On November 2, 2017, the House released a draft of the “Tax Cuts and Jobs Act”. If passed, this legislation will represent the most substantial tax reform since 1986. As with most tax reform legislation, the general approach of the bill is broad-based tax rate reduction offset by elimination of targeted tax benefits.
Consistent with any legislation, there are both winners and losers, mostly dependent on how impacted you might be by some of the targeted tax incentives which are eliminated. We are still analyzing the bill to make overall assessments. We will soon be able to offer our clients an assessment of how the Tax Reform will impact your specific situation.
Below is a brief summary of the highlights of the proposed reform. This is not comprehensive, and we are certain there will be additional drafts of the bill before and if there is final passage. We hope you find this summary helpful. Please feel free to contact us with specific questions.
I. Tax Rates – There are now two separate tax brackets for ordinary income tax and capital gains tax.
Ordinary Income Tax Brackets
Rate Married Single
12% Under $90K Under $45K
25% $90K – $260K $45K – $200K
35% $260K – $1M $200K – $500K
39.6% $1M + $500K +
Capital Gains Tax Brackets
Rate Married Single
0% $77,200 1/2 of Married
15% $77,200 – $479K $38,600 – $425,800
20% $479K + $425,800 +
II. Enhancement of Standard Deduction
Married Head of Household Single
$24,400 3/4 of Married 1/2 of Married
III. Deduction for Personal Exemptions is Repealed
IV. Enhancement of Child/Dependent Credits
–Credit for qualifying child increases from $1,000 to $1,600.
–A temporary credit for other dependents (including taxpayer and spouse) of $300 is allowed from 2018 – 2022 (perhaps to partially offset loss of personal exemption).
–Income at which phaseout begins increases from $110,000 to $230,000 for married taxpayers and to an amount equal to 1/2 of the threshold for married taxpayers for all other taxpayers.
–The annual child credit will now be subject to inflation adjustments beginning after 2018.
V. AMT is Repealed.
VI. Maximum Rate on Business Income of Individuals:
–30% of business income (Schedule C and K-1 income) will be subject to a maximum 25% tax rate.
–Above limitation is 100% of business income for passive investors.
–Complex calculation allows the 30% limitation to be increased for business employing large amounts of assets.
–Generally, no rate reduction is allowed for business income arising from personal services.
VII. Other Selected Changes:
-Elimination of the Following Deductions:
–Student loan interest deduction.
–Medical expense deduction.
–Charitable deduction for contributions to college athletic booster clubs.
–Moving expense deduction.
–Alimony deduction is disallowed for new agreements. Similarly, alimony income does not have to be reported.
–Itemized deduction phase-out.
–Maximum mortgage for which deduction is allowed is reduced from $1,000,000 to $500,000 for new mortgages.
–Deductions for second homes are eliminated.
–Home Equity interest deductions are eliminated (unless used for principal residence).
-Exclusion of Gain on Sale of Primary Home:
–Ownership and occupancy requirements increased from 2 of the previous 5 years to 5 of the previous 8 years.
-Deferred Compensation Plans Severely Curtailed.
-Bonus Depreciation Deduction Increased From 50% to 100%.
-Maximum Allowed Annual “Section 179” Deduction Increased to $5,000,000.