On Thursday, the House Ways and Means Committee released a 429-page bill aimed at tax reform. The Tax Cuts and Jobs Act has winners and losers. The losers are already lining up to lobby for changes to reinstate and protect their precious “sacred cows” Thus, as you would expect, this legislation has a long way to go before it is on the President’s desk. Here is a brief summary of this first try at tax reform1.
- Individual rates would be reduced.
|Proposed Tax Rates and Brackets|
|25%||$45,001 – $200,000||$90,001 – $260,00||$45,001–$130,000||$67,501– $230,00|
|39.6%||Over $500,000||Over $1,000,000||Over $500,000||Over $500,000|
2. Personal exemptions would be eliminated.
3. The child tax credit would be increased from $1,000 to $1,600 for a qualifying child. The refundable portion would remain $1,000. A $300 credit would be added for the taxpayer and spouse and other dependents to 2023. The phase-out for the credits would be increased to $115,000 for single and $230,000 for MFJ (currently $75,000 and $110,000, respectively.)
4. The standard deduction would be increased to $12,2002 single, $18,300 HOH and
$24,400 MFJ. The additional standard deduction for the elderly and the blind would be repealed.
5. The phaseout of itemized deductions would be repealed.
6. AMT would be repealed. AMT credit carryovers would reduce regular tax in 2018, and then become 50% refundable 2019–2021. Any unused AMT credit carryover would be 100% refundable in 2022.
7. For sales and exchanges after Dec. 31, 2017, §121 exclusion of gain on the sale of a personal residence would be modified to require that the home be owned and used for five of the last eight years. Section 121 would be modified to phase-out the exclusion based on AGI above $250,000 ($500,000 MFJ).
8. The credits for adoption and plug-in electric vehicles would be repealed.
9. The exclusions for employee achievement awards, dependent care assistance programs, moving expense reimbursement, and adoption assistance programs would be repealed.
10. Education credits would be consolidated into an enhanced American Opportunity Tax Credit (AOTC). The AOTC would remain the same at 100% of the first $2,000 and 25% of the next $2,000. The AOTC would be available for five years (the fifth year at ½ the rate of the first four years.)
11. The deduction for interest on student loans would be repealed. The exclusion for interest on US savings bonds used for higher education expenses would be repealed. The exclusion for employer provided education assistance programs would be repealed.
12. The special rule permitting a recharacterization of Roth IRA contributions as traditional IRA contributions would be repealed.
13. The moving expense deduction would be repealed.
14. The alimony paid deduction would be repealed for agreements executed after Dec. 31, 2017. There would be a corresponding repeal of the provisions providing inclusion of alimony in gross income.
15. The phase-out of itemized deductions would be repealed.
16. The medical expense deduction and the deduction for state and local taxes would be repealed.
17. The mortgage interest deduction would be reduced from acquisition debt amounts of $1,000,000 to $500,000 for new home purchases on or after Nov. 2, 2017. Interest on home equity borrowing after the effective date of the law would be repealed.
18. Mortgage interest deduction would be limited to one qualified residence.
19. The 50% AGI limitation on cash contributions to public charities and certain private foundations would be increased to 60%.
20. Charity mileage would be indexed for inflation (finally.)
21. Miscellaneous itemized deductions for employee business expenses, personal casualty losses, and tax preparation fees would be repealed.
22. The exclusion for housing provided for the convenience of an employer and for employees of educational institutions would be limited to $50,000 and would phase-out beginning at AGI of $120,000. The exclusion would be limited to one residence.
23. The estate, gift, and generation skipping transfer tax exemption amount would be increased to $10,000,000 for decedents dying after Dec. 31, 2017. Estate taxes would be repealed after Dec. 31, 2023.
24. Maximum corporate tax rates would be reduced to 20% from 35%. For a personal service corporation, the maximum rate would be 25%.
25. Dividends received by a domestic corporation from a specified 10%-owned foreign corporation would be allowed as a deduction in an amount equal to the foreign-source portion of such dividend.
26. A portion of net income distributed by a pass-through entity to an owner or shareholder would be treated as “business income” subject to a maximum rate of 25%. Provisions are included to guard against reclassifying wages as business income to utilize the lower rate.
27. The 100% bonus depreciation (§168(k)) would be extended through Dec. 31, 2022.
28. Section 179 expensing would be increased to $5,000,000 for taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2023. A phase-out would apply if the business places in service more than $20,000,000 of §179 property during the taxable year.
29. The gross receipts test on the use of the cash method of accounting by a corporation or partnership with a corporate partner would be increased to $25,000,000.
30. Interest deduction would be limited for large corporations and partnerships. Businesses with gross receipts of less than $25,000,000 would be exempt.
31. The NOL carryback would be eliminated except for a one-year carryback for eligible disaster losses. The NOL carryforward would be indefinite (currently 20 years) but limited to 90% of taxable income (like AMT limitation now.).
32. Section 199 deduction for income attributable to domestic production activities would be repealed.
33. Self-created property (patent, invention, design, formula, or process) would not be treated as a capital asset.
34. Incentive stock options would be treated like non-qualified stock options (taxed at exercise unless subject to forfeiture or §83(b) election).
35. Section 1031 would apply to real property exchanges only.
36. Rehabilitation credit, work opportunity credit, and disabled access credit would be repealed.
37. No tax-exempt bonds could be issued for professional stadiums.
As you read the list of proposed changes, some will make you say, “Oh, for heaven’s sake, that will never fly.” Correct, but there can be no debate until something, anything, is put in writing. Congratulations to the Ways and Means Committee. In a week or so, we’ll see what Senate Finance proposes. And then the battle really begins.
For sure, the Democrats will vote against the legislation. Republicans are already acknowledging ringing phones from constituents, donors, and lobbyists. Even though it is certain that many of these proposals will not find their way into a final tax reform bill, our clients will appreciate our (crystal ball) thoughts on their own “sacred cow” threatened in the Tax Cuts and Jobs Act.
1Most of provisions in the Tax Cuts and Jobs Act would be effective for taxable years beginning on or after Jan. 1, 2018.
2Standard deduction amounts shown are the 2018 numbers adjusted for inflation as provided in the text of the Tax Cuts and Jobs Act.
©2017 Sharon Kreider