Tax Update: U.S. Tax Reform Plans Announced by Trump Administration
On November 2, the Trump administration unveiled the long awaited details of its tax plan. The 429-page “Tax Cuts and Jobs Act“ (“the Act”) articulates the scope of the changes and contemplates new law for individuals & businesses. While the initial plan has been released, many GOP members are suggesting that the bill may be substantially rewritten over the weekend before a scheduled markup in the Ways and Means Committee on Monday, November 6, 2018. This blog pinpoints the key proposed changes (while not all-inclusive) that our firm will be monitoring to keep our clients informed.
REFORM FOR INDIVIDUALS WILL INCLUDE:
• A near-double increase in the standard deduction amount to $24,000 for married couples filing jointly (up from $12,700 in 2017 under current law) and to $12,000 for single filers (from $6,350). Single filers with at least one qualifying child could claim a standard deduction of $18,000 under the new legislation.
• Retention of the mortgage interest deduction for current indebtedness. Limitation of the mortgage interest deduction attributable to new acquisition indebtedness to amounts not in excess of $500,000 (the law currently allows interest deductions on acquisition indebtedness of up to $1 million). Interest would be deductible only on a taxpayer’s principal residence, and home equity indebtedness would no longer be deductible.
• Elimination of personal exemptions (under current law, a taxpayer generally may claim personal exemptions of $4,500 for each of the taxpayer, the taxpayer’s spouse, and any dependents).
• Elimination of the state and local income tax deduction, and a limitation on the deduction for real property taxes to $10,000.
• Elimination of various deductions, exclusions and credits. The Act eliminates the medical expense deduction; the deduction for alimony payments; the deduction for employee business expenses; the exclusion for dependent care expenses; the exclusion for adoption assistance; the adoption credit; the credit for plug-in electric drive vehicles and several other tax benefits.
• Elimination of the estate tax and generation skipping tax. The Act doubles the estate tax and generation skipping tax exemption and phases out the estate and generation skipping tax entirely over six years (the current rate is 40% for 2017, and it applies to estates and generation skipping transfers valued at more than $5.49 million for individuals, and $10.98 million for married couples). The step-up in tax basis on estate property is preserved. The gift tax rate is lowered to 35% and the basic exclusion amount is increased to $10 million (indexed for inflation).
• Retention of the earned income tax credit, child tax credit and charitable giving deduction.
REFORM FOR BUSINESSES WILL INCLUDE:
• Permanent decrease in the top corporate tax rate to 20% from its current 35%. Personal service corporations would be taxed at 25%.
• Decrease in the tax rate on a portion of “business income” received through a pass-through entity to 25%, while introducing safeguards to keep high earners from passing off wage income as business income eligible for the 25% rate. Owners of pass-through businesses-which include sole proprietorships, partnerships and S-corporations–currently pay tax on their businesses’ earnings at marginal tax rates up to 39.6%.
• Ability of businesses to immediately expense 100% of the costs of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. (Currently, businesses must depreciate the value of these assets over time.)
• Expansion of Section 179 expensing limitation to $5 million, and increase in the phase-out amount to $20 million. (Under current law, businesses may immediately expense up to $500,000 of the cost of any ‘section 179 property’ placed in service each taxable year.)
ALTERNATIVE MINIMUM TAX (AMT) REPEAL
The Act also includes plans to repeal the alternative minimum tax (AMT), a device intended to curb tax avoidance among high earners by modifying the computation of taxable income. Under current law, taxpayers must compute their income for purposes of both the regular income tax and AMT tax, and their tax liability is equal to the greater of their regular income tax liability or AMT tax liability. Under the provision, if a taxpayer has AMT credit carryforwards, the taxpayer would be able to claim a refund of 50 percent of the remaining credits (to the extent credits exceed regular tax for the year) in tax years beginning in 2019, 2020, and 2021. Taxpayers would be able to claim a refund of all remaining credits in the tax year beginning in 2022.
It remains to be seen whether these proposed changes will be enacted into law. We will continue to provide updates as the proposed reform plan reaches further development. For tax inquiries or information about our services, please contact us at firstname.lastname@example.org or (212) 245-5900.
Deven M. Conner, CPA, EA is a Tax Professional with FF&F. He is an IRS Enrolled Agent and has over 10 years of combined tax and public accounting experience comprised of family office groups, private equity firms, and forensic accounting. Deven has a strong background in individual, fiduciary, and partnership taxation. His diversified experience in the private and public sectors, which include a Big Four firm and top mid-size public accounting firm, serves as a solid foundation for his unique and comprehensive understanding of taxation.