House Releases Tax Bill: Talking Points and Takeaways
On November 2, 2017, the House Ways and Means Committee released the “Tax Cuts and Jobs Act” (H.R. 1). Key elements include reducing the tax rate on corporations to 20%, and reducing the tax rate paid on income earned by pass-through entities (partnerships and most limited liability companies) to 25%. For individuals, the bill would eliminate the alternative minimum tax and phase out the estate tax over six years. The bill would also eliminate the deduction for state and local taxes, but preserves the deduction for property taxes up to $10,000. A more detailed explanation of the proposed changes is below.
The President’s goal is to sign the bill by Christmas. The House Ways and Means Committee’s markup is officially scheduled for Monday, November 6th, at noon EST. The Senate Finance Committee, the Senate counterpart to the House Ways and Means Committee, is expected to release its version of the tax bill the week of Nov. 13.
Provisions Affecting Businesses
The bill has a number of provisions that could reduce taxes on corporations and income earned by pass-through entities, and provisions that eliminates deductions.
The bill reduces the corporate tax rate to 20% and the rate on pass-through business income to 25%;
The bill provides safeguards designed to ensure that the 25% tax rate applies only to business income and not to wage income. The purpose of these guidelines is to stop people who provide services, like doctors, lawyers, accountants, etc., from changing their business organization to get the lower 25% tax rate.
The bill allows businesses to immediately write off the full cost of new equipment instead of depreciating it over the life of the equipment;
The bill eliminates the ability of many businesses to write off interest expenses, but preserves the interest deduction for small businesses;
The bill provides a one-time tax on earnings held abroad by US businesses, and modifies the rules on taxing foreign income earned by US businesses; the bill includes other provisions designed to stop businesses from relocating abroad, and exempts income from “routine” foreign operations from US tax.
Provisions Affecting Individuals
The bill provides five tax brackets: 0%, 12%, 25%, 35% and 39.5%;
The bill eliminates the alternative minimum tax, doubles the estate tax deduction immediately, and completely eliminates the estate tax in six years; beneficiaries will continue to receive a stepped-up basis in estate property;
The bill eliminates the deduction for state and local taxes, medical expenses, and property casualty losses, but preserves a deduction for property taxes up to $10,000;
The bill eliminates the personal exemption but increases the standard deduction to $12,000 for individuals and $24,000 for families. The bill also provides a new family credit which includes an increase in the child tax credit to $1600.
Many Deductions Thought to be at Risk are Preserved
Before the bill was released there was much discussion of various tax provisions thought to be at risk because of the need to pay for the tax cuts in the bill. For example, the bill preserves the current treatment of 401(k) and IRA contributions. The bill also protects the mortgage interest deduction and the itemized deduction for charitable contributions.