Tax Reform Details

Tax Reform Details

On the heels of the “framework,” which was issued several weeks ago, the first official outline of the tax bill called, Tax Cuts & Jobs Act, has been released by the House Ways & Means Committee. It will provide clarity to the speculation that has been building over past months. 

Touted as a tax break for working families and small business, this bill cuts a wide path across the personal, small-business, corporate and estate tax structure. While not final, the first run of “tax reform” gives us a strong indication of the direction this tax bill will follow, and what the negotiating points will be. The following is a highlight of several of the issues in this bill which impact small business and individuals.

Small Business

As expected, the Act caps the tax rate on small business income (flow-through) to a top rate of 25%.  

It also allows businesses unlimited immediate write off of the full cost of new business equipment.

And maintains the interest expense write-off for small business loans. 

Individuals

The original framework started with three brackets,  12%, 25% and 35%. The recently released bill expands it to four by keeping the 39.6% rate for high-income individuals with taxable income over $1 million. More significantly, more income is subjected to lower rates than under the current system. It also:

• doubles the standard deduction, the base amount each taxpayer is given without having to specifically identify the cost. By way of example, married filers will see an increase from $12,700 to $24,000. Anything above that is eligible for itemized deduction;
• expands the Child Tax Credit and keeps the Child and Dependent Care Tax Credit as well as Earned Income Tax Credit;
• maintains the deduction for charitable contributions, but limits the deduction for medical expenses and student loan interest;
• keeps the home mortgage interest deduction for existing mortgages and limits the deduction on new borrowings over $500,000;
• caps the write off  of state and local property taxes at $10,000. As currently written, the deduction for state income taxes would longer be available;
• retains popular retirement savings options such as 401(k)s and Individual Retirement Accounts; and
• completely repeals the Alternative Minimum Tax.

Estate Tax

The bill provides immediate relief from the Estate Tax by doubling the amount of property exempt from taxation with a full repeal after six years.

Corporations

It also lowers the corporate (C-corporation) tax rate to 20%, down from a maximum rate of 35%.

What Happens Next?

The bill begins the mark-up process on November 6th and GOP leaders hope to have it on the House floor for a vote by Thanksgiving. Be on the lookout for updates as it moves through the House.