Nov 03, 2017

SPECIAL ALERT: House Releases Tax Cuts and Jobs Act (H.R. 1)

Following many months of conjecture regarding what could be included in Trump-era tax reform, legislative language has arrived with the release of the Tax Cuts and Jobs Act (H.R. 1). The 429-page document, which was released by the House of Representatives today, is set to reconfigure the current tax incentives and burdens for both business and personal finances.

GOP leadership hopes to enact legislation before 2018 so stakeholders will need to quickly digest the bill and its potential effects.

We will be studying this bill and its impact. Following are a few of the major elements of the bill and how the provisions would change current law:

Corporate Tax Rate:  Beginning in 2018, 20% flat corporate tax rate; 25% flat rate for personal service corporations.

Pass-Through Tax Rate:  Beginning in 2018, 25% maximum tax rate on portion of pass-through entity distributions treated as business income (remaining portion of distributions treated as wage income subject  to individual income tax rates). Owners of shareholders receiving distributions from active business activities would be able to elect to: (1) treat 30% as business income and 70% as wage income, or (2) determine ratio of business income to wage income based on capital investment.

Individual Tax Rate:  The bill would have four tax brackets: 12%, 25%, 35%, and 39.6%, in addition to an effective fifth bracket at zero percent in the form of the enhanced standard deduction. The income levels would be indexed for Chained Consumer Price Index for eight All Urban Consumers (C-CPI-U) instead of CPI, a different measure of inflation.

Estate & Gift Taxes:  The bill would increase the federal estate and gift tax unified credit applicable exclusion amount to $10,000,000, effective for decedents dying and gifts made after 2017. The bill would repeal the federal estate tax, effective for estates of decedents dying after 2023.

Other Individual Income Tax Changes:  The bill would repeal the alternative minimum tax, cap the deduction for mortgage interest at $500,000 in debt on future home purchases (the cap is currently $1 million), retain the deduction for charitable giving with increased AGI limits, and repeal the state and local tax deduction except for property taxes up to $10,000.

The bill is still being digested on the Hill and by the public but the repeal of the state and local income tax deduction in particular will not be popular, especially in high income tax rate states such as New York, New Jersey, California, Oregon, Minnesota and others. The final version of a bill, if and when passed, could be significantly different that H.R. 1.

Please plan for a more detailed summary from BMSS next week.