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Tax Reform Proposals

(posted: December 7th, 2017)


Now that the congressional GOP leaders and the president have a framework for tax changes, the Republicans are calling for new tax rates and other changes to the way taxes are applied, including changing or eliminating various deductions and some "loopholes".

Below we call out the main issues, and give you the different solutions proposed from the House bill and the Senate bill.

Individual tax brackets:

  • House plan - individual brackets of 12%, 25% and 39.6% to be permanent.
  • Senate plan - individual brackets of 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5% to expire after 2025.

Owners of pass-through entities such as S corporations, LLCs and sole proprietorships:

  • House plan – 25% rate on 30% of qualified business income and not applicable to certain personal services businesses.
  • Senate plan – 17.4% rate on qualified business income.

Individual write off for property taxes:

  • House plan – maximum deduction of $10,000
  • Senate plan – no deduction

Mortgage interest:

  • House plan – the deduction would be limited to $500,000 for newly purchased homes
  • Senate plan – the deduction remains the same at $1,000,000

Deductions repealed:

  • House plan – state and local income taxes; sales taxes; personal casualty losses; alimony; tax preparation fees; moving expenses, medical expenses and employee business expenses; and the limitation on itemized deductions.
  • Senate plan – state and local income taxes; sales taxes; personal casualty losses (except a loss incurred in a Presidentially-declared disaster); tax preparation expenses; all miscellaneous itemized deductions that are subject to the 2% floor under current law; moving expenses; interest on home equity loans; the limitation on itemized deductions; and moving expenses.

Increased Standard Deduction & Elimination of Personal Exemptions:

  • House plan – increases the standard deduction to $24,400 for joint returns and surviving spouses, $18,300 for unmarried individuals with at least one qualifying child, and $12,200 for all others. The personal exemption would be eliminated.
  • Senate plan – increases the standard deduction to $24,000 for joint returns and surviving spouses, $18,000 for head of household filers, and $12,000 for all others and would be indexed for inflation. The personal exemption would be eliminated.

Enhanced Child Tax Credit & New Family Tax Credit:

  • House plan – increases the child tax credit to $1,600 and replaces the term "qualifying child" with "dependent." It provides for a $300 credit for non-child dependents as well as a $300 "family flexibility credit" for the taxpayer (or both spouses for a joint return) effective for tax years ending before January 1, 2023. The credits would phase out beginning at income levels of $115,000 for single and $230,000 for joint filers. The refundable portion would be limited to $1,000 and would be indexed for inflation.
  • Senate plan – increase the child tax credit to $1,650 per qualifying child and increase the age limit to a qualifying child under 18. There would be a $500 nonrefundable credit for non-child dependents. The phase out would begin at $500,000 for single and $1 million for joint filers with no indexing. The refundable portion would be limited to $1,000 per qualifying child and be indexed for inflation.

Alternative Minimum Tax: repealed under both plans

Estate and Generation–Skipping Transfer Taxes:

  • House plan – exclusion is doubled and adjusted for inflation. The estate and GST taxes would be repealed after 2024. The stepped-up basis rules for beneficiaries of inherited property would not be repealed. The gift tax rate would drop to a top rate of 35% for gifts made after December 31, 2023 and would maintain the annual exclusion as indexed for inflation.
  • Senate plan – double the estate and gift exemption effective for estates of decedents dying, generation-skipping transfers, and gifts made after December 31, 2017. The plan does not provide for repeal.

Corporate Tax Rates:

  • House plan – 20% flat rate effective 1/1/18. The rate for personal service corporations would be reduced to 25%
  • Senate plan – 20% flat rate effective 1/1/19. The special tax rate for personal service corporations would be eliminated.

Section 179 Expensing:

  • House plan – increased to $5 million and the phase –out amount would be increased to $20 million effective for tax years beginning after 2017 through 2022. The limits would be indexed for inflation.
  • Senate plan – permanently increased to $1 million and the phase-out amount would be increased to $2.5 million effective for tax years beginning after December 31, 2017.

Cost Recovery Deduction:

  • House plan – instead of bonus depreciation for qualified property, taxpayers would be able to immediately expense 100% of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. Property would be eligible for expensing if it is the taxpayer's first use, repealing the current requirement that the original use of the property begin with the taxpayer. Qualified property would not include any property used in a real property trade or business.
  • Senate plan – extend and modify the additional first-year depreciation deduction through 2022. The 50% allowance is increased to 100% for property placed in service after September 27, 2017 and before January 1, 2023. The $8,000 deduction for passenger automobiles placed in service after December 31, 2017 would be maintained. The maximum deduction for listed property would be $10,000 for the year placed in service; $16,000 for the second year, $9,600 for the third year, and $5,760 thereafter if the taxpayer does not claim cost recovery depreciation in the first year.

Business Interest:

  • House plan – every business, regardless of its form, would be subject to a disallowance of a deduction for interest expense in excess of 30% of the business' adjusted taxable income. Any interest disallowed would be carried forward five years. The limitation would not apply to real property trades or businesses. Businesses with average gross receipts of $25 million or less would be exempt from the interest limitation rules.
  • Senate plan – business interest would be limited to the sum of business interest income plus 30% of the adjusted taxable income. Disallowed interest would be carried forward indefinitely.

Meals and Entertainment:

  • House plan – 50% limitation on qualifying meals would be retained with no deduction allowed for entertainment expenses.
  • Senate plan – retains the 50% limitation on qualifying meals and would expand it to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de Minimis fringes. No deduction would be allowed for an activity generally considered to be entertainment, amusement or recreation.

Net Operating Loss:

  • House plan – limited to 90% of the taxpayer's taxable income. Repeals all carrybacks but provides a special one-year carryback for small businesses and farms in the case of certain casualty and disaster losses.
  • Senate plan – limit the deduction to 90% of taxable income and repeals the two-year carryback.

The two bills still have to be reconciled, so we will see which items stay and which go in the final legislation.

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