The Conference Committee has reached a deal on tax reform! The bill will now go to the full House and Senate where it is expected to pass. I will have some year-end tax tips to address the putative new tax law, but for now, I wanted to briefly outline the bill.
There are many big-ticket items that will change. The new law drops the corporate tax rate from 35% to 21%. The top individual tax rate will fall to 37% from its current 39.6%. There will be a new tax deduction of 20% for income from pass-through entities like LLC’s and S-corporations. However, it appears that this deduction will not apply to entities that generate income from services, so it may exclude many small businesses. The Estate tax will remain, however the exemption from that rather draconian tax will be doubled, so less American families will be hit by this tax. The healthcare mandate enacted by the Affordable Care Act will be repealed. The Alternative Minimum tax on Corporations will be repealed although the AMT for individuals remains, albeit with a higher threshold of 1 million dollars for families and $500,000 for individuals.
On the bad side, for some tax payers, is the phase-out of the home mortgage interest deduction for home mortgages over $750,000 as well as a limitation on deductions for state and local income taxes of over $10,000. This could be painful for my clients in high tax states such as New York, California and Illinois. Keep in mind however that many high-income individuals are subject to the Alternative Minimum tax which treats these state and local taxes as a “preference” item thus truncating their deductibility, so high earners may not realize much of a hit to their bottom line tax.
I continue to drill down on the potential new tax law and will update. I am also working on year-end strategies to take advantage of the new law. Stay tuned!