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Proposed Tax Plan from House Republicans

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Proposed Tax Plan from House Republicans

11/9/17 – Curt Wenzler

Contributing author - Jill Kruetzkamp

On Thursday, November 2, 2017, House Republicans released a bill which, if passed, would make major changes to the current tax code impacting virtually every individual and business.  The proposed plan has a long way to go before any of the provisions are passed and made effective. The Senate Finance Committee is also working on a tax reform bill. If passed into law, the majority changes in the proposed bill would not take effect until in 2018. 

Some of the key elements in the bill are:

  • Tax Brackets - The bill would reduce the current 7 tax brackets to 4 tax brackets. The top rate would stay the same at 39.6% but would apply to married couples with income of greater than $1 million from the current income of greater than $480,050. The chart below shows the current and proposed rates for a married couple filing joint.

 

  • Repeal the individual Alternative Minimum Tax
  • Repeal the estate tax over six years
  • Double the amount of exempt inherited wealth from $5.5 million to $11 million

Standard Deduction, Personal Exemption & Child Tax Credit

Deductions

  • Repeal casualty loss deduction
  • Repeal alimony deduction
  • Repeal student loan interest deduction
  • Repeal medical expense deduction
  • Repeal state and local income tax and sales taxes deduction
  • Repeal Deduction for tax preparation
  • State and local property taxes remain deductible up to $10,000
  • Mortgage interest remains deductible with the cap on newly purchased homes decreasing from $1 million to $500,000
  • Charitable contributions retained

 Credits

  • Adoption credit repealed
  • Elderly and totally and permanently disabled credits repealed
  • Mortgage credit certificates repealed
  • Plug-in electric vehicles credit repealed
  • Current education credits (American Opportunity, Hope and Lifetime) would be combined into one education credit.  Proposed would be 100% credit on the first $2,000 and 25% of the next $2,000.
  • Contributions to Coverdale education savings accounts would be prohibited.  Existing Coverdale accounts can be rolled over into a 529 Plan.

Income from Pass-Through Businesses

  • Create a new 25% rate for some pass-through business income – Sole proprietorships 1040 Schedule C, Partnerships 1065 K-1, and S Corporations 1120S K-1. Currently the income is being taxed at the taxpayer’s individual tax rate
  • Certain Personal services businesses would not be eligible for the 25% rate: Law, accounting, health, engineering, performing arts, financial services, brokerage services and consulting
  • Passive activities would be eligible for the 25% rate
  • Non-passive pass-through business activities, including wages, would generally be 30% taxed at 25% and the other 70% at the taxpayer’s individual tax rate

Business Provisions

  • A flat corporate rate of 20% (25% for personal service corporations), would replace the current four tier schedule (15%, 25%, 34% and 35%)
  • Repeal the Corporate Alternative Minimum Tax
  • Most business credits repealed except research and development and low-income housing

REPEALED CREDITS/DEDUCTIONS

    • Domestic Production
    • Orphan Drug Credit (testing for rare diseases)
    • Corporate Charitable Contributions
    • Energy Production Credit
    • Energy Investment Credit
    • Work Opportunity Credit
    • Access for disabled Credit
    • Oil and Gas Credits
    • New Markets Credit

MODIFIED CREDITS

    • Social Security taxes on employee tips
    • Electricity from certain renewable sources
    • Production from advanced nuclear power facilities
    • Investment tax Credit for eligible energy property
  • Qualified property, newly acquired, and placed in service can be expensed at 100% (additional year for longer life property).
  • Section 179 limitation would be raised to $5 million from $500, 000 and the phase-out threshold to $20 million from $2 million
  • Like-kind (Sec. 1031) exchanges limited to real estate with the exception of pending exchanges 
  • Net Operating Losses limited to 90% of taxable income. Indefinite carry forward and no carry back
  • Recreation and entertainment expenses limited to amounts included in employees’ taxable compensation
  • Cash Accounting method of accounting made available to corporations with gross receipts of $20 million or less from the current $5 Million
  • Exemption for the percentage-of completion method for long term contracts would increase from $10 million to $25 million
  • Several tax exempt bonds would become taxable:
    • Private Activity Bonds
    • Professional Sports Stadium Construction Bonds
    • Advance refunding bonds
    • New tax credit bonds
    • Public infrastructure bonds
    • Hospital Construction Bonds