Tax Alert: Tax Cuts and Jobs Act

On November 2, 2017, House Republicans unveiled their much-anticipated tax reform legislation, the Tax Cuts and Jobs Act (HR 1) (“House Bill”). As various parts of the House Bill and eventually a Senate version will be negotiated by Congress to obtain the votes needed to pass a final draft, the House Bill should be viewed as a starting point to a process which will likely take several months to conclude, with no certainty that any Bill will be delivered to President Trump for signature.

While many taxpayers were concerned over the potential elimination of retirement saving plans (i.e., 401(k)s, IRAs, etc.), the House Bill in its current form does not include any such reform in this area.  Additionally, the itemized deduction for charitable donations will be retained.

Below is a summary of some of the significant changes which would affect individual and business taxpayers:

Individuals:

  • Reduce the tax rates to 12, 25, and 35 percent. For joint filers, the 25 percent tax rate would start at $90,000 of taxable income; the 35 percent tax rate would start at $260,000 of taxable income (half for single filers). The current 39.6 percent tax rate would be maintained for joint filers with taxable income of more than $1 million (half for single filers);
  • Increase the standard deduction from $6,350 to $12,200 for individual filers and $12,700 to $24,400 for married filers;
  • Eliminate the alternative minimum tax (“AMT”), as well as personal exemptions;
  • Lower the debt limit for the home mortgage interest deduction from $1 million to $500,000 for mortgages entered into after passage of the House Bill. Existing mortgages would be grandfathered in, thus retaining the current debt limit of $1 million;
  • Limit the itemized deduction for state and local property taxes to $10,000 while eliminating the itemized deduction for state and local income taxes;
  • Double the current exclusion ($5.49 million for 2017; $5.60 million for 2018) for Estate & Generation-Skipping Transfer taxes, with full repeal after six years;
  • Preserve the Earned Income Credit, while establishing a new Family Credit, which includes an increase of the Child Tax Credit from $1,000 to $1,600, as well as a $300 credit for each parent and nonchild dependent.

Business:

  •  Reduce the corporate tax rate to a flat rate of 20 percent and repeal the AMT;
  • Create a top tax rate of 25 percent on pass-through income, however there are several exceptions, some of which are by industry;
  • Retroactively establish a temporary 100 percent expensing write-off for property used in a trade or business placed in service from September 28, 2017 – December 31, 2022;
  • Increase the Internal Revenue Code (“IRC”) Sec. 179 expensing limitation and phase-out amount to $5 million and $20 million, respectively;
  • Cap the deduction for net interest expenses at 30 percent of adjusted taxable income, except for small businesses;
  • Eliminate the IRC Sec. 199 Domestic Production Activities Deduction, as well as certain entertainment and fringe benefit related deductions;
  • Modify the net operating loss deduction carryover and carryback rules;
  • Repeal numerous tax credit initiatives, including the Work Opportunity Credit, New Market Tax Credits and Historical Tax Credits, while preserving the Low-Income Housing and Research & Development Tax Credits;
  • Eliminate the like-kind exchange regime for any exchange that does not involve real estate;
  • Require U.S. shareholders that own at least 10% of a foreign subsidiary to include foreign earnings and profits that have not been previously subject to U.S. tax in taxable income. Earnings and profits associated with cash and cash equivalents would be taxed at a 12 percent rate, while the remainder would be taxed at a 5 percent rate. Impacted taxpayers can elect to pay the tax ratably over an 8-year period; and
  • Alter the U.S. corporate taxability of dividends received by 10 percent owners of certain foreign corporations.

As mentioned above, this is only the starting point. We expect numerous iterations over the next few months as the negotiation process plays out.

At Sax LLP, we are committed to being at the forefront of this legislation and will continue to provide updates as they emerge. Should you have any questions or concerns in the interim, please do not hesitate to contact a Sax advisor at (973) 472-6250.