President Trump and his administration have been adamant about reforming the current income tax code in the United States. A major step in this process was taken by the administration when the “Tax Cuts and Jobs Act” was released on Thursday, November 2. The administration had released a proposed framework in late September that presented the underlying motivations for tax reform and main areas of expected change. The bill unveiled on November 2 by Republicans in the House of Representatives stayed true to that framework in some respects. It also clarified some areas of concern that seemed to go unaddressed in the proposed framework. Trump has claimed the new tax plan will provide relief to the middle class and become one of “the largest tax cuts ever.”
Below are some of the major changes to the current tax system proposed by the Tax Cuts and Jobs Act:
- Reduced number of tax brackets from seven to four. The framework in late September proposed a reduction to only three tax brackets. However, the bill settled on four brackets leaving the top marginal tax rate unchanged at 39.6%. The preceding three brackets include tax rates of 12%, 25%, and 35%. Taxable income thresholds for Individual taxpayers and Married taxpayers filing jointly can be seen below:
See the figures at the end of this article for a visual representation of the proposed tax bracket breakdown compared to the current structure.
- Increased Standard Deduction. As promised by the proposed framework in September, the standard deductions for all taxpayers would roughly double to $24,400 for those filing jointly and $12,700 for individual filers. This will substantially decrease the amount of people who itemize their deductions.
- Elimination of most Itemized Deductions and Personal Exemptions. The elimination of most itemized deductions will further decrease the amount of taxpayers who itemize. The only surviving itemized deductions would be for mortgage interest and real property, subject to new limitations, taxes, and charitable contributions. The elimination of medical expenses as well as state & local income taxes as itemized deductions is a major area of criticism facing the bill. Personal exemptions for taxpayers and all dependents listed on your return would also be eliminated.
- Enhancement of Child Tax Credit and Family Tax Credit. The bill has clarified the September proposal’s promise of “significant” increases to the child tax credit. The child tax credit would increase from $1000 to $1600 per qualifying dependent. Phase-out thresholds for this credit would also increase significantly, meaning more people would be able to take advantage of the credit.
- Eventual repeal of the Estate Tax. The amount of property excluded from estate taxes would increase from $5.6 million to $11.2 million per spouse for the next five years. After 2023, the estate tax would be fully repealed.
- Repealing of Alternative Minimum Tax. In an effort for increased simplification, the AMT would no longer exist if the bill is passed.
- Reduced corporate tax rate from 35% to 20%. Perhaps the biggest tax cut proposed in the bill comes in the form of a reduction in the tax rate for corporations. The bill proposes a flat 20% tax rate for corporations and a flat 25% rate for personal service corporations.
- Reduced tax rate for portion of income from pass-through entities. A portion of net business income from pass-through entities like sole proprietorships, partnerships, and S corporations could be taxed at a new maximum rate of 25%. The portion of income that qualifies for the 25% rate would largely depend on the nature of the business. Most cases would only allow 30% of net business income to be taxed at the 25% rate. Additionally, the new 25% rate would not apply to ownership of service firms.
- Full expensing of depreciable assets for five years. As proposed in the September framework, the bill would allow for immediate expensing of qualified property put into use after September 27, 2017. In a possible effort to increase investment in the short run, immediate expensing of property will only last until December 31, 2022. Section 179 depreciation limits would also increase from $500,000 to $5 million during this five year period.
The above only highlights a few of the changes proposed by the bill. There are several others that may affect many taxpayers. To view the full text of the bill, please click here.
There is no doubt the bill still has a long way to go before being passed. Strong opposition is expected from some members of Congress on the Democratic side. The plan also needs to avoid creating too large of a budget deficit from expected cuts in tax revenue. President Trump aims for the new tax code to be in effect for the 2018 tax year. Timing aside, one thing is clear about the structure of our tax system: Change is coming.
Proactive tax planning will be ever more important this year. Please contact our office with any specific questions. As always, HBE will continue to monitor the status of the proposed changes and provide updates as they become available.