On November 2, House Republicans unveiled their much-anticipated tax reform legislation, the Tax Cuts and Jobs Act (HR 1).
The legislation seeks to dramatically cut taxes on corporations and consolidate benefits like personal exemptions, the standard deduction, and the child credit for individuals. It would eliminate the alternative minimum tax and estate tax, and pare back certain individual deductions. It would also offer a new low tax rate for owners of “pass-through” businesses like LLCs and partnerships, whose income from their businesses, is taxed as personal income. Please note, unless otherwise disclosed, all proposed changes are effective starting January 1, 2018.
The House plan as it currently stands, is far from final since under Senate rules, some legislation can pass with only 51 votes but only if it doesn’t increase the long-run deficit. So, the current draft of the legislation would probably need 60 votes instead, meaning significant Democratic support.
The following is a summary of the highlights that are in the draft bill. BKC will provide real time updates on the changes that are made to the draft bill as the House Republicans attempt to get a bill to President Trump by Thanksgiving.
The rates would be consolidated from seven to four, while setting a $12,200 standard deduction for single filers and a $24,400 standard deduction for those who file married filing joint. It keeps the current top bracket of 39.6 percent, repeals the personal exemption, and the tax thresholds would be increased annually.
The initial brackets for single filers:
- 12 percent: $12,000 to $45,000
- 25 percent: $45,001 to $200,000
- 35 percent: $200,001 to $500,000
- 39.6 percent: $500,001 and up
NOTE: There is a special phase-out for upper income individuals that increase their income in the 12% bracket up to 39.6%. This phase-out of the 12% bracket begins at an AGI of $1,000,000 for individuals, and $1,200,000 for married couples. Once these income thresholds are reached, a 6% surtax applies effectively creating a new 5th tax bracket at 45.6% before reverting back to 39.6% again
The initial brackets for married taxpayers filing jointly:
- 12 percent: $24,000 to $90,000
- 25 percent: $90,001 to $260,000
- 35 percent: $260,001 to $1 million
- 39.6 percent: $1 million and up
The top tax rate for pass-through businesses (S-corporations, LLCs and partnerships), would be reduced to 25 percent from the current 39.6 percent, while limiting the kinds of income that would qualify.
• Among those who wouldn’t automatically qualify are lawyers, accountants, consultants, engineers, financial services workers, and performance artists.
• Qualified pass-through business owners can choose to count 70 percent of their income as wages — subject to their individual tax rate — and 30 percent as business income, taxable at the 25 percent rate. Or, they can set the ratio of their wage income to business income based on their capital investment.
• The alternative-minimum tax would be repealed, along with the overall limit on itemized deductions.
• The home-mortgage interest deduction would be reduced for new purchases to $500,000 of home mortgage indebtedness from the current $1 million. Interest deductions on homes that are currently owned with mortgages over $500,000 would not be affected.
• The alimony-payment deduction and income recognition would be eliminated.
• The deduction for state and local income taxes would be repealed, while the deduction for state and local property taxes would be capped at $10,000.
• Deductions would be repealed for:
– medical expenses
– tax preparation expenses
– moving expenses
– most personal casualty losses, unless the casualty loss is related to special disaster-relief legislation
– interest on education loans
– qualified tuition and related expenses
– unreimbursed employee business expenses
– home office deductions
– interest on U.S. savings bonds used to pay qualified higher education expenses
• The child tax credit would be increased to $1,600 from $1,000 for each child under age 17, plus another $300 for nonchild dependents and another $300 credit for other dependents.
• The following tax credits would be repealed:
• The adoption tax credit.
• The credit for the elderly and the totally and permanently disabled.
• The credit for plug-in electric vehicles.
• The American Opportunity tax credit, the Hope scholarship credit, and the lifetime learning credit would be combined into one credit, providing a 100% tax credit on the first $2,000 of eligible higher education expenses and a 25% credit on the next $2,000, effective for tax years after 2017.
• The year of residency requirement for a “principle residence” to be eligible for the $250,000/$500,000 gain exclusion on a sale is changed from 2 out of the last 5 years to 5 out of the last 8 years.
What wasn’t changed?
• No repeal of Obamacare’s individual mandate.
• No changes to 401(k) plans (except the bill repeals the rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions and the rule allowing conversion of a traditional IRA to a Roth IRA).
• No change in deductibility of charitable contributions for those who itemize.
• Earned Income Tax Credit is preserved.
• The miscellaneous itemized deduction for advisory fees is not eliminated, although with the elimination of other miscellaneous itemized deductions, it may be more difficult to reach the 2%-of-AGI threshold for deductibility.
• No change to the current tax treatment of qualified dividends and capital gains.
• Tax rates on carried interest.
• The corporate tax rate would be cut to a flat 20 percent from the current maximum of 35 percent.
• Multinational companies accumulated offshore earnings would be taxed as high as 12 percent.
• Cap the deduction for net interest expenses at 30% of adjusted taxable income, except for small businesses.
• The repatriation rate will be a mandatory one-time tax on overseas assets for US companies. Illiquid assets would be taxed at a 5% rate, spread out over a longer period than liquid assets like cash, which would be taxed at a 12% rate.
• Bonus depreciation under Section 168(k)(1)(A) is increased to 100% starting with qualified property placed in service after September 27, 2017 and before January 1, 2023.
• Section 179 expensing limitation ceiling and phaseout thresholds increase to $5 million and $20 million respectively.
• Meals and Entertainment Expenses will be limited to only a 50% deduction for food and beverage and business meals (but not other types of entertainment), and no deduction will be permitted for entertainment, amusement or recreation activities, even if related to the employer’s trade or business.
• The Sec. 199 domestic production activities deduction would be repealed.
• Deductions of net operating losses (NOLs) would be limited to 90% of taxable income. NOLs would have an indefinite carryforward period, but carrybacks would no longer be available for most businesses.
Repeal of the following business credits:
• The work opportunity tax credit.
• The credit for employer-provided childcare.
• The credit for rehabilitation of qualified buildings or certified historic structures.
• The estate tax would be repealed after 2023. Before then, the amount excluded from the tax would be doubled for individuals from the current $5.49 million.
• The top gift tax rate would be cut to 35 percent from 40 percent.
• Increases to $25 million the current $5 million average gross receipts ceiling for corporations generally permitted to use the cash method of accounting and extend it to businesses with inventories. Such businesses also would be exempted from the uniform capitalization (UNICAP) rules.
• The exemption from the percentage-of-completion method for long-term contracts of $10 million in average gross receipts would also be increased to $25 million.
• Like-kind exchanges are amended to only include “real property”, not just “property”. Consequently, vehicle trade-ins will no longer qualify.
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