The House Ways and Means Committee this week unveiled a $1.51 trillion plan to cut taxes and re-write the tax code.
The “Tax Cuts and Jobs Act” is the first step in Congress’s move toward major tax reform. The bill includes tax cuts for individuals and corporations, the elimination of certain taxes, and changes to some popular tax deductions.
Most proposed changes would be effective on January 1, 2018. The bill represents the first step in the legislative process. A Senate version will follow, and then the two proposals will have to go through a reconciliation process.
Some of the highlights:
House Republicans unveil tax plan with cuts and a rewrite of tax codeIndividual income tax
- Creates a tax rate structure with the following brackets: 12%, 25%, and 35%. Those earning up to $24,000 will pay no income taxes. The top rate of 39.6% will be retained for those earning above $500,000 (individuals) and $1 million (couples).
- There would be no changes to the taxation of dividends and long-term capital gains. The 3.8% net investment income surtax remains.
- The standard deduction would be roughly doubled to $12,000 for individuals and $24,000 for married couples. The personal exemption is eliminated.
- Repeals the alternative minimum tax (AMT).
- Retains the deduction for charitable contributions.
- Caps the mortgage interest deduction for newly acquired debt at $500,000, down from the current level of $1 million. The bill retains the current deduction for existing mortgages.
- State and local tax deductions would be limited to property taxes, with a cap of $10,000. The bill eliminates the ability of taxpayers to write off other state and local taxes including income and general sales taxes.
- Retains retirement savings options such as 401(k)s and individual retirement accounts, and the current tax status of these accounts.
- Simplifies education savings benefits through a streamlined American Opportunity Tax Credit (AOTC).
- Numerous tax credits and deductions would be repealed, including the medical expense deduction, a 15% credit for individuals age 65 or older who are retired on disability, the adoption tax credit, tax preparation deduction, and alimony payment deduction.
- The option to recharacterize a Roth conversion is eliminated.
- The estate tax lifetime exclusion would be doubled and the tax would be repealed after six years.
- Step-up in cost basis of property at death is retained.
- Lifetime gift tax exclusion amount increases to $10 million (adjusted for inflation), the maximum tax rate is reduced to 35% from 40%, and the annual gift tax exclusion remains ($15,000 for 2018).
- The tax rate would be reduced to 20% from the current 35% maximum.
- The AMT for corporations would be eliminated.
- The deductibility of interest for most companies would be limited, with an exception for smaller companies.
- The ability of companies to expense 100% of capital expenditures is allowed for the next five years.
- The plan creates a minimum tax of 10% on the income earned by American subsidiaries worldwide. Currently, these profits are not taxed until they are brought back to the United States. Companies would also pay a one-time 12% tax on cash assets and 5% tax on illiquid assets held offshore.
- The tax rate for businesses that are treated as “flow-through” entities would be reduced to 25% from 39.6%.
The Senate version to follow
Of course with any legislative process, there will be changes made as debate follows. There are no guarantees that all of these provisions will make it to the final proposal. Industry groups, including those in the real estate sector, have already expressed concern about the cap on new mortgage interest-rate deductions. Lawmakers in high-tax states have voiced concern about the impact of limiting state and local deductions for their constituents. Compromise will be needed to finalize the tax-rate reductions as well. Certainly, advisors and investors will want to monitor the progress of tax reform as any changes could have an impact on an individual’s financial plan.