BHBM Tax Law *Special* Alert | House Releases Tax Bill
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Metairie Seminar – November 8, 2017
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FEDERAL TAX LAW UPDATE
House Unveils Long-Awaited Tax Bill
On November 2, 2017 the House Ways and Means Committee released its initial draft of a tax bill, which is subject to modification by both the House and Senate. Highlights of the draft bill are set forth below.
Individual Tax Changes:
- Reduced income tax brackets: The bill would reduce the number of tax brackets from seven to four: 12% on income up to $45,000 for individuals and $90,000 for married couples, 25% on income up to $200,000 for individuals and $260,000 for married couples, 35% on income up to $500,000 for individuals and $1,000,000 for married couples, and 39.6% on income over $500,000 for individuals and $1,000,000 for married couples. In addition, there would be an effective fifth bracket at zero percent in the form of the enhanced standard deduction. For single parents filing as a head of a household, the bracket thresholds would be the midpoint between the thresholds for unmarried individuals and married taxpayers filing jointly, except that the 39.6% threshold for heads of household would be $500,000.
- Increased standard deduction: The standard deduction would be increased from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples. Single filers with at least one qualifying child could claim a standard deduction of $18,000 (up from $9,350). The standard deduction amounts would continue to be adjusted for inflation as under current law.
- Personal exemptions: The personal exemptions for the taxpayer, his/her spouse and any dependents would be repealed.
- Eliminated itemized deductions: The bill would eliminate most itemized deductions, including the tax preparation expense deduction, the medical expense deduction, the deduction for alimony payments, the deduction for moving expenses, the deduction for contributions to a medical savings account and the deductions for unreimbursed employee expenses.
- Decreased state and local tax deduction: The bill would permit individuals to deduct state and local property taxes up to $10,000, but not income or sales taxes unless paid or accrued in a trade or business.
- Decreased mortgage interest deduction: The bill would cap the mortgage interest deduction for newly purchased homes at $500,000 for married couples, down from $1,000,000 under current law. For existing mortgages, the deduction would be preserved. The bill provides that interest is only deductible on the taxpayer’s principal residence.
- Increased child tax credit and new family tax credit: The bill would increase the credit from $1,000 to $1,600 per child under the age of 17. Additionally, each parent is permitted a $300 credit as part of a consolidated family tax credit.
- Changes to charitable contribution rules: The bill would make several changes to the rules applicable to charitable contributions, including increasing the AGI limitation for cash contributions to public charities from 50% to 60%.
- Retained credits: The bill would retain the research and experimentation credit and low-income housing tax credit.
- Repeal of alternative minimum tax (AMT): The bill would repeal the AMT.
- Eliminated estate tax: The bill would initially double the basic estate tax exclusion amount from $5.49 million (as of 2017) to $10 million, which would be indexed for inflation. Commencing on January 1, 2024, the bill would fully eliminate the estate tax while maintaining a beneficiary’s stepped-up basis in estate property.
- Decreased gift tax: The bill would lower the top gift tax rate from 40% to 35% and retain a basic exclusion amount of $10 million and an annual exclusion of $14,000 (as of 2017), which would be indexed for inflation.
- Repeal of rehabilitation credit: The bill would repeal the credit for expenses incurred to rehabilitate old and/or historic buildings. The bill would provide a transition rule for expenditures incurred through the end of a 24-month period, which must begin within 180 days after January 1, 2018.
- Changes to like-kind exchanges: The bill would revise the like-kind exchange rules to allow like-kind exchanges only for real property (i.e., no personal property exchanges unless relinquished personal property is disposed of or replacement property is acquired prior to 12/31/17).
Business Tax Changes:
- Reduced corporate rate: The bill would immediately and permanently cut the corporate tax rate from 35% to a flat 20% rate; provided, however, that personal service corporations would be subject to a flat 25% tax rate.
- Reduced pass-through entities rate: The bill would reduce the tax rate on a portion of the income distributed by pass-through entities to 25%; the remaining income would be treated as compensation, taxable at ordinary income rates. For active owners, the bill stipulates two options for determining how the owners can distinguish their wages from their business profits. The owners can choose to categorize 70% of their income as wages, subject to ordinary rates, and 30% as business income, taxable at the 25% rate. Alternatively, the owners can choose to set the ratio of their wage income to business income based on the level of their capital investment. Currently, income earned by pass-through entities is passed through and subject to tax at the individual owner level.
- Business expensing: The bill would allow businesses to fully and immediately deduct 100% of the costs of “qualified property.” Furthermore, the bill would expand the property eligible for immediate expensing. Currently, the cost of capital investments is generally deducted from income over multiple years through a depreciation deduction.
- Multinationals: The bill would create a territorial tax system. Currently, companies are taxed on their worldwide income.
View the complete text of the bill, here.