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Finally . . . Proposed Tax Reform

(First in a series)

 

Recently the House Committee on Ways and Means released tax reform legislation known as the Tax Cuts and Jobs Act, intended to cut income tax rates for individuals and businesses. Sponsors say the plan would reform the tax code by lowering tax rates on wages, investment, and business income, broadening the tax base, and simplifying the tax code.

The Joint Committee on Taxation estimates the static revenue loss from the plan would cost $1.5 trillion, however new tax revenues generated by economic growth are estimated to total $1 trillion, bringing the plan closer to revenue neutral within the first 10 years.

The new tax bill is still very much a work in progress and remains a hot issue since it affects so much in the life of a business or individual. Let’s review some proposed key changes:

  • Individual Income Tax:
    • Consolidates the current seven tax rate brackets into four, with rates of 12%, 25%, 35% and 39.6%;
    • Eliminates personal exemption yet creates a $300 non-child dependent personal credit;
    • Increases child tax credit to $1600, with each parent allowed a $300 expense credit;
    • Filing as single:
      • Income threshold brackets will be up to $45,000, $200,000, $500,000 and more than $500,000;
      • Deductions will increase from $6350 to $12,000;
    • Filing as married couple:
      • Individual threshold brackets will be up to $90,000, $260,000, $1 million and more than $1 million;
      • Deductions will increase from $12,700 to $24,000;
    • Eliminates medical expense deductions;
    • Preserves mortgage interest deduction for existing mortgages but includes cap of $500,000 for new homes.
    • Eliminates deductions for state and local income taxes. (Residents of states with no state tax can expect to lose the sales tax deduction.)
  • Estate Tax:
    • Doubles the estate tax exemptions from $5 million to $10 million.
  • Business Income Tax:
    • Reduces multifamily business income earned by pass-through entities (LLCs, partnerships and S corporations) by lowering tax rate from 39.6% to 25%;
    • Reduces corporate income tax rate from 35% to 20%;
    • Increases favorable treatment for income earned abroad, which will either not be taxed or taxed less than 20%;
    • Eliminates business deductions for:
      • Employer-sponsored health insurance;
      • Interest expenses;
      • Entertainment expenses;
      • Domestic production activities; and
      • New markets tax credit.
  • Housing:
    • Limits mortgage interest tax deductions to new loans of no more than $500,000, down from the current $1 million;
    • Deductions for second homes will no longer be allowed;
    • Deductions for property taxes will be capped at $10,000.

Encouragingly, this tax reform legislation is the most detailed effort to date, itemizing each proposed change to the tax code along with appropriate transitions, and other specific provisions as necessary.

To no surprise, the legislation includes many tax cuts, but also proposes significant broadening of the tax base to finance these cuts. It also scales back or reforms numerous tax breaks and deductions and introduces a simplification of the currently complex tax code.

But the process just began. The bill is still in committee and then must pass the full House and Senate and then a conference committee between House and Senate before final legislation is passed and sent to the President (whew!).

Bottom line: changes are guaranteed! We’ll blog regularly about the bill’s provisions, its progress and amendments along the way, so check back often.

In the meantime, if you have any questions regarding current tax law, the proven tax accounting firm of Patrick & Robinson CPAs can help. Contact us at Office@CPAsite.com or (904) 396-5400.

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