The House of Representatives Ways and Means Committee released their plan to significantly rewrite the tax code. The Tax Cuts and Jobs Act contains a wide range of changes affecting individuals and businesses. While the bill still needs to pass both houses of Congress and is expected to undergo changes throughout that process, it provides a detailed framework of the House’s specific goals in rewriting the code.
Please click here for a detailed explanation of section-by-section changes: tax_cuts_and_jobs_act_section_by_section
Some of the significant changes are listed below. These provisions generally apply to tax years beginning after 2017.
INDIVIDUALS:
- Tax Rates – The current seven tax brackets would be consolidated into four (12%, 25%, 35% and 39.6%). The income thresholds for married taxpayers filing jointly would be $90,000 for the 25% bracket, $260,000 for the 35% bracket and $1 million for the 39.6% bracket.
- Standard Deduction – The standard deduction would be increased to $24,000 for joint filers and $12,000 for individual filers.
- Personal Exemptions – The deduction for personal exemptions would be repealed.
- Education Incentives – The existing higher education tax credits would be consolidated into a single American Opportunity Tax Credit, providing up to $2,500 of credit. The deduction for interest on education loans and the deduction for qualified tuition would be repealed.
- Itemized Deductions – The overall limitation on itemized deductions would be repealed. But the deduction for medical expenses, state and local income taxes, casualty losses (except for hurricanes) and employee business expenses would not be allowed. Deductible mortgage interest would be limited to interest on loans up to $500,000 (for loans after Nov. 2, 2017). The maximum deduction for property taxes would be $10,000.
- Sale of Principal Residence – The $500,000 gain exclusion would only apply if the home was a principal residence for five out of the previous eight years and would start to phase out if the taxpayer’s adjusted gross income exceeds $500,000.
- Alternative Minimum Tax – The Alternative Minimum Tax would be repealed, both for individuals and corporations.
ESTATE AND GIFT:
The estate and gift tax basic exclusion amount would increase from $5 million to $10 million per person (indexed for inflation). This would apply to tax years 2018-2023. After 2023 the estate and generation-skipping taxes would be completely repealed, and the beneficiaries still receive a stepped-up basis in estate property. The gift tax rate is lowered from 40% to 35%.
BUSINESSES:
- Special Rate for Pass-through Income – A portion of income received by owners of partnerships and S-corporations would be subject to a maximum tax rate of 25%, rather than the current maximum rate of 39.6%
- Corporate Tax Rate – The corporate tax rate would be a flat 20%, a reduction from the current top rate of 35%. Personal service corporations would be subject to a flat 25% rate.
- Increased Expensing – Taxpayers would be able to fully and immediately expense 100% of the cost of qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. Qualified property could include used property, but would not include any property used in a real property trade or business.
- Expansion of Section 179 – The expensing limitation under Section 179 would increase from $500,000 to $5 million and would be indexed for inflation.
- Accounting Methods – The gross receipts threshold for the ability to use the cash method of accounting, having to account for inventory, being subject to UNICAP, and having to use the percentage-of-completion method would increase to $25 million. Businesses with average gross receipts under this threshold could use the cash method and would be fully exempt from the UNICAP rules.
- Business Interest – Businesses would be subject to a disallowance of a deduction for net interest expense in excess of 30% of their adjusted taxable income. This provision would not apply to businesses with average gross receipts of $25 million or less.
- Like-kind exchanges – Deferral of gain on like-kind exchanges would be modified to only allow for like-kind exchanges with respect to real property.
- Domestic Production Activity Deduction – This deduction would be repealed.
- Repeal of Business Credits – The following credits would be repealed, among others:
INTERNATIONAL:
- Foreign Dividend Received by Domestic Corporation – 100% of the foreign-sourced portion of dividend paid by a foreign corporation to a U.S. corporate shareholder that owns 10% or more of the foreign corporation would be exempt from U.S. taxation.
- Deferred Foreign Income – There will be a one-time tax on U.S. shareholder’s pro-rata share of earnings and profits (E&P) from a foreign subsidiary that is owned by the U.S. shareholder by at least 10%. The tax rate would be 12% on cash and 5% on illiquid assets.
- Foreign Tax Credit – Indirect foreign tax credit under §902 will be repealed. No foreign tax credit or deduction will be permitted for taxes paid or accrued with respect to exempt dividends.
- Earnings Reinvested in U.S. Property – The imposition of the current U.S. tax on U.S. corporate shareholders with respect to untaxed foreign subsidiary earnings reinvested in United States property would be repealed.
Please contact us with any questions or to discuss how the proposed tax changes may affect you or your business.
