Important Changes in the New House Tax Bill
H.R. 1 includes a measure to cut individual tax rates for many Americans. (The top marginal rate would remain at 39.6%.) Under the proposed legislation, taxable income would be as follows:
Tax Cuts and Jobs Act (H.R. 1)
|12.0%||$0 to $45,000||$0 to $90,000|
|25.0%||$45,001 to $200,000||$90,001 to $400,000|
|35.0%||$200,001 to $500,000||$400,001 to $1,000,000|
|39.6%||Over $500,000||Over $1,000,000|
As noted in the U.S. House of Representatives Committee on Ways and Means’ “Tax Cuts and Jobs Act H.R. 1 Section-by-Section Summary”:
For high-income taxpayers, the provision would phase out the tax benefit of the 12-percent bracket, measured as the difference between what the taxpayer pays and what the taxpayer would have paid had the income subject to the 12-percent bracket instead been subject to the 39.6-percent bracket. This tax benefit is phased out at a rate of $6 of tax savings for every $100 of adjusted gross income in excess of $1,000,000 (single filers) or $1,200,000 (joint filers).
These thresholds are adjusted for the Chained Consumer Price Index in tax years after 2017.
- The three itemized deductions that would be preserved are:
- Charitable contributions – The deduction limit would increase to 60% from the current 50% limit. The proposed legislation would also revise the rules for charitable contributions.
- Home mortgage interest – The mortgage interest deduction on existing mortgages would remain the same. For new mortgages, the limit on qualifying acquisition indebtedness would be reduced from $1 million to $500,000.
- Real property taxes – State and local real property taxes would continue to be deductible, up to $10,000.
- The standard deduction would increase to $12,200 for individuals (up from $6,350 currently) and $24,400 for married couples (up from $12,700) in 2017.
- The child tax credit would increase from the current $1,000 to $1,600.
- The exclusion from income on gain on the sale of a personal residence would now require that the home be occupied five of the past eight years instead of two of the past five years. It would also be phased out for married taxpayers with income in excess of $500,000 ($250,000 for single taxpayers).
- The exclusion from income for lodging provided at the convenience of the employer would be capped at $50,000 and would be phased out for persons earning more than $120,000.
- The basic exclusion for estate and generation-skipping taxes would double from $5 million to $10 million, indexed annually for inflation. After 2023, the estate and generation-skipping taxes will be repealed while maintaining a beneficiary’s stepped-up basis in estate property.
- The following would be repealed:
- The provision for “personal exemptions.”
- The alternative minimum tax.
- The exclusion for adoption assistance programs, which currently allows families a maximum credit of $13,570 per eligible child.
- The deduction for state and local income tax and sales tax.
- The deduction for medical expenses.
- The deduction for moving expenses.
- The deduction for tax preparation expenses.
- The exclusion from income for employer-provided and flexible spending account (FSA)-dependent care assistance programs.
- The employer-provided child care credit.
- Section 127 employer education assistance programs, which currently exempt up to $5,250 of employer-paid qualified education expenses.
- Section 117(d) qualified tuition reduction plans for school employees and their dependents.
Churches (but not other section 501(c)(3) organizations) would be allowed to engage in political speech as long as:
- The speech occurs in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose; and
- The speech results in the organization incurring not more than de minimis incremental expenses.
Individual “Business Income”
The maximum rate on individual “business income” would be 25%. The bill states that:
…a portion of net income distributed by a pass-through entity to an owner or shareholder may be treated as “business income” subject to a maximum rate of 25 percent, instead of ordinary individual income tax rates. The remaining portion of net business income would be treated as compensation and continue to be subject to ordinary individual income tax rates. Each owner or shareholder would separately determine their proportion of business income.
There are intricate rules with regard to the definition of “business income.”
Corporate Tax Rates
Corporate tax rates are currently as follows:
15% $0 to $50,000
25% $50,001 to $75,000
34% $75,001 to $10,000,000
35% Over $10,000,000
Under the proposed new law, the corporate tax rate would be a flat 20% rate beginning in 2018. Personal services corporations would be subject to a flat 25% corporate tax rate.
Additionally, there would be a tax of up to 12% on multinational companies’ accumulated offshore earnings.
What Didn’t Change: 401(k) Plans and the Individual Mandate
Despite what many expected, no changes to 401(k) plans were included and the bill does not contain a repeal of the Obamacare individual mandate.
We still await the passage of the Senate’s bill and the harmonizing of the House and Senate legislation into a bill that can be presented to President Trump for passage. President Trump has called on Congress to pass the legislation by Christmas. With a number of challenges on the horizon, this may or may not be possible. The bill was taken up by the House Ways and Means Committee on November 6.
We will provide further updates as they become available. Please contact our tax team with any questions or concerns.
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