On November 2nd, the House Republicans released a long-awaited and much anticipated first draft of a new tax reform bill. We would expect some level of compromise and change to the bill(s) as they go through both the House of Representatives and the Senate. With the multitude of changes, it is evident that the bill, if it were to become law, would impact individuals very differently depending upon circumstances. While working families in low-tax states might benefit, others may actually see a tax increase resulting from the loss of the ability to deduct items like state income taxes paid and limitations on real estate tax deductions. We also believe that the repeal of the Alternative Minimum Tax (AMT) might seem beneficial, although AMT is often caused by high deductions for state income taxes and real estate taxes, so the overall tax impact may be minimal.
Below, we have itemized some of the more significant aspects of the bill:
- Reduces the number of individual tax brackets from 7 down to 4. Maintains the top rate of 39.6% but increases the taxable income thresholds whereby the top bracket takes effect. Below is a summary of the updated brackets.
Married filing joint (estimates): Single (estimates):
12% for taxable income 0 – 90,000 12% for taxable income 0 – 45,000
25% for taxable income 90,000 – 260,000 25% for taxable income 45,000 – 200,000
35% for taxable income 260,000 – 1,000,000 35% for taxable income 200,000 – 500,000
39.6% for taxable income above 1,000,000 39.6% for taxable income above 500,000
- Lowers the top corporate income tax rate from 35% down to 20%.
- Creates a special 25% income tax rate for pass-through business income, with some limitations.
- Increased expensing of capital asset purchases for businesses.
- Elimination of domestic production activities deduction.
- Indefinite carryforward of net operating losses, but limiting the deduction to 90% of current year income.
- Provides small increases to child tax credits.
- Eliminates the Alternative Minimum Tax.
- Immediately doubles the estate tax exemption, with a proposal to completely eliminate the estate tax by 2024. New estate tax exemption would be roughly $10,000,000 per person. Also proposes reducing the top estate tax rate down to 35% from 40% over time.
- Maintains basis step-up for appreciated assets upon death, even with increased and phased-out estate tax exemptions.
- One-time tax holiday for overseas earnings.
- Eliminates potential deductions for alimony and moving expenses.
- $10,000 of 529 plan distributions would be allowed for elementary or secondary education.
- Additional restrictions to the gain exclusions related to sale of primary residence (5 of the last 8 years of occupancy required), also phase-out of exclusion for high earning households.
- Changes specifically related to standard and itemized deductions:
- Nearly doubles the standard deduction ($12,000 for single taxpayer, $24,000 for married filing joint); however, eliminates deductions for personal exemptions.
- Elimination of the deduction for state and local taxes paid, or sales taxes paid.
- Limit on deductibility of real estate taxes paid to $10,000.
- On new mortgages, homeowners will only be able to deduct mortgage interest on the first $500,000 of indebtedness (down from $1,000,000, although existing mortgages will be grandfathered).
- Repeals overall limitation on itemized deductions.
- Potentially eliminates medical expense deduction.
We certainly encourage our clients and all taxpayers to discuss any changes, once finalized and clear, with their advisors. Until that time, however, we are cautious in advising clients to not make any hasty decisions until the changes have actually been voted into law.