The House of Representatives has passed a tax reform bill, which for the first time since the 1980’s, would enact fairly comprehensive changes to our Tax Code. The Senate is now working to pass its own version. I have received many questions from clients seeking details on how these changes will impact them. In very general terms, there are some good provisions for taxpayers, as well as some that could negatively impact your tax scenario. I am waiting until we get closer to an actual bill that would go to the President to begin advanced tax planning strategies, but at this point wanted to keep you updated on where we are now.
Below is a summary of the major provisions of the House package:
• Individual Income Tax Rates and Brackets: Consolidates the current seven income tax rates into four, while retaining the top marginal rate of 39.6 percent.
• Standard Deduction: Increases the standard deduction to $12,200 for single filers, $18,300 for heads of household, and $24,400 for joint filers.
• Itemized Deductions: Retains the state and local property tax deduction, capped at $10,000, while eliminating the remainder of the state and local tax deduction, except for taxes paid or accrued in carrying on a trade or business; limits the mortgage interest deduction to the first $500,000 in principle value.
• Child and Family Tax Credits: Increases the child tax credit value to $1,600, with the phaseout for joint filers beginning at $230,000, while creating a new $300 per-person family tax credit for those not eligible for the child tax credit, to expire after five years.
• Treatment of Pass-Through (LLC and Sub Chapter S Corporations) Income: Caps the pass-through rate at 25 percent and adds a lower minimum rate, with anti-abuse rules.
• Corporate Income Tax: Cuts the tax rate to 20 percent, effective tax year 2018.
• Capital Investment: Increases the Section 179 small business expensing cap from $500,000 to $5 million, with the phaseout beginning at $20 million, and maintains current depreciation schedules for real property.
• Tax Treatment of Interest: Caps the net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA).
• Business Credits and Deductions: Eliminates credits for orphan drugs, energy, private activity bonds, rehabilitation, and contributions for capital, among others.
• International Income: Moves to a territorial system with base-erosion rules. Currently US taxpayers are taxed on world-wide income regardless of where earned. An anomaly in international tax theory.
• Deemed Repatriation: Enacts deemed repatriation of currently deferred foreign profits at a rate of 14 percent for liquid assets and 7 percent for illiquid assets.
• Estate Tax: Increases the exemption to $10 million, indexed for inflation, with repeal after six years.
Stay tuned as this will change dramatically as we work through the legislative process.