Preface: This blog out lines the proposed changes in the tax laws from the Tax Cuts and Job Acts introduced by the House on November 2.
Summary of Proposed Tax Legislation for Individuals and Businesses
Credit: Donald J. Sauder
The House introduced a tax revision to individual and business tax codes on November 2, 2017. The 400+ pages of the introduced tax plan, propose lower tax rates for both business and individual taxpayers. In addition a change to numerous tax credits, and other tax provisions in the plan are for individual taxpayers relevant to say itemized deductions and exemption modifications.
While the tax bill has additional hurdles to clear before passage to law, we think it relevant to keep you apprised of tax code revisions pertinent to your tax filings looking towards 2018.
Individual Highlights
Firstly, individual tax rates are proposed to be simplified to four rates in 2018, e.g. 12, 25, 35, and 39.6 percent. Individual tax payers would be in a 12% effective rate up to $90,000 MJF income or $45,000 filing individually. The 25% bracket would be from $90,000 – $260,000 for MFJ filers, and $45,000 – $200,000 for individual filers; over a $1m would be taxed at 39.6% for MFJ filers. The child tax credit would increase, with a $300 credit for non-child dependents. The proposed plan does not change taxation of qualified dividends or capital gains, nor the Affordable Care Act (ACA) net investment tax or additional Medicare taxes. A joint proposal was filed on November 1, to repeal the employer shared responsibility and individual responsibility required form the ACA.
Standard deductions with the plan are proposed to increase 100% to $24,200 for MFJ filers and $12,200 for individual filers. This is designed to result in fewer itemized deductions. With the increased itemized deduction, it is believed that charitable contributions will decline to non-profit organizations, with less encouragement on the tax benefits for 20%+ of taxpayers who will not benefit from itemized taxes, i.e. simplified tax code. Secondly, with a higher itemized deduction, it is thought to likely have an impact on real estate prices from lower incentive for home mortgage deductions on itemization. The real estate tax deduction would be limited to $10,000.
Federal estate taxes are proposed to be repealed after 2023, with an increased estate exemption increased to $11.2m per person, or $22.4m for couples, for the 2018 tax year. AMT taxes would be erased with the proposed tax provisions beginning in 2018.
Business Highlights
The proposed House Bill sets a 20% corporate tax rate; with a current maximum of 35%, it provides relief for corporations taxed at towering tax costs, and provides incentive to keep businesses from shifting activity out-side borders. In addition, qualified property could be deducted 100% in the current year of purchase, for five-year property, placed in service after October 1, 2017. The Bill would also temporarily increase Section 179 expensing limits to $5m, with a phase-out at $20m for tax years before 2023. This increase would benefit capital expenditure intensive businesses, e.g. transportation and agricultural.
The Code Section 199 domestic production activities deduction, and non-real property like kind exchanges would be eliminated entirely. Those repealed current tax benefits would result in higher taxable income, albeit, at a lower rate for some businesses. The Bill keeps the research and development credit intact. Companies with higher interest costs would have a cap at 30% of adjusted taxable income on interest expenses, with exceptions for some entrepreneurial businesses.
Partnerships, S-Corporations and sole proprietorships paying tax at the pass-through rates currently in place for 2017, would see a top tax rate of 25% for 2018. The Bill proposes a tax fence for services provides, e.g. doctors or lawyers, to prevent the converting of service compensation to business income at the flat 25% rate.
Although there are numerous benefits to the proposed Bill, as with all tax changes, this proposed plan has both rewards and costs relevant to specific taxable circumstances.
This is not to be construed to be tax advice, and is for informational purposes only. Please consult with your tax advisor for specific tax advice and/or before making any tax decisions.