The House Ways and Means Committee just released the details of their tax reform bill and will start hearings next week. The Senate Finance Committee will roll out their companion legislation in the next couple weeks.
Many of the provisions are similar to those of the joint framework released in late September. However, now we have more specifics, albeit with many gaps still remaining.
The most important points are highlighted here, acknowledging that the legislative process will make significant changes, especially in the Senate. In fact, the final bill will have to look much more like the Senate version to pass with only Republican votes. It appears that there will be no Democratic support.
On the individual side, the current seven income tax brackets would be reduced to four, including keeping a top rate of 39.6%. However, that rate would only apply to taxable income of $1 million for those filing married joint, and $500,000 for others. The other rates are 12%, 25%, and 35%. The standard deduction would be $24,000 for married joint filers and $12,000 for single filers. This is roughly double the current amount, but personal exemptions would be eliminated.
The 12% rate would apply to taxable income between $24,000 and $90,000 for joint filers, with the rate 25% between $90,000 and $260,000, and 35% between $260,000 and $1 million for example. The current lowest individual rate is 10%, and that is one item likely to be looked at closely by the Senate.
Other major individual provisions include an increase to the child tax credit that phases out at a higher income level than currently and retention of the earned income tax credit. These were key elements to meet the promise of a middle class tax cut.
On the deduction side, there would be a limit on deductibility of interest on new home mortgages of $500,000 or more and further restrictions on gain exclusion from sales of personal residences. The property tax deduction would be limited to $10,000 and the deduction for state and local income taxes would be repealed. This raises a lot of revenue, but is opposed by major lobbies for homebuilders and realtors and by Republican representatives from high tax states like New York and New Jersey. It is ripe for modification and may be one of the biggest upcoming battles.
The deduction for charitable contributions would be maintained, but deductions for medical expenses, casualty losses, and miscellaneous deductions would be repealed. Contributions to retirement plans would still be deductible, preventing a huge fight that appeared on the verge of breaking out. But, the loss of an itemized deduction for casualty losses in a year of major hurricanes and fires is likely to be unpopular.
Other major items include the repeal of the alternative minimum tax (AMT) and repealing the estate tax in six years, after doubling the estate tax exemption for the intervening years. A likely Senate bill would not include an outright repeal of the estate tax.
On the business side, the 35% corporate tax rate would be reduced to 20% in 2018, instead of being phased in over several years. This, too, is an area where the Senate is likely to adopt some sort of phase-in and maybe not lower the rate as much. Corporate AMT would be repealed.
Most new property subject currently to 50% bonus depreciation would be subject to 100% bonus for assets placed in service before 2023, but most business credits would be repealed, except for the R&D credit. These include the work opportunity tax credit, new markets credit, and others. Also, the Section 199 domestic production deduction (currently 9% of many businesses’ taxable income) would be repealed. There would also be significant changes to US international tax rules.
A very important, but still undefined, provision would be to limit the tax rate applied to a portion of a pass-through business (LLC, S corporation, partnership) income to a maximum rate of 25%. Details on this are still to be worked out.
So, in summary, this is another step in the direction of a major tax overhaul. The House would like to pass their bill by Thanksgiving, in hopes that the Senate could finish its work and get a bill to the President by Christmas. With the other items to be dealt with over the next two months, that is a very aggressive timeframe.
We will keep you updated as further details emerge. If you have questions about how you could be affected, we can help.
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