GOP Leaders Reveal Tax Reform Bill

On Nov. 2nd, Kevin Brady, Chairman of the House Ways and Means Committee, introduced the “Tax Cuts and Jobs Act” (H.R. 1) which would overhaul and “simplify” the tax code.  We have summarized below some of the more prevalent provisions, most of which would be effective for tax years beginning after 2017.  However, keep in mind that there are many more steps in the legislative process before any of this becomes law and we are likely to see significant changes from the current draft.  It’s also important to note that if this ultimately comes to fruition through the budget process, all of these changes could “sunset” at the end of the 10 year budget cycle.

Changes for Individual Taxpayers

• Revised individual tax rates – 12%, 25%, 35% and 39.6% (this eliminates the 10%, 15% and 28% brackets).
• “Business income” from pass-through business would be taxed at 25% for individuals. Calculation of this “business income” is complex and will be the subject of additional debate.
• Enhanced standard deduction – the standard deduction for single filers would increase from $6,350 to $12,000. The standard deduction for married filing joint filers would increase from $12,700 to $24,000.
• Changes to certain itemized deductions:
  – Mortgage interest deduction – For new acquisition debt, mortgage interest would only be allowed on the first $500,000 (instead of $1,000,000).
  – State and local income tax deduction – eliminated for state and local taxes on non-business income.
  – Real estate tax deduction – allowed up to $10,000.
  – Overall limitation on itemized deductions – eliminated.
  – Casualty loss deduction – eliminated, except for those in a special disaster relief area.
  – Charitable contribution deduction – increase to the AGI limitation for certain cash contributions from 50% of AGI to 60% of AGI.
  – Medical expense deduction – eliminated.
  – Certain miscellaneous itemized deductions – eliminated. These would include employee business expenses and tax preparation fees.

• Repeal of deduction for alimony payments – alimony payments would not be deductible by payor. or includible in income of the payee. Effective for divorce agreements executed after 2017.
• Moving expense deduction – eliminated.
• Child tax credit – increased child tax credit of $1,600 (currently $1,000), with an additional $300 tax credit for non-child dependents.
• Alternative minimum tax – repealed.
• Student loan interest – above the line deduction would be repealed.
• Tuition deduction – above the line deduction would be repealed.
• Gains from the sale of a personal residence – the current exclusions for gains would be limited and phased out for those with AGI in excess of $500,000.
• Estate taxes – the current estate exclusion amount would be doubled, resulting in an increase from $5.49 million to $11 million beginning after 2017. Beginning in 2023, the estate tax would be repealed while maintaining a beneficiary’s stepped-up basis in estate property.
• Gift taxes – the annual gift exclusion amount would remain in place ($14,000 per year per person in 2017 / $15,000 in 2018), but the lifetime basic exclusion would increase to $11 million and the top tax rate would be reduced to 35%.

Changes for Businesses

• Lowered corporate tax rate – reduced tax rate to 20% from current rates which max at 35%.
• Bonus Depreciation – generally 100% deduction for assets placed in service between September 27, 2017 to December 31, 2022. This change does not apply to Real Property businesses.
• Sec. 179 Expensing – increases limits to $5 million from $500,000 for property placed in service through 2022. The phase-out cap increases to $20 million from $2 million.
• Alternative Minimum Tax – repealed.
• Cash Accounting Method – this method is now allowable for any business with gross receipts under $25 million, including those using inventory.
• Interest Deductibility – only allowed to the extent less than 30% of adjusted net income. Depreciation, interest and NOLs are added back to the calculation. Does not apply to Real Property businesses.
• Net Operating Losses (NOLs) – limited to 90% of taxable income and generally no carrybacks allowed.
• Domestic Production Activities Deduction (Sec. 199) – eliminated completely beginning in 2018.
• Meals & Entertainment – no deductions for any entertainment allowed.
• Repeal of Credits – beginning in 2018, the Child Care Credit, Rehabilitation Credit, Work Opportunity Tax Credit, among others, are eliminated.
• Executive Compensation over $1 million – rules tightened to get rid of ‘performance based’ and other exceptions. Compensation over $1 million will generally not be deductible regardless of form.
• Nonqualified Deferred Compensation – all subject to tax when substantial risk of forfeiture removed.  Older plans are grandfathered until 2026.

The full 429 page legislative text of the Tax Cuts and Jobs Act can be found on the Ways and Means website.

We will continue to monitor the legislative progress of H.R.1 and will provide updates as soon as they are available.