December 20, 2017
Last Friday the House and Senate released the revised Tax Cut and Jobs Act (HR 1) when a congressional conference committee released its
final report
outlining its version of the bill. The House and Senate both passed the legislation today. President Trump has stated he will sign the Tax Cut and Jobs Act into law before the Christmas break.
According to the
Tax Foundation’s Taxes and Growth Model
, the Tax Cuts and Jobs Act, when fully implemented, would add $600 billion in federal revenues from economic growth. These new revenues would reduce the cost of the plan substantially. Overall, the plan would decrease federal revenues by $1.47 trillion on a static basis and by $448 billion on a dynamic basis.
In 2018, taxpayers’ overall after-tax income will increase by 1.8%. Over the long run, the plan would lead to 0.3% lower after-tax income on average for all taxpayers. The United States Senate Committee on Finance claims that the typical family of four earning the median family income of $73,000 will receive a tax cut of $2,059. The Tax Foundation analyzed how the Tax Cut and Jobs Act
will impact eight typical American households
. The Foundation’s results indicate a reduction in tax liability in every scenario they estimated, with some of the largest changes in after-tax income accruing to moderate-income families with children. When accounting for the increased Gross Domestic Product (GDP), after-tax incomes of all taxpayers would increase by 1.1% in the long run.
The House and Senate Conference Committee outlined the revisions to the
Tax Cuts and Jobs Act
that were passed today. The Tax Foundation also provides a summary of the
proposed changes to the tax
law which compares the current tax law to the conference committee’s recommendations.
Some of the main points of the proposed legislation that you should be aware of are:
Individual Ordinary Income Tax Rates
– Income tax on salaries, interest income, and business income will continue to be subject to a seven-bracket progressive system (now at 10%, 15%, 25%, 28%, 33%, 35% and a top rate of 39.6%). The final bill preserves the seven-bracket structure, but reduces most of the tax rates, including the top rate from 39.6% to 37%.
The current and new rates for
single taxpayer
are:
Income Level:
$0 - $9,525
Current Rate:
10%
Proposed New Rate:
10%
Income Level:
$9,525 - $38,700
Current Rate:
15%
Proposed New Rate:
12%
Income Level:
$38,700 - $82,500
Current Rate:
25%
Proposed New Rate:
22%
Income Level:
$82,500 - $93,700
Current Rate:
25%
Proposed New Rate:
24%
Income Level:
$93,700 - $157,500
Current Rate:
28%
Proposed New Rate:
24%
Income Level:
$157,500 - $195,450
Current Rate:
28%
Proposed New Rate:
32%
Income Level:
$195,450 - $200,000
Current Rate:
33%
Proposed New Rate:
32%
Income Level:
$200,000 - $424,950
Current Rate:
33%
Proposed New Rate:
35%
Income Level:
$424,950 - $426,700
Current Rate:
35%
Proposed New Rate:
35%
Income Level:
$426,700 - $500,000
Current Rate:
39.6%
Proposed New Rate:
35%
Income Level:
> $500,000
Current Rate:
39.6%
Proposed New Rate:
37%
The rates for
married taxpayers
filing jointly are:
Income Level:
$0 - $19,050
Current Rate:
10%
Proposed New Rate:
10%
Income Level:
$19,050 - $77,400
Current Rate:
15%
Proposed New Rate:
12%
Income Level:
$77,400 - $156,150
Current Rate:
25%
Proposed New Rate:
22%
Income Level:
$156,150 - $165,000
Current Rate:
28%
Proposed New Rate:
22%
Income Level:
$165,000 - $237,950
Current Rate:
28%
Proposed New Rate:
24%
Income Level:
$237,950 - $315,000
Current Rate:
33%
Proposed New Rate:
24%
Income Level:
$315,000 - $400,000
Current Rate:
33%
Proposed New Rate:
32%
Income Level:
$400,000 - $424,950
Current Rate:
33%
Proposed New Rate:
35%
Income Level:
$424,950 - $480,050
Current Rate:
35%
Proposed New Rate:
35%
Income Level:
$480,050 - $600,000
Current Rate:
39.6%
Proposed New Rate:
35%
Income Level:
> $600,000
Current Rate:
39.6%
Proposed New Rate:
37%
Indexing Provisions
– The individual income tax provisions will be indexed to the Chained Consumer Price Increase (CPI) measure of inflation instead of the Traditional CPI.
Standard Deduction
– The
legislation increases the standard deduction from $6,350 to $12,000 for single taxpayers and from $12,700 to $24,000 for married taxpayers filing jointly.
Long Term Capital Gains and Qualified Dividends Rates
– The bill leaves the preferential rates on capital gains and dividends unchanged.
Personal Exemptions
– The individual deduction (currently at $4,100 for yourself, your spouse, and any dependents; phased out for high-income taxpayers) is eliminated.
