Tax Cut and Jobs Act Introduced

11/6/2017

In the long-awaited announcement, Speaker of the House Paul Ryan and House Ways and Means Chairman Kevin Brady introduced The Tax Cut and Jobs Act. The Act is over 400 pages, so our team is busy digesting it. Here are some highlights: it would create four tax brackets for individuals and lowers tax rates for businesses. For individuals, the bill would also increase the standard deduction and eliminate many itemized deductions. The cash basis method of accounting threshold for corporations and partnerships with a corporate partner has been increased from $5 million to $25 million allowing businesses greater access to cash.

Reconciliation: This Bill, if it is passed, will require simple majorities in the House and Senate. It will also have its provisions expiring in no longer than 10 years. It seems likely there will not be a lot of debate, if any.

Effective date: One significant provision is retroactive to September 27, 2017, which is business full expensing of qualifying property. The majority of provisions are effective for years beginning after 2017, in 2018.

 

Overview:

Individual taxes:

  • 4 tax brackets: 12%, 25%, 35% and 39.6% (on over $1,000,000 of income);
  • Child credit increased to $1,600, non-child dependent credit of $300; $1,000 is refundable; (income limits apply);
  • Personal exemptions eliminated;
  • Alternative Minimum Tax (AMT) eliminated;
  • Student loan interest and tuition deduction eliminated.
  • Phase out of the 12% bracket for high earned over $1M (single) and $1.2M;
  • Brackets indexed for chained CPI;
  • Married filing separate is now like single;
  • Head of Household filing status has its own bracket and uses the single std deduction;
  • Standard deduction increased to $12,000 for single, $18,000 for single with qualifying child and $24,000 for married;
  • Itemized deductions limited to mortgage interest (existing mortgages and new mortgages up to $500,000), property taxes (up to $10,000), and charitable contributions (and only deductible if they exceed the standard deduction);
  • The following itemized deductions are eliminated: medical, casualty losses, tax preparation, unreimbursed employee business expenses, state and local income taxes;
  • Alimony is not deductible, nor included in income;
  • Moving expense deduction is repealed;
  • Principal residence exclusion changed;
  • Repeal of the age 65 with disability credit, adoption credit, and electric plug-in vehicle credit eliminated.

 

Estate and Gift tax:

  • Doubles the exemption now for estate taxes and generation-skipping taxes, phases the estate tax out by 2023;
  • Step-up basis is retained, even after repeal.
  • Gift tax has same exclusion (~$11M), rate lowered to 3%. $14,000 excluded gift remains

 

 

Business taxes:

  • Corporate tax rate cut to 20%;
  • Pass-through taxes for Subchapter S and LLCs at 25%. 70% of pass-through income is assumed to be earned income and subject to individual rates. For personal services, like doctors, lawyers, and accountants, all income is presumed to be earned income and subject to ordinary individual rates. An alternate calculation is available to apply a capital percentage;
  • Full expensing of qualified property, starts 09/27/17, expires in 2023;
  • Deductibility of interest limited to 30% of business taxable income (exemption for businesses with less than $25M of revenue);
  • Like-kind exchanges now only for real estate;
  • Changes to business entertainment deductions;
  • Employer child-care credit repealed;
  • Territorial tax for multinationals;
  • Deemed repatriation of offshore profits (12% tax on cash and 5% on other assets)
  • Cash basis of accounting expanded to businesses with revenues under $25M;
  • Research and development (R&D) credit and low-income housing credit retained.
  • Corporate AMT eliminated.

 

So...what’s next? What happens next is that the Senate will introduce a bill as well, with likely changes to this one. The joint committee will likely hammer out the differences and the joint Bill will be voted on by both houses. Our research team will be working on the activities as the action unfolds. The timeline set by the Bill’s sponsors is tight. We have been formulating planning opportunities for 2017, but there will be a short time window to implement.

Tags: tax