Tax Reform Bill Key Points

With the House releasing a comprehensive 429-page tax reform bill last week, many people are curious as to how the proposed tax bill will impact their personal taxes as well as their businesses. We have outlined some key details of the House plan below, but it is important to note that the Senate is working on their own version of a tax reform bill, so there could still be significant changes before the final bill hits the President’s desk. The details below are intended to take effect beginning January 1, 2018.

Individual Income Tax Reform Key Points:

Individual Income & Tax Rates:

  • Four main tax brackets (income levels for married filing jointly): 12% ($0-$90k), 25% ($90k-$260k), 35%($260k-$1MM), and 39.6% ($1MM+)
  • The alternative minimum tax (AMT) would go away
  • Capital gain income tax rates would remain unchanged
  • Pretax contributions to 401(k) plans would remain unchanged

Individual Deductions:

  • Standard deduction amounts would be raised to $24,400 (married) and $12,200 (single and others).
  • Personal exemptions which are currently $4,050 per person would be eliminated
  • Charitable contributions would be limited to 60% of your AGI (currently 50%)
  • No deduction for state and local taxes paid, medical expenses, alimony, moving expenses or tax prep fees
  • Mortgage interest deduction would be capped on all new home loans over $500,000 that originated after November 2, 2017 (existing home loans above $500,000 would be grandfathered)
  • Property tax deduction would be limited to $10,000.
  • No deduction for student loan interest
  • Deduction for qualified tuition and related expenses would be eliminated
  • Contributions to Coverdell education savings accounts would be prohibited

Tax Credits:

  • The Child Tax Credit would be raised to $1,600 per child ($1,000 refundable)
  • The American Opportunity tax credit, Hope scholarship credit, and lifetime learning credit would be rolled into a single credit with a maximum of $2,500
  • Other various credits such as the adoption credit would go away

Business Income Tax Reform Key Points:

Business Income & Tax Rates:

  • Flat corporate tax rate of 20% and a flat 25% rate for personal service corporations
  • The AMT would be eliminated
  • For business owners who are sole proprietors or who have active business income from a partnership or S corporation: 30% of that business income will be taxed at a maximum 25% rate, with the remaining 70% taxed at ordinary tax rates
  • Passthrough entities would also have an option to elect a flat tax of 15% for income retained inside the business
  • All income from passive activities would be taxed at a maximum rate of 25%

Business Deductions:

  • 100% deduction for new or used assets purchased before January 1, 2023 as long as it’s the first time owned by the taxpayer (would not apply to property used in real property trade or business)
  • Section 179 expensing would increase to $5 million for the next 5 years with a $20 million phase-out limit (currently $500,000 with a $2 million phase-out limit)
  • Business entertainment expenses would not be deductible but business meals would remain at a 50% deduction
  • Interest expense would be limited to 30% of the businesses adjusted taxable income but would not apply to real property businesses or businesses with average gross receipts less than $25 million
  • A net operating loss (NOL) carryforward would be limited to 90% of the taxpayer’s taxable income. NOL carrybacks would go away with few exceptions

Tax Credits:

  • Research & Development credit would remain unchanged
  • Most other various credits such as the work opportunity credit would go away

Estate & Gift Income Tax Reform Key Points:

  • The estate tax exclusion amounts would be doubled through the year 2023 (exclusion is currently $5.49 million for 2017)
  • The estate tax and generation-skipping taxes would be repealed beginning after the year 2023
  • Gift tax rate would max out at 35% (current max is 40%). Annual & lifetime exclusions would remain indexed each year