Child and Family Tax Credit
– The bill will increase the child care credit from $1,000 to $2,000 and the refundable amount of the credit will increase from $1,100 to $1,400. All dependents ineligible for the child tax credit are eligible for a new $500 per-person family tax credit. The income limits at which a taxpayer starts to lose the two credits will increase from $75,000 to $200,000 for single taxpayers and from $110,000 to $400,000 for married taxpayers. Social Security Numbers are required for portions of the above. All provisions sunset at the end of 2025.
Alimony Deduction
– For divorce or separation instruments executed after December 31, 2018, alimony will no longer be deductible by the taxpayer, nor will it be includible in income of the payee.
Education Incentives and 529 Deduction
– The legislation preserves all the education incentives under current law. It also expands the use of 529 accounts to cover tuition for students in K-12 private schools and homeschooling costs in addition to expenses for college. Graduate student tuition waivers also remain in place.
Exclusion on Sale of Primary Residence
– The bill retains the current exclusion of a gain up to $250,000 for a single taxpayer who sells his or her home or $500,000 if married filing jointly (provided the taxpayer has owned and used the home as his or her primary residence for two of the previous five years).
Estate Taxes
– The bill immediately doubles the estate tax exemption to $11 million for single taxpayers or $22 million for a married couple. However, the estate tax will not be fully repealed.
Individual Alternative Minimum Tax (AMT)
– AMT is retained but the exemption increases from $84,500 to $109,400 for married taxpayers and the phaseout threshold increases to $1 million for joint filers. Other exemptions (state and local income taxes, unreimbursed employee expenses and personal exemptions) and phaseout thresholds exist for single filers and married couples filing separately. The exemption rates are also adjusted in the bill.
Property Taxes and State and Local Taxes
(SALT)
– The legislation allows taxpayers to deduct up to $10,000 of a combined property taxes and SALT. Taxpayers cannot deduct any prepayments of 2018 SALT in 2017.
Medical Expenses
– The bill decreases the medical expense deduction from 10% to 7.5% for 2018. It reverts to 10% thereafter.
Mortgage Interest Deduction
– Taxpayers will only be allowed to deduct up to $750,000 (down from $1 million under the current tax law) of acquisition debt and cannot deduct home equity debt ($100,000 can now be deducted).
Moving Expense Deduction
– The legislation repeals the moving expense deduction (except for active duty military personnel).
Other Miscellaneous Itemized Deductions
– The bill eliminates the deduction for tax preparation fees, unreimbursed employee expenses, investment advisory and other miscellaneous itemized deductions.
Individual Insurance Mandate
– The bill repeals the individual mandate penalty in 2019.
Corporate Tax Rate
– The legislation decreases the corporate tax rate to a flat rate of 21% (it is 35% to 39% under the current law).
Corporate AMT
– The bill repeals the corporate AMT.
Treatment of Pass-Through Income
– Sole proprietors, S corporation shareholders, and partners in a partnership will be allowed to deduct 20% of their allocable share of pass-through income. This deduction is limited to the greater of either 50% of wage income or 25% of wage income plus 2.5% of the cost of tangible depreciable property for qualifying businesses, including publicly traded partnerships but not including certain service providers. Limitations (both caps and exclusions) do not apply for those with incomes below $315,000 (joint), and phaseout over a $100,000 range.
Capital Investments
– The legislation allows full (100%) expensing of short-lived capital investments, such as machinery and equipment, for five years, then phases out the provision over the subsequent five.
Section 179 Limitation
– Section 179 small business expensing is capped at $1 million with a phaseout starting at $2.5 million.
Tax Treatment of Interest
– The net interest deduction is capped at 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30% of earnings before interest and taxes (EBIT) thereafter.
Net Operating Loss (NOL) Provisions
– The bill eliminates net operating loss carrybacks while providing indefinite net operating loss carryforwards, limited to 80% of taxable income.
Eligibility Requirements to Use the Cash Accounting Method
– Businesses with up to $25 million (it is $5 million under the current law) in income can now use the cash accounting method.
Business Credits and Deductions
– The legislation modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while limiting the deduction for FDIC premiums. It also amortizes the Research & Experimentation (R&E) credit after 2021.
International Income
– The bill moves how income earned from sources outside of the U.S. to a territorial system with anti-abuse rules and a base erosion anti-abuse tax (BEAT) at a standard rate of 5% of modified taxable income over an amount equal to regular tax liability for the first year, then 10% through 2025 and 12.5% thereafter, with higher rates for banks.
Deemed Repatriation
– The legislation enacts deemed repatriation of currently deferred foreign profits at a rate of 15.5% for liquid assets and 8.0% for illiquid assets.
Since it is likely that the Tax Cuts and Jobs Act will be signed into law, taxpayers should be aware of how each provision could impact their situation. Feel free to call us with your questions at 610-828-1900. You can contact Jackie Himes, CPA, our tax manager, at
Jacquelyn.Him
[email protected]
or me at
[email protected]
. We are always happy to help.
