In early November, Republicans in the House of Representatives finally released the details of a tax reform plan that many have been speculating about for months. If enacted, the Tax Cuts and Jobs Act would implement the biggest changes to our nation’s tax code in more than three decades.
Of course, this is a very big “if.” Politicians in Washington remain deeply divided about tax reform, and the House bill will eventually have to be reconciled with a Senate tax reform plan.
But the House plan provides a good blueprint for what tax reform may eventually look like if and when it is passed. Following is a look at some of the major provisions of the plan that would affect individuals and businesses.
On the Individual Side
- The current seven individual income tax brackets would be reduced to just four brackets: 12%, 25%, 35% and 39.6%
- Earned income up to $24,000 would not be taxed. Income between $24,000 and $90,000 would be taxed at the 12% rate, income between $90,000 and $260,000 would be taxed at the 25% rate, income between $260,000 and $1 million would be taxed at the 35% rate, and income over $1 million would be taxed at the 39.6% rate.
- The child tax credit would be increased from $1,000 to $1,600. Also, a $300 tax credit would be added for the primary taxpayer, his or her spouse and non-child dependents, including college students.
- The standard deduction would be almost doubled — to $12,200 for singles and $24,400 for married couples in 2018 — but personal exemptions would be eliminated.
- Deductions for state and local income taxes (or SALT) and sales taxes would be eliminated.
- The deduction for mortgage interest on a primary residence would be limited to interest paid on mortgages up to $500,000, down from the current $1 million. Existing mortgages would not be affected, however.
- Deductions for property taxes paid would be limited to $10,000.
- The estate tax would be repealed beginning in 2024, while the estate tax exemption would double next year to $11.2 million per person and $22.4 million per married couple.
- The Alternative Minimum Tax (AMT) would be repealed, as would the adoption tax credit, the deduction for student loan interest and deductions for medical expenses.
On the Business Side
- The corporate tax rate would be slashed from 35% to 20% permanently.
- The top tax rate for pass-through businesses such as partnerships and S corporations would be 25%.
- A new one-time tax would be assessed on overseas profits of 12% for cash holdings and 5% for illiquid holdings.
- A new 10% tax would be assessed on the high-profit foreign subsidiaries of U.S. companies.
- Corporate interest deductions would be capped at 30% of earnings before interest, taxes, depreciation and amortization (or EBITDA), with real estate firms and small businesses exempt from the limit.
- Capital investments would be immediately deductible, instead of depreciated over time with a bonus in the first year.
Tallying Up the Tax Savings
It’s estimated that the Tax Cuts and Jobs Act would result in a total of $300 billion in tax reductions for individuals and $1 trillion in tax reductions for businesses. In addition, it would save families an estimated $172 billion in estate taxes.
We will continue to keep you posted on the latest developments regarding tax reform. In the meantime, please contact us if you have any questions.