On Thursday, the House Ways and Means Committee released their tax reform bill. The 429-page document, “The Tax Cuts and Jobs Act,” builds upon the framework released last month and provides more details for legislation.
The bill would add an estimated $1.5 trillion to the deficit over the next 10 years. The next step will be for this bill to move to the House for mark-ups expected next week. It is only a proposed bill, and we expect some debate on specifics as well as changes.
We will advise as we become aware of these changes, but please feel free to contact us if you have any questions. Below we have outlined some of the major initiatives within the bill.
The bill reduces individual tax brackets from seven to four and defines the income levels for each bracket. The framework did not provide income levels and left the possibility of an additional top rate to be added.
As mentioned in the framework, the standard deduction will increase to $12,000 for single filers and $24,000 for MFJ filers and eliminate personal exemptions for taxpayers and their dependents. Many of the current itemized deductions are eliminated, such as medical expenses, student loan interest and state and local income and sales tax. Property tax deduction is limited to $10,000. Mortgage interest deduction for current mortgages remains the same, but deduction for new mortgages is limited up to $500,000.
Under the new bill, families will benefit from additional tax credits. The Child Tax Credit will increase from $1,000 to $1,600, with the additional $600 being nonrefundable. The new Adult Dependent Credit for adult dependents, and Family Flexibility Credit for each spouse if they file jointly, provides $300 for each and is a nonrefundable credit. All three credits start to phase out at $115,000 for single filers and $230,000 for MFJ filers. However, the bill does eliminate some dependent benefits such as the tax exclusion for dependent care assistance accounts.
Prior to the bill, there was speculation that pre-tax contributions to 401(k) would be negatively impacted in some way, however no such reduction has been included. The bill would repeal the existing individual Alternative Minimum Tax (AMT) immediately and the death and generation-skipping estate taxes by 2024. Under the new bill, the exclusion of gain from the sale of principal residence requirements would change. Currently, the homeowner must live in the home for two of the last five years, but that requirement would increase to five of the last eight years. Additionally, the exclusion would begin to phase out at certain income levels.
The proposed legislation reduces the corporate tax rate to from 35% to 20%. There was speculation that this reduction would be phased in over the course of the next few years, however the bill states it will be immediate. The bill also eliminates the corporate Alternative Minimum Tax (AMT) and limits the interest deduction on future loans to 30% of earnings before interest, taxes, depreciation and amortization.
The bill also creates a new maximum tax rate on pass-through income of 25%, subject to anti-abuse rules. The anti-abuse rules state that 70% of pass-through income is assumed to be compensation and subject to ordinary individual tax rates, and 30% is subject to the maximum rate of 25%. Certain industries, such as health, law and professional services, are excluded from this 70/30 split and must “prove out” their business income to claim the lower rate.
The bill allows for immediate expensing of capital expenditures that are currently subject to bonus depreciation for the next five years. Additionally, the Section 179 expense will increase from $500,000 to $5 million and increase the phase-out from $2 million to $20 million.