House Reveals Tax Reform Bill

The proposed tax reform bill was revealed by the House of Representatives yesterday. This is the first illustration of the bill and over the course of the legislative process we will see multiple iterations before an actual bill is passed and signed into law. Here are some highlights of the proposed bill:

Individual Provisions:

  • There will be only four tax rates: 12%, 25%, 35%, and 39.6%
    • The tax rate has actually risen for the lowest tax bracket and the 35% percent bracket starts much earlier than it did under the previous law. The top tax bracket will begin at $1 million of income, which is up substantially from the previous law.
  • Standard deduction is doubled but personal exemptions are eliminated
  • Tax rate on some pass through income will be 25%
    • There is a complicated calculation of what that entails but it does not include income from the traditional personal services (accounting, law, medicine, engineering, consulting).
  • Mortgage interest will only be allowed on interest up to $500,000 of debt
    • This only applies to mortgages entered into after November 2, 2017
    • Mortgage interest is only on your principal residence
  • Repeals the deduction for state income taxes and limits real estate tax to $10,000
  • Repeals the deduction for alimony payments and moving expenses
  • Exclusion of the gain on your principal residence would change
    • Proposed rule would require you to live at your primary residence five out of eight years and the exclusion would phase out based on income
    • Phase-out begins at $250,000 for single $500,000 for married
  • Tax credit for buying an electric car would be eliminated

Business Provisions:

  • There would be only one tax rate:  20%
  • Personal Service Corp tax rate would be 25%
  • Significant discussion about Accumulated Earnings in the proposed bill; potential to require more dividends to be declared
  • Bonus depreciation would go back to 100% and be extended to 2022.
  • Section 179 limits would rise to 5 million through 2022
  • Limitations on the amounts of interest that are deductible
    • Small businesses would be exempt
    • Limited to the amount of interest income plus 30% of taxable income
  • Net-operating losses (NOLs) would no longer be able to be carried back; but no expiration
  • Domestic Production Activities Deduction (DPAD) would be repealed.
  • Entertainment expenses would not be deductible
  • Repeal of technical terminations of partnerships

Miscellaneous

  • Non-Qualified Deferred Compensation rules would change
  • Estate tax exemption rises to $10 million and is repealed after 2023
  • Gift tax would remain unchanged

Most of the bill provisions would go into effect at the beginning of 2018. To learn more and read the policy highlights, click here.

If you have any questions or would like additional information please contact your trusted advisor.

David D. Brauer, CPA, MBT

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