The US House of Representatives recently released their first draft (and second draft) of congress’ much anticipated tax reform bill (H.R. 1). Significant tax reform may actually be passed this year, and it looks possible that it will offer the greatest sweeping changes to the US tax code in more than 30 years. Although H.R. 1 is likely to see many changes before becoming law and its passage is uncertain, taxpayers should be aware of what has been released by congress and how it may impact them.
As CPAs that have spent uncountable hours helping our clients understand and apply the tax law, we understand more than most, exactly how much time and resources are wasted due to the complexity of the US Tax regime. We are honestly enormous proponents of simplifying the tax code, so that our time and our clients’ resources could be spent on more important matters, such as growing businesses and their profitability. Unfortunately, in our opinion, H.R. 1 does very little to create the much-needed tax simplification we believe our country so critically requires. The proposed legislation does minimally simplify an average individual’s personal tax return by reducing the likelihood of their need to itemize their deductions with increased standard deduction amounts, repealing the alternative minimum tax and repealing some other itemized deductions, but the simplification sadly mostly ends after that. Businesses do receive a large and needed tax cut, but pass through entities are likely to see increased complexity in filing their tax returns to take advantage of those cuts, especially in the service sector.
Overall, we believe this legislation would positively impact our clients with a lower tax bill, and will also improve the economy to a large extent. Yet, we also believe much more still needs to be accomplished by our federal government to reduce the over burdensome tax regime and allow the US economy to really reach its incredible potential.
We have reviewed the entirety of the first draft of H.R. 1, as well as much commentary on the legislation, and offer some of the most impactful components of it below. We will continue to keep abreast of this legislation, and are available to discuss it with our clients at their request. Most of the new rules impact tax years ending after the 2017 tax year, however, it is rarely ever too early to start planning for your future taxes. We are here to help you figure out how you might want to modify and address your current tax situation and build in flexibility to adapt as the details of this reform legislation advances. So, give us a call.
Some Individual Tax Impacts:
- Reduces the current 7 tax brackets to 4: 12%, 25%, 35% and 39.6%. The top bracket starts at
$1,000,000 for married taxpayers filing jointly and $500,000 for other individuals. The lower
three tax brackets begin at a considerably larger income than previously.
- Repeals the Alternative Minimum Tax.
- Nearly doubles the Standard Deduction to approximately (as adjusted for inflation) $24,000 for
married filing jointly taxpayers, $18,000 for heads of households, and $12,000 for other
- Repeals the personal exemptions, but increases the child tax credit to $1,600 per child ($1,000 of it being “refundable”), creates a nonrefundable $300 tax credit for adult dependents, and a temporary nonrefundable non-dependent credit (i.e. both spouses on a joint return) of $300, while also increasing the income at which these credits are phased out.
- Repeals the overall limit of itemized deductions.
- Caps property tax deduction at $10,000, and repeals the state and local income tax and sales tax deductions.
- Modifies the mortgage interest deduction by capping it for interest on up to $500,000 of debt, and only one residence can qualify, for mortgages made before November 3rd , 2017. Existing mortgages for purchases prior to that date are grandfathered in.
- Repeals the medical expense, alimony and moving expense deductions.
- Increases most charitable contributions deductions to 60% of AGI, rather than the current 50% limit.
- Sets an AGI phase out for the exclusion of selling a home beginning at $500,000 for married taxpayers filing jointly and $250,000 for other taxpayers. It also makes the ownership and use tests more restrictive.
Some Business Tax Impacts:
- The business tax rates are cut 20% for C-Corporations (25% for personal service C-Corps)
and a maximum of 25% for partnerships, S-Corps, and sole proprietorships. However, the
lower tax rate for pass-through entities does not apply to service sector entities, except to the
extent the argument can be made that the income results from something other than what
should be considered “compensation” to the owners. Therein lies the “rub”, and likely where a
lot of time and resources will be spent in tax return preparation.
- Section 179 limits increase to $5,000,000 with phase out beginning at $20,000,000 of assets
purchased in one year, for asset purchases between 2018 and 2022.
- Limits interest expense to no more than 30% of the business’s taxable income for businesses
with more than $25,000,000 of gross receipts.
- Reduces the NOL deduction to only 90% of taxable income.
- Corporations with earned income parked offshore would be hit with a one-time tax of 12% for
liquid holdings, and 5% on others. However, they would then be free to bring their earnings
back to the US tax-free. Additional future earnings would also be taxed at the same rates, and
would also be allowed to be repatriated tax-free.
- Greatly impacts the tax regime for companies doing business in other countries, and foreign
owned companies doing business in the US.