House Tax Bill Released
The House of Representatives released a draft tax reform bill titled the “Tax Cuts and Jobs Act” on November 2, 2017. The Ways & Means Committee intends to formally markup the bill the week of November 6 with full House floor consideration planned before Thanksgiving. Most of the provisions would be effective starting in 2018.
The bill would reduce individual and business tax rates, modify or eliminate a variety of itemized deductions, repeal the estate and alternative minimum taxes and would change the taxation of foreign income. A broad overview of the changes include:
Individual tax rates. Under the House bill, individuals would be subject to four tax brackets at 12, 25, 35 and 39.6 percent. The 39.6 rate would apply at $1 million for married taxpayers filing jointly and $500,000 for other filers. The standard deduction would be increased, from $6,350 to $12,200 for single filers and from $12,700 to $24,400 for married taxpayers filing jointly. Personal exemptions would be repealed; however, the child tax credit would be expanded.
Business tax rates. The corporate tax rate would be reduced from 35 percent to 20 percent and certain “business income” from pass-through entities would be taxed at 25 percent instead of an owner’s individual rate. Bonus depreciation of 100 percent would be available for qualifying property placed in service before January 1, 2023, new property types would qualify for bonus depreciation and expense amounts would be expanded. The bill proposes to eliminate the Domestic Production Activities Deduction and change other aspects of entertainment expenses, net operating losses, like-kind exchanges, business credits, and small-business accounting methods, among other provisions. The bill would also repeal the corporate alternative minimum tax (AMT) and make existing AMT credit carryforwards refundable over a period of five years.
Itemized deductions. Many current itemized deductions would be eliminated including: medical expenses, state and local income taxes, unreimbursed employee expenses and tax preparation fees. The property tax deduction would be retained but would be subject to a $10,000 maximum. Mortgage interest expense would be deductible on $500,000 of acquisition debt and no deduction would be permitted on home equity debt. This is a departure from the current deduction of up to the first $1.1 million of acquisition and home equity debt. Existing mortgages would be grandfathered. The individual alternative minimum tax (AMT) would be repealed. Transition provisions would ensure taxpayers with AMT carryforwards would be able to use the remaining credits between 2018 and 2022.
Estate taxes. The threshold for paying an estate tax would increase the exemption amount from $5.6 million to over $10 million for individuals and from $11.2 million to over $22 million if married. The bill would repeal the estate tax such that it would not apply to estates of decedents dying after December 31, 2023. The beneficiary’s stepped-up basis in estate property would be maintained.
Taxation of foreign income. Taxation of a corporation’s foreign income would change from a worldwide system to an exemption system, with a 100-percent exemption from U.S. tax for the foreign source portion of dividends paid by a foreign subsidiary to U.S. corporate shareholders that own 10 percent or more of the foreign subsidiary. The bill includes a transition tax for untaxed foreign earnings and provisions to prevent base erosion.
The 429-page House bill includes provisions that would impact other areas including education tax credits, private foundations and more. The release of the bill is the first detailed legislative step toward tax reform by the Trump administration. The Senate will also have its own version and the two will need to be melded together.