superheroes to movie stars. Scammers, on the other hand, don’t leave their impersonations to one day. They can happen any time of the year.

People can avoid taking the bait and falling victim to a scam by knowing how and when the IRS does contact a taxpayer in person. This can help someone determine whether an individual is truly an IRS employee.

Here are eight things to know about in-person contacts from the IRS.

• The IRS initiates most contacts through regular mail delivered by the United States Postal Service.
• There are special circumstances when the IRS will come to a home or business. This includes:
  • When a taxpayer has an overdue tax bill
  • When the IRS needs to secure a delinquent tax return or a delinquent employment tax payment
  • To tour a business as part of an #audit
  • As part of a criminal investigation
• Revenue officers are IRS employees who work cases that involve an amount owed by a taxpayer or a delinquent tax return. Generally, home or business visits are unannounced.
• IRS revenue officers carry two forms of official identification.  Both forms of ID have serial numbers. Taxpayers can ask to see both IDs.
• The IRS can assign certain cases to private debt collectors. The IRS does this only after giving written #notice to the taxpayer and any appointed representative. Private collection agencies will never visit a taxpayer at their home or business.
• The IRS will not ask that a taxpayer makes a payment to anyone other than the U.S. Department of the Treasury.
• IRS employees conducting audits may call taxpayers to set up appointments, but not without having first notified them by mail. Therefore, by the time the IRS visits a taxpayer at home, the taxpayer would be well aware of the audit.
• IRS criminal investigators may visit a taxpayer’s home or business unannounced while conducting an investigation. However, these are federal law enforcement agents and they will not demand any sort of payment.

Taxpayers who believe they were visited by someone impersonating the IRS can visit IRS.gov for information about how to report it.

More Information:

• Tax Scams/Consumer Alerts.