News & Events

Summary of the “TAX CUTS AND JOBS ACT”

-by Ron Dean, Tax Manager; reviewed by David Gobeille, Partner

Tax Cuts and Jobs ActThe House and Ways Committee released an initial draft of tax reform legislation on November 2, 2017. The “Tax Cut & Jobs Act” provides significant changes to tax rules for both individuals and businesses. Although this legislation is probably subject to change, it provides a blueprint to what some of the final legislation may look like. The following is a summary of the most far-reaching provisions in the initial draft of the “Tax Cut & Jobs Act.”

Individuals

Tax Rate Changes

  • The 10% and 15% rates would be eliminated and replaced with a new 12% rate which would apply to the first $45,000 in taxable income for single filers and the first $90,000 for joint filers. The benefit of the new 12% individual income tax rate would be phased out for single filers with adjusted gross income (AGI) over $1 million and joint filers with AGI over $1.2 million.
  •  The 25% rate would apply to taxable income over $45,000 for single filers and $90,000 for joint filers.
  •  The 28% and 33% rates would be eliminated and the 35% rate would apply to taxable income over $200,000 for single filers and $260,000 for joint filers.
  •  The 39.6% rate would apply to taxable income over $500,000 for single filers and $1 million for joint filers.
  •  Capital Gains and qualified dividends would continue to be taxed at their current 0%, 15%, and 20% rates.

Sansiveri Observation: Note the reduced rates should provide some relief to taxpayers. For example, taxpayers currently in the 28% and 33% brackets would have that income taxed at the 25% rate. A Married joint filer with income of $1 million would have over $500,000 taxed at the 35% vs. 39.6% which would reduce their tax by approximately $25,000.

Other Individual Changes

  • The standard deduction will increase to $24,400 for joint returns and $12,200 for single filers. Single filers with at least one qualifying child would get an $18,300 standard deduction.
  • Personal exemptions would be repealed.
  • The Alternative Minimum Tax would be repealed.
  • The estate, gift, and generation-skipping taxes will initially stay in the law with a doubled $10 million basic exclusion, but the estate and generation-skipping taxes would be repealed after 2023 (with a stepped-up basis in property) and the top rate on the gift tax would be reduced to 35%.
  • The child tax credit would increase from $1,000 to $1,600, and a new $300 credit would be available for tax years before 2023 for non-child dependents and taxpayers themselves. These credits would be subject to an increased phaseout (single filers from $75,000 to $115,000 and for joint filers from $110,000 to $230,000).
  • The ownership period for gain exclusion from the sale of a principal residence would be extended from two out of the previous five years to five out of the previous eight years. The exclusion would only be available once every five years and would be subject to phaseout limitations.
  • The current education credits (American Opportunity Credit, the Hope Scholarship Credit, and the Lifetime Learning Credit) would all be consolidated into one American opportunity credit. Like the current AOTC, the new AOTC would provide a 100% credit for the first $2,000 of expenses, and a 25% credit for the next $2,000 of expenses.
  • New contributions to a Coverdell education savings account will be disallowed after 2017 and the 529 plan will be expanded to allow unborn children to be designated as beneficiaries and to cover expenses for apprenticeship programs and up to $10,000 of elementary and high school expenses.

Sansiveri Observation: The Repeal of the Estate tax and Alternative Minimum tax are seen as items benefiting the only the very top income earners of the country, so these two changes will be subject to a lot of scrutiny before they will ever become law.

Modification and repeal of current individual tax expenditures

  • The principal cap on deductible home mortgage interest for new mortgages (after November 2, 2017) would be reduced from $1 million to $500,000. The deduction would no longer be available for a second residence or home equity lines of credit. Existing mortgages over $500,000 would be grandfathered to allow the higher deduction.
  • The deduction for state and local income taxes would be repealed and a limitation of $10,000 would be placed on real estate taxes.
  • The 50% AGI limitation for charitable contributions would increase to 60%.
  • The deduction for medical expenses, casualty losses, tax preparation expenses, alimony payments, and moving expenses would be repealed.
  • The above-the-line deductions for student loan interest and qualified tuition including related expenses would be repealed

Sansiveri Observation: The reduction of the mortgage interest deduction and elimination of the deduction for state taxes is already seeing significant pushback from the real estate and mortgage industries and from states like those in the Northeast where real estate prices and state taxes are high.

Corporations

20% corporate tax rate — The current graduated rates of 15%, 25%, 34%, and 35% would be replaced with a 20% flat rate effective for tax years beginning after 2017.

100% cost recovery deduction — Instead of utilizing bonus depreciation for qualified property, taxpayers would be able to expense 100% of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. Qualified property would not include any property used by a regulated public utility company or any property used in a real property trade or business.

Section 179 expensing — The dollar limitation for Section 179 would increase from $500,000 to $5 million with the phaseout also increasing from $2 million to $20 million of the cost of property placed in service.

Like-kind exchanges — These types of exchanges would be allowed for real property only. There will be a transition rule that allows for like-kind exchanges that are currently underway to be completed.

Net operating losses — The deduction of an NOL carryforward would be limited to 90% of a C corporation’s taxable income for the year. The carryback provisions would be generally repealed, except for a special one-year carryback for small businesses and farms for certain casualty and disaster losses. NOLs arising in tax years beginning after 2017 could be carried forward indefinitely with an interest factor to preserve its value.

FICA Tip Credit — The FICA tip credit will still be in place but there will be a modification to the credit to reflect tips reported above the current minimum wage as well as expanded reporting requirements.

The initial draft will also repeal or terminate the following:

  • Corporate AMT
  • Domestic production activities deduction (Section 199)
  • Rehabilitation tax credit for old and/or historic buildings
  • Work opportunity tax credit for targeted groups
  • New markets tax credit

Other Miscellaneous Items

Accounting methods — The following are the accounting methods changes included in the legislation. These changes will have the biggest impact on small businesses.

  • The $5 million annual gross receipts threshold for the use of the cash method of accounting for corporations (and partnerships with a corporate partner) would be increased to $25 million. This gross receipt test would be adjusted by inflation annually.
  • Business that meet the gross receipts test would still be able to use the cash method of accounting even if the business had inventory.
  • Business that meet the gross receipts test would be exempt from the uniform capitalization (UNICAP) rules and the percentage-of-completion accounting method for long-term contracts.

401(k) Plans — Although there was talk of major changes to restructure the tax savings from retirement plans, most notably 401(k) plans, the initial “Tax Cut & Jobs Act” does not have any significant modifications to the current law

Pass-through Tax Rate – A significant change would be how pass-through entity income (from partnerships, LLC’s and S Corporations) will be taxed. These rules will be complex but essentially a portion of net income from the pass-through entity will be taxed at a maximum rate of 25%. This new rate will not be available for specified service activities which are defined in Sec. 1202(e)(3)(A) as any trade of business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of ties employees.

These are just some of the significant changes included in the “Tax Cut & Jobs Act” legislation. All the above is subject to change as the legislation has not been finalized. If you have any questions regarding how the proposed changes may impact your situation, please to contact one of the experienced tax specialists at Sansiveri, Kimball & Company, LLP at 401-331-0500. We will be monitoring the progress of the legislation and keep you informed regarding items that may affect you in the future.