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Tax Reform Summary

Dec 7, 2017 02:14 PM
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If you are feeling confused by the recent tax reform proposals, you are not alone. With the Senate narrowly passing their version of tax reform early Saturday morning, both the House of Representatives and the Senate have now each passed their own versions of a tax legislation bill, but the two versions include many technical differences.

We have been closely monitoring the progress of these bills. Although the final details of the bill are yet to be determined, it is clear that it will have a dramatic impact on your 2018 tax return (filed in 2019).

House and Senate Republicans are set to reconcile differences between the two tax bills.  Here are a few highlights of things that may affect you.

 Individual tax rates

  • The House bill collapses the current seven brackets into four and keeps the top tax rate of 39.6%, although it raises the income level at which that applies. The changes would take effect in 2018.
  • The Senate bill has seven brackets, but reduces the top rate to 38.5% (currently 39.6%) for income over $500,000 for single filers and $1 million for couples filing jointly. The Senate bill also reduces income levels on other brackets compared with the current levels.

 Obamacare individual mandate

  • While the House bill makes no changes to the Affordable Care Act, the Senate bill would repeal the individual mandate that requires Americans to purchase health insurance or face a tax penalty.

 Mortgage interest deduction

  • The House bill would reduce the mortgage interest deduction for future home purchases.  Homeowners would be limited to deducting interest on up to $500,000 in mortgage debt. Deductions for second homes would no longer be allowed. Existing mortgages would not be affected.
  • The Senate bill does not change any of those provisions.

 Estate tax

  • The House and Senate bills would double the exemption next year for assets subject to the estate tax, a levy of as much as 40% that hits heirs of large estates.
  • The current exemption levels are $5.49 million for an individual and about $11 million for a couple.

 Alternative minimum tax

  • The House bill eliminates the alternative minimum taxes for individuals and corporations.
  • The Senate bill also repeals the tax, but AMT would return in 2026 as part of the expiration of the changes to that part of the tax code.

 Corporate rate reduction

  • The House and Senate bills permanently cut the corporate tax rate to 20% from 35%. The House cut would take effect next year, but the Senate bill delays it until 2019.

 Tax rate on pass-through businesses

  • The House and Senate bills also reduce taxes on pass-through businesses — sole proprietorships, partnerships, limited liability companies, and S corporations.
  • The changes are complicated and the bills take different approaches to those taxes.
  • The House bill would cap the top tax rate for pass-throughs at 25%, down from 39.6% individual rate.
  • The Senate plan would continue taxing pass-through businesses at the individual rate that would apply to the owner, with a top proposed rate of 38.5%. But the Senate bill would allow most pass-throughs to deduct about 23% of their business income from their taxes. 
  • This would likely exclude many service-based companies.

 State income tax

  • If you itemize your deductions, you can deduct state and local income taxes or sales taxes. Both proposals would eliminate the state and local income tax or sales tax deduction for individual taxpayers.
 
 
Dan Packard, CPA, Cooper Norman
You can read more about the author Dan Packard, MAcc, CPA, CFE, CVA here. 
 
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