H.R. 1, the Tax Cuts and Jobs Act, is a wide-ranging proposed tax bill addressing many different aspects of the Internal Revenue Code.  The last time such a far-reaching tax act was considered and passed was during the Reagan Administration, 31 years ago.  Introduced by Ways and Means Committee chairman Kevin Brady (R, TX), the proposal is just the first salvo, and there will be many more before this is completed.  Below are the highlights that are included in this proposed legislation.

Individual and Families

  • Tax rates would be reduced for low and middle-income Americans.
    • The rates are 12%, 25% and 35% with breakpoints at higher levels.
    • The top tax bracket remains at 39.6% with this top marginal rate breakpoint increased to $1 million from $480,050 for married couples.
    • For high income taxpayers, the provision would phase out the tax benefit of the 12% bracket.
  • The standard deduction for single individuals has been increased to $12,000 from $6,500 and married couples to $24,000 from $13,000.
  • State and local income tax deductions would be eliminated; however real estate/property taxes will continue to be deductible up to $10,000.
  • Interest on home mortgages on the principal residence would still be deductible
    • Interest on mortgages for principal residences purchased after November 2, 2017 would be limited to $500,000 of principal. There are exceptions for houses under binding contracts.
    • Existing mortgages (now limited to $1 million principal and up to $100,000 of home equity indebtedness) would be grandfathered in.
    • Refinancing of grandfathered mortgages is allowed with certain limitations (no cash out, only through the term of the original indebtedness)
  • The Child Tax Credit will be increased from $1,000 to $1,600, and will provide a credit of $300 for each parent and non-child dependent.
  • Charitable contributions will continue to be deductible. Ceiling for cash contributions increased from 50% to 60%.
  • Higher education benefits have been modified and enhanced.
  • The Earned Income Tax Credit survives
  • 401(k) plans and other retirement vehicles will continue unaffected.
  • The Alternative Minimum Tax is being repealed.
  • The following individual deductions would be eliminated:
    • Student loan interest deduction;
    • Medical expense deduction;
    • Moving deduction;
    • Alimony payment;
    • Tax preparation fees; and
    • Employee business expenses
  • The Estate Tax exemption would double (currently at $5.49 million to approximately $11 million) and be repealed after six years
  • There is currently no change to the treatment of carried interest.

Businesses

  • The maximum corporate tax rate would be reduced to 20%.
    • Currently the top tax rate is 35%.
  • Pass-through entity income (S Corporation and Partnership income) would be capped at 25% on “Business Income”.
    • Currently, the top rate is the highest individual income tax rate of 39.6%.
    • When the owner or shareholder is materially active, a determination is made as to how much of the income will be subject to the 25% vs 39.6% on the compensation portion.
    • The 25% tax rate would not apply not wages.
  • New equipment will be deductible upon purchase/utilization rather than depreciated/amortized over their respective lives.
    • This proposal would sunset after five years.
  • Interest on business loans will continue to be deductible with certain limitations.
  • Real estate businesses will be allowed full deduction on business interest; however, the full expensing provision would not apply.
  • Utilization of net operating losses would be limited to 90% of taxable income for the year.
  • The low income housing credit will continue in effect.
  • The research and development tax credit will continue in existence.
  • The wage tips credit is modified to account for higher minimum wages in effect
  • The following business deductions and credits would be eliminated:
    • Domestic production activity deduction;
    • Charitable contributions deduction for certain contributions to colleges and universities;
    • Expenses relating to certain entertainment facilities
    • Orphan drug credit for testing drugs for rare diseases
    • Energy production credit
    • Energy investment credit
    • Work opportunity tax credit
    • Unused business credit carryforwards beyond 2017
  • Unrepatriated foreign earnings would be deemed repatriated at reduced rates (12% or 5%)
  • Incentives that currently reward companies shifting jobs, profits and manufacturing plants abroad would be eliminated

If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting Specialists, or call us at 1-800-239-1474.