Below is an outline of proposed bill by U.S, House of Representatives Ways & Means Committee. Some of the key points proposed in the Tax Cuts and Jobs Act HR-1 bill are:
Individual Tax Rates
• There are currently seven regular individual tax rates- The new law reduces and consolidates the rates to four brackets. 12 percent, 25 percent, 35 percent and 39.6 percent.
• For married taxpayers the 25 percent bracket threshold would be $90,000, the 35 percent bracket would be $260,000 and the 39.6 percent bracket would be $1 million. For single taxpayers the bracket thresholds would be half except that the 35 percent bracket threshold would be $200,000.
• For high-income taxpayers the benefit of the 12-percent bracket will phase out.
The Standard Deduction increases while eliminating personal exemptions
• The individual standard deduction increases from $6,350 to $12,000 and the joint standard deduction increases from $12,700 to $24,000
• The child credit would increase to $1600 from $1,000 and provides a credit of $300 for non-child dependents
Many itemized deductions are retained
• Charitable deductions would continue and the 50 percent of adjusted gross income limitation will be raised to 60 percent
• Mortgage Interest deductions for existing mortgages are retained and newly purchased homes would be limited to $500,000 of home acquisition indebtedness
• The deduction for real property taxes would be allowed up to $10,000 but state and local taxes would only be allowed if they are paid in connection with a trade or business
Many Deductions would disappear
• Medical expense deductions would be repealed.
• Moving expense deductions and the tax-free status of employer reimbursements for them would both be repealed.
• Alimony payments would not be deductible by the payor or taxable to the payee
• Medical Savings accounts would be terminated
Other key points
• The Alternative Minimum Tax would be repealed.
• 401K contributions pre-tax and IRA Deductions remain.
• Estate Tax Exemptions would immediately double before the Estate Tax is repealed in Six Years.
• Corporate Tax Rates on non-pass through entities would be lowered from 35 to 20%.
• There would be an immediate write off for the Full Cost of New Equipment but not buildings.
• Pass through entities will have separate rates for active vs. passive activities. The taxable income from passive businesses will qualify for a 25% rate. The taxable income from businesses in which the owner materially participates would only partially benefit from the 25% rate. Only 30% of the pass-through income will be taxed at the 25% rate while 70% will be taxed at the individual’s tax rate for wages. And, the income from personal service businesses such as doctors, consultants, and lawyers won’t qualify for the reduced rate at all, meaning that all of the pass-through income will be taxed as wages.
• Foreign Earnings of US Companies would receive a dividend received exemption reducing the amount that is taxable. The bill also includes a one-time low tax rate of 12% on foreign cash holdings and 5% on reinvested profits. The payment of this tax could be spread over 8 years
Keep in mind that this is just the first proposal! We expect that there will be many changes in this House version and a future Senate Version.
For more information on how any of these changes might impact you or your business, please contact your tax advisor or Timothy Devlin, Tax Services Leader, at [email protected].