GOP Tax Plan Released By House Ways and Means

The House Ways and Means Committee has proposed sweeping changes to the tax rules. The proposal would drop corporate rates from the current top rate of 35% to a top rate of 20%.  It also collapses the individual rates to 4 brackets ranging from 12% to 39.6%.    This is being touted as a middle class tax cut but is it?

How it affects individuals and families will depend a lot on where they live and how reliant they are on specific deductions. The deductions for state and local taxes and medical costs are on the chopping block.  Mortgage interest deductions would be limited and no deduction would be allowed for second homes.  Standard deductions double for most taxpayers, but they repeal the personal exemptions.  This would be a positive change for taxpayers who do not itemize but likely not for those who do.  The higher standard deduction minus is unlikely to make up for the lost exemptions and itemized deductions for many, if not most, folks who currently itemize.  The proposal would increase the child credit to $1,600 per child and extend the credit to those earning $230,000.   This could mitigate the loss of the exemption deductions for dependents but not those claimed by the taxpayer and spouse. 

The only way to know for certain how this bill would impact you would be to re-work your tax return under the new proposed laws.  My sense is that it will be a middle class tax cut for some and an increase for many.  Again, this is just a proposal at this point.  The final tax bill is likely to have many changes.  In its current form, it is estimated that the bill would increase the national debt by 1.4 trillion dollars.  

One item to note when doing your tax planning is the proposed change to the sale of principal residence rules.  Under the current law, you can exclude gain on the sale of your principal residence up to $250,000 for singles or $500,000 for married joint.  Currently, you need to have resided in the home for 2 of the past 5 years.  The new proposal would change that to 5 out of the last 8 years.  This rule would take effect for sales after 12/31/17.  This could negatively impact taxpayers whose houses are currently on the market if they have not met the new residency rules.  See item 7 below.

​For those of you with stock options, take a look at item 11 under business proposals.  The incentive to exercise and hold stock options may be on its way out.

Individual Proposals​

1.  Individual rates would be changed – 12% for income under $45000 single $90,000 joint, 25% up to $200,000 single $260,000 joint (I see the marriage penalty is back) 35% up to $500,000 single $1,000,000 joint, and 39.6% for all income over $500,000 single and $1,000,000 joint.
2. Personal and dependency exemption deductions (currently $4,050 each) would be eliminated.
3.  The child tax credit would be increased from $1,000 to $1,600 for a qualifying child..)
4. The standard deduction would be increased to $12,200 single, $18,300 HOH and
5. $24,400 MFJ. The additional standard deduction for the elderly and the blind would be repealed.
6. The phaseout of itemized deductions would be repealed.
7.  AMT would be repealed. AMT credit carryovers would reduce regular tax in 2018, and then become 50% refundable 2019–2021. Any unused AMT credit carryover would be 100% refundable in 2022.
8. For sales and exchanges after Dec. 31, 2017, §121 exclusion of gain on the sale of a personal residence would require that the home be owned and used for five of the last eight years. (Current law requires 2 out of the last 5.) Section 121 would be modified to phase-out the exclusion based on AGI above $250,000 ($500,000 MFJ).
9.  The credits for adoption and plug-in electric vehicles would be repealed.
10.  You will no longer be able to exclude from income amounts received from employers for employee achievement awards, dependent care assistance programs, moving expense reimbursement, and adoption assistance programs.
11. Education credits would be consolidated into one credit only - the American Opportunity Tax Credit The credit would remain the same at 100% of the first $2,000 and 25% of the next $2,000 and would be available for five years (the fifth year at ½ the rate of the first four years.)
12. The deduction for interest on student loans would be repealed. The exclusion for interest on US savings bonds used for higher education expenses would be repealed. The exclusion for employer provided education assistance programs would be repealed.
13. The special rule permitting a recharacterization of Roth IRA contributions as traditional IRA contributions would be repealed.
14. The moving expense deduction would be repealed.
15. The alimony paid deduction would be repealed for agreements executed after Dec. 31, 2017. There would be a corresponding repeal of the provisions providing inclusion of alimony in gross income.
16. The phase-out of itemized deductions would be repealed.
17. The medical expense deduction and the deduction for state and local taxes would be repealed.
18. The mortgage interest deduction would be reduced from acquisition debt amounts of $1,000,000 to $500,000 for new home purchases on or after Nov. 2, 2017. Interest on home equity borrowing after the effective date of the law would be repealed.
19.  Mortgage interest deduction would be limited to one qualified residence.
20. The 50% AGI limitation on cash contributions to public charities and certain private foundations would be increased to 60%.
21. Charity mileage would be indexed for inflation.
22. Miscellaneous itemized deductions for employee business expenses, personal casualty losses, and tax preparation fees would be repealed.
23. The exclusion for housing provided for the convenience of an employer and for employees of educational institutions would be limited to $50,000 and would phase-out beginning at AGI of $120,000. The exclusion would be limited to one residence.
24. The estate, gift, and generation skipping transfer tax exemption amount would be increased to $10,000,000 for decedents dying after Dec. 31, 2017. Estate taxes would be repealed after Dec. 31, 2023.

Business Proposals

1. Maximum corporate tax rates would be reduced to 20% from 35%. For a personal service  corporation, the maximum rate would be 25%.
2.  Dividends received by a domestic corporation from a specified 10%-owned foreign corporation would be allowed as a deduction in an amount equal to the foreign-source portion of such dividend
3. A portion of net income distributed by a pass-through entity to an owner or shareholder would be treated as “business income” subject to a maximum rate of 25%. Provisions are included to guard against reclassifying wages as business income to utilize the lower rate.
   
4. The 100% bonus depreciation (§168(k)) would be extended through Dec. 31, 2022.
5. Section 179 expensing would be increased to $5,000,000 for taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2023. A phase-out would apply if the business places in service more than $20,000,000 of §179 property during the taxable year.
   
6. The gross receipts test on the use of the cash method of accounting by a corporation or partnership with a corporate partner would be increased to $25,000,000.
7. Interest deduction would be limited for large corporations and partnerships. Businesses with gross receipts of less than $25,000,000 would be exempt.
   
8. The NOL carryback would be eliminated except for a one-year carryback for eligible disaster losses. The NOL carryforward would be indefinite (currently 20 years) but limited to 90% of taxable income (like AMT limitation now.).
9. Section 199 deduction for income attributable to domestic production activities would be repealed.
10. Self-created property (patent, invention, design, formula, or process) would not be treated as a capital asset.
11. Incentive stock options would be treated like non-qualified stock options (taxed at exercise unless subject to forfeiture or §83(b) election).
    
12. Section 1031 would apply to real property exchanges only.
13.  Rehabilitation credit, work opportunity credit, and disabled access credit would be repealed.
14.  No tax-exempt bonds could be issued for professional stadiums.