House releases "Tax Cuts and Jobs Act"

November 3, 2017

On Thursday, Nov. 2, 2017, the House Republican leaders released the "Tax Cuts and Jobs Act" in a 429-page document. The bill makes a number of substantial changes to the federal income tax law. Republican House leadership (Ways and Means Committee Chair, Kevin Brady, R-Tex.) is indicating probable approval by the House of Representatives by Thanksgiving. In our first review of this lengthy document, we note the following items have been changed and/or maintained under the bill (most changes are effective in 2018):

1. The number of individual tax rates is reduced from seven brackets to five: 0%, 12%, 25%, 35% and 39.6%. The top rate on ordinary income continues to hold at 39.6% for taxable income greater than $1 million for married couples filing jointly (the tax benefit of the 12% rate is phased out for married taxpayers filing joint returns with taxable income of over $1.2 million).
2. Personal exemptions are eliminated; however, the standard deduction for married persons filing joint returns is doubled to $24,000, and the child tax credit would be increased from $1,000 to $1,600.
3. The individual alternative minimum tax is repealed.
4. The bill makes no changes to rules on 401(k) plans.
5. The deduction for state and local income taxes would be eliminated, and the deduction for real estate property taxes would be limited to $10,000.
6. The deduction for home mortgages continues to be allowed but only on a maximum mortgage balance of $500,000, down from a maximum mortgage balance of $1 million under current law. This change would apply to mortgage debt incurred after Nov. 2, 2017.
7. The itemized deduction for charitable contributions continues, with an increased limit to 60% of adjusted gross income from the 50% of adjusted gross income limitation under current law.
8. The deduction for alimony and the itemized deduction for medical expenses would be repealed.
9. Like kind exchanges (which allow deferral of taxable gain if the requirements of Sec. 1031 are met) would be allowed only for real property interests.
10. The estate tax could be repealed for those dying after 2023. For years after 2017 through 2022, the lifetime exclusion is increased to $10 million per person. Full basis step-up after death is maintained for all years.
11. The top corporate tax rate is reduced to 20% (25% for personal service corporations) from the current top rate of 35%.
12. The business interest expense deduction is limited to the sum of business interest plus 30% of other business income.
13. The income taxed to an individual from a pass-through entity (partnership or S-corporation) may be partially or entirely subject to the 25% tax rate depending on the individual’s involvement in the business. Where the individual taxpayer does not materially participate in the business, then the entire pass-through income is eligible for the 25% tax. Where the individual does materially participate in the business, then the income must be divided between a return on capital (eligible for the 25% rate) and the rest of the business income, which will be taxed at the regular rates.
14. For taxable years 2018 through 2022 the immediate expensing of eligible assets under Sec. 179 is allowed for up to $5 million of property placed in service in a tax year, and increase from the current limit of $500,000. The phase-out of the Sec. 179 expense amount begins at $20 million. For the same 2018 through 2022 period, there is also an expansion of bonus depreciation.

The success of this bill cannot be predicted; however, we will monitor the progress of the bill over the upcoming months. For questions, please call 888-556-0123. For more tax-related updates, visit our blog.