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):
- 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).
- 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.
- The individual alternative minimum tax is repealed.
- The bill makes no changes to rules on 401(k) plans.
- 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.
- 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.
- 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.
- The deduction for alimony and the itemized deduction for medical expenses would be repealed.
- 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.
- The estate tax could be repealed for those dying after 2023.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.
- The top corporate tax rate is reduced to 20% (25% for personal service corporations) from the current top rate of 35%.
- The business interest expense deduction is limited to the sum of business interest plus 30% of other business income.
- 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.
- 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.