The Republican controlled House of Representatives unveiled their first draft at tax reform on November 2, 2017. The 429 page H.R. 1 bill proposes significant changes to individual, business, gift and estate taxes. The House Ways and Means Committee also released a shorter 82 page summary version of the bill. The Senate is expected to release their version of the bill sometime soon. As with most new legislation, this bill will most certainly change in scope before it is voted on by both chambers.
The number of tax brackets would reduce from seven to four. The brackets would be 12%, 25%, 35% and 39.6%. The filing statuses of single and married filing separately would be combined into a single status using half the rates of the married filing jointly status. For high-income earners, over $1 million for single filers or $1.2 million for joint filers, a phase out of the lower tax brackets would exist in the form of an additional 6% tax for the income normally taxed in the lower brackets.
The standard deductions would double from existing amounts and the personal exemptions would be repealed.
For owners of pass-through entities, the tax rate would be lowered to 25%. However, there are various caveats that would cause certain amounts to be reclassified as ordinary income and not be eligible for the 25% tax rate. Currently there are exclusions for most all professional service and consulting business entities. The current rules are complex and appear to go against the “tax simplification” approach the Republicans promised.
The child tax credit would be increased and enhanced to $1600 per child and the phase-out threshold would be significantly increased. A new, temporary, family tax credit would be introduced to help ease the repeal of the personal exemptions.
The various education credits currently available would be combined into an enhanced American Opportunity Credit. Contributions to Coverdell education savings accounts, after 2017, would be prohibited. Section 529 plans would be modified to allow for elementary and high school expenses in addition to the already allowed use for college tuition.
Certain other deductions would be fully repealed: Student loan interest, itemized medical deductions, personal casualty losses, tax preparation fees, alimony payments (and the associated income inclusion), moving expenses, employee business expenses and various others. State and local income tax and sales tax deductions are also scheduled for repeal.
Mortgage interest deduction would be modified to limit it on the first $500,000 of a primary home. There would be no deduction for a second home or home equity indebtedness from refinancing. Existing mortgages and home equity indebtedness would be grandfathered in and maintain the old rules.
Primary home sale exclusion would be modified to be phased out if your income is over $500,000 for a joint return ($250,000 for single). In addition, to qualify for the exclusion you would need to live in the primary home for five of the last eight years and could only claim a primary exclusion once in a five-year period.
Alternative Minimum Tax would be fully repealed.
Estate & Gift
The lifetime exclusion would be doubled to $10 million and indexed for inflation. The tax rate would be lowered to 35%. Beginning after 2023 the estate tax would be fully repealed while maintaining a beneficiary’s stepped-up basis in the inherited property.
Corporate tax rates would be lowered to a flat 20% rate for all income levels beginning in 2018. Personal service corporations would be subjected to a flat 25% rate.
Both Section 168(k) bonus depreciation and Section 179 depreciation would be modified. Bonus depreciation would go from 50% to 100% until 2023 before it expires. Used property would also qualify for bonus if it was the taxpayer’s first use of the property. Section 179 expensing would be increased to $5 million and indexed for inflation. This is up from the $500,000 level presently.
Other areas of change would include the level of deductibility of interest expense, net operating loss changes and limiting the types of property that qualify for the tax deferred like kind exchanges.
Certain deductions and credits would be fully repealed: DPAD, entertainment expenses that were previously limited to 50% deductions, employer provided child care credit, rehabilitation credit, work opportunity credit and new markets tax credit.
It’s best to think of the current Republican bill as a very rough first draft. This bill will most certainly change in scope, size and areas affected to garner enough votes for passage. The Senate will also offer significant changes. We will continue to update as changes are made.
As always, our tax advisors are here to help if and when the bill passes.