Tax Reform Bill: Tax Cuts and Job Acts

November 4, 2017 | Britany Foley

On November 2, 2017, a comprehensive tax reform bill called the “Tax Cuts and Jobs Act” was released by the House Ways and Means Committee. While the Committee’s product is on the House floor, the Senate will be completing and releasing a Senate Republican version of a tax reform bill within the near future. The goals are for both the House and Senate to pass their respective tax reform bills by Thanksgiving and to agree to a single bill before year-end.

Individual Taxes

For individuals, the House bill is pursuing rate reduction, simplicity and fairness amongst the nations’ households.

Tax Brackets

Currently, there are 7 tax brackets in effect, ranging from 10 to 39.6 percent. The house bill aims to reduce the applicable brackets to four:

  • 12% would apply to the first $45,000 in taxable income for single filers and the first $90,000 for joint filers.
  • 25% would apply to taxable income over $45,000 for single filers and $90,000 for joint filers.
  • 35% would apply to taxable income over $200,000 for single filers and $260,000 for joint filers.
  • The 39.6% rate would apply to taxable income over $500,000 for single filers and $1 million for joint filers.

Capital Gains and Dividends

The capital gains and dividends rates would remain at their current 0%, 15% and 20% rates. These income classes would continue to be subject to the 3.8% net investment income tax when adjusted gross income exceeds certain threshholds.

Standard Deduction and Exemptions

The House bill nearly doubles the current standard deduction, increasing the amounts to $24,400 for joint filers, and $12,200 for single filers. Personal exemptions would be eliminated.

Additional Individual Tax Provisions

The House bill would modify or eliminate several of the currently availableitemized deductions and credits.

  • The principal cap on deductible home mortgage interest for new mortgages would be reduced from $1 million to $500,000. Second homes and home equity lines of credit would no longer be considered qualified home mortgage interest for purposes of the deduction.
  • The deduction for state and local income taxes would be repealed. The allowable deductions for property and real estate taxes paid would be capped at $10,000.
  • The deduction for medical expense, casualty losses, tax preparation expenses, alimony payments, moving expenses, and Archer Medical Savings Account contributions would be repealed.
  • The ownership period for the exclusion of gain from the sale of a principal residence would be extended from two out of the previous five years to five out of the previous eight years.
  • The exclusion for employer-provided dependent care assistance programs, moving expense reimbursement and adoption assistance programs would be repealed.
  • The Pease limitation on itemized deductions would be repealed.
  • Alternative Minimum Tax would be repealed.
  • The child credit would increase from $1,000 to $1,600. The phase-out would increase to $115,000 for single filers and $230,000 for joint filers.
  • The House bill would consolidate the three existing higher education credits into one modified American Opportunity Tax Credit, which would provide a 100% credit for the first $2,000 of expenses, and a 25% credit for the next $2,000 of expense for first four years of education.
  • The repeal of the above-the-line deductions for student loan interest and qualified tuition and related expenses would be repealed.
  • No major changes to defined contribution plans.

Business Taxation

Tax Rates

  • Corporate Tax rate would be 20%
  • Individuals with pass-through qualified business income (QBI) would be taxed at 25%. In summary, QBI would be 100% of “net business income” derived from a “passive business activity” and 30% of any “net business income” derived from any “active business activity”. However, businesses that offer professional services wouldn’t qualify for the reduced rate. It is unclear at this point exactly how “professional services” would be defined but it is presumed that doctors, lawyers, accountants, designers, etc. would be included in this definition.
  • The bill would repeal the Corporate alternative minimum tax.

Additional Business Tax Provisions

  • Businesses will have the option to expense 100% of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.
  • The deduction for net interest expense incurred by C Corporations will be partially limited.
  • Section 199 deduction would be repealed.
  • Section 179 expensing would be expanded by increasing the dollar limitation to $5 million and increasing the phase-out to $20 million.
  • Net operating losses would be limited to 90% of a C-Corporation’s taxable income. Carryback provisions would be repealed, however NOLs arising after 2017 could be carried forward indefinitely.
  • Like-kind exchanges would be only eligible for real property.
  • The House bill would repeal or terminate many credits including the tax credit for employer-provided childcare, rehabilitation tax credit for old and/or historic building and the work opportunity tax credit.

International

The House bill would move to a territorial system of taxing foreign earnings with anti-base erosion provisions targeting both US-based and foreign-based multinational companies. Significantly, the bill includes a new excise tax on otherwise deductible payments from US companies to related foreign companies that acts similar to the border adjustment in the House Republican Blueprint, but only for outbound payments. The adoption of a territorial tax system includes a one-time transitional tax on accumulated foreign earnings, determined as of November 2, 2017, or December 31, 2017 (whichever is higher), at 12% for cash and cash equivalents and 5% for illiquid assets, and payable over up to eight years.

Over the next month, the House and Senate will be working diligently to finalize their tax reform plans. We will continue to keep you up to date as more information becomes available.

For additional information, or if you have specific questions or concerns, please contact Britany Foley, or any of your trusted advisors at HHM, today.

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