Tax Cuts and Jobs Act

by Jennifer Kobylarz, CPA, MST, Tax Services, Rosenfield & Co, PLLC
After the House passed the Fiscal Year 2018 tax budget last week, the House Republican leaders have unveiled their proposed tax bill that could lower individual taxes for some but raise the tax bill of others. The approved budget allowed for tax cuts up to $1.5 trillion (over a 10 year period).
Here is a rundown of some of the key changes proposed in the 429 page bill that was released earlier today.
Individual Taxation:
  1. The current seven bracket system would be reduced to four brackets:
    • 12% on the first $45,000 of taxable income for individuals, $90,000 for married couples filing jointly;
    • 25% starting at $45,001 of taxable income for individuals, $90,001 for married couples filing jointly;
    • 35% starting at $200,001 of taxable income for individuals, $260,001 for married couples filing jointly;
    • 39.6% starting at $500,001 of taxable income for individuals, $1,000,001 for married couples filing jointly.
Illustration of Proposed Brackets for a Single Taxpayer:
Table Credit: Business Insider, 2017

Illustration of Proposed Brackets for a Joint Taxpayers:
Table Credit: Business Insider, 2017
2. The standard deduction would be increased from $6,350 to $12,000 for single filers and increased from $12,700 to $24,000 for married couples filing jointly.
    • The increase to the standard deduction is aimed to decrease the number of filers who itemize their deductions, thus simplifying tax filings.
      • To further this agenda, the mortgage interest deduction will now be capped at a principal balance of $500,000 instead of the current cap of $1,000,000;
      • State and Local tax deductions will be eliminated except for,
        • The real estate tax deduction will be allowed but limited to $10,000.
    • Other personal and itemized deductions that will be eliminated include:
      • Student Loan Interest Deduction
      • Medical Expenses
      • Moving Deduction
      • Alimony Payment Deduction
3. The personal exemption of $4,050 would be eliminated.
4. The current child tax credit of $1,000 would increase to $1,600 for qualifying families. A new consolidated family tax credit would be created by this bill. The credit is $300 for “each parent and non-child dependent.” Together, these credits would be called the Family Credit.
5. The current retirement plan rules would be left unchanged, meaning that the pre-tax contribution cap on 401(k) contributions will remain $18,000.
6. The Alternative Minimum Tax would be repealed.

7. The estate tax will be repealed over a six-year period and doubles the current exemption amount.

8. The “Obamacare” individual mandate would not be repealed as a part of the tax cut bill.
Business Taxation:
The bill includes many tax cuts that President Trump says are aimed at lowering the tax bills for small to medium sized businesses:
  1. The corporate tax rate would be cut from 35% down to 20%.
  2. Pass-through income would be taxable at 25% rather than the highest tax bracket of 39.6%.
    1. Currently, it appears as though the type of business income that would qualify for the lower 25% tax rate will be limited and that professional service income, i.e. income earned by doctors, lawyers, and accountants, may not automatically qualify. The final bill would have to clarify this point.
    2. In order to prevent intentional tax avoidance, the final bill will include measures for ensuring that wages are not deflated in order to increase the amount of business income that is subject to the lower tax rate. The proposed options include:
      1. 70% of income would be treated as wages with the remaining 30% of income subject to the lower 25% tax rate; or
      2. Taxpayers can set up this ratio based on their capital investment.
Foreign Taxation:
US Companies doing business overseas may be affected by these changes:
  1. A new 10% tax imposed on high profit foreign subsidiaries of US Companies;
  2. A 20% tax on payments made overseas from American operations; and
  3. A repatriation tax of up to a 12% tax on accumulated offshore earnings.
Other Issues Addressed:
The bill also includes changes to some miscellaneous tax items:
  1. Large private university endowments would be subject to an excise taxed of 1.4% on net investment income;
  2. The Johnson Amendment, which prevents tax-exempt nonprofits from making explicit election endorsements, will be repealed by this bill; and
  3. Interest income earned on bonds issued to build sports stadiums will no longer be deductible.
The President has stated that it is his goal to have the final version of this bill signed by Christmas Day.
We will continue to closely monitor the 2017 Tax Reform closely in order to keep you up to date on the most recent changes.

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