At nearly 500 pages and counting, the Tax Cuts and Jobs Bill (H.R. 1) is the first significant tax reform effort undertaken by Congress in more than 30 years. If the proposed tax reform becomes legislation, these tax changes will affect everyone from individual taxpayers to business owners and educational institutions.
Tax Brackets. The number of tax brackets is reduced to four (currently there are seven): 12%, 25%, 35% and 39.6%.
For individuals, the following tax rates apply:
12% up to $45,000
25% up to $200,000
35% up to $500,000
39.6% over $500,000
For married couples filing jointly, the following rates apply:
12% up to $90,000
25% up to $260,000
35% up to $1 million
39.6% over $1 million
Standard Deduction. The standard deduction increases to from $6,350 (2017) to $12,000 for individuals and from $12,700 (2017) to $24,000 for married couples.
Personal Exemption. The deduction for personal exemptions is repealed.
Child Tax Credit. The Child Tax Credit increases to $2,000 from the current $1,000. An additional $500 credit is provided for each non-child dependent. Also, Social Security numbers for children are required before claiming the enhanced credit.
Alternative Minimum Tax. The AMT remains but with increased threshold amounts, affecting fewer taxpayers.
Capital Gains and Dividends. The maximum tax rate remains at 23.8% (20% plus the 3.8% Medicare tax for taxpayers with income above $200,000 or $250,000 married filing jointly).
Estate Tax. The exemption (currently $5.5 million) immediately doubles to $11.2 million and remains at this level for the next six years, after which time the estate tax is is eliminated completely (tax year 2025 and beyond).
Education Tax Credits. Coverdell plans (Section 530 Program) are eliminated and 529 Savings Plans are expanded to allow some funds to be used for K-12 education. Rollovers to Achieving a Better Life Experience (ABLE) Sec. 529A accounts will be allowed as well.
Mortgage Interest Deduction. Remains but with a few changes such as allowing interest deduction for up to $500,000 (currently $1 million) in mortgage principal on new homes. Existing mortgages are grandfathered in.
State and Local Income Tax Deduction. Preserved. Deduction allowed for up to $10,000 a year in state and local property taxes; however, taxpayers would no longer be able to deduct state and local income or sales taxes.
Charitable Contributions. Deductions for charitable donations remain.
Medical Expense Deductions. The Medical expens deduction (currently 10% of AGI) is temporarily lowered to 7.5% of income for tax years 2017 and 2018.
Student Loan Interest Deduction. Repealed.
Miscellaneous Deductions. Many are repealed including those relating to tax preparation, alimony payments, and moving expenses with the exception of the moving expense reimbursement for members of the Armed Forces on active duty who move because of a military order.
Adoption Tax Credit. Remains.
Electric Vehicles. The $7,500 tax credit for the purchase of electric vehicles is eliminated.
Corporate Tax Rate. Reduced to 20% from 35%.
Territorial Taxation. Companies with offshore earnings, currently taxed at a 35% rate, would transition to a territorial tax system. Under the tax reform bill income derived from offshore earnings, if repatriated, would be subject to an effective tax rate of 14% for earnings held in liquid assets and 7% for illiquid assets.
Business Interest. Small businesses retain the ability to write off interest on loans.
Business Expensing. Businesses would be allowed to immediately write off the full cost of new equipment.
Business Entertainment Expenses Deduction. The deduction for business entertainment expenses is eliminated.
Pass-through Entities. The tax rate on pass-through business entities is reduced to a maximum of 25%. Furthermore, a 9% tax rate (vs. the 12% tax rate currently in place) now applies for the first $75,000 ($37,500 for single filers and $56,250 for heads of household) in pass-through business income of an active owner or shareholder earning less than $150,000. The threshold amount is $75,000 for single filers and $112,500 for heads of household. This 9% rate applies to all businesses (subject to the $75,000 income ceiling) and is phased in at 11% for 2018 and 2019, 10% for 2020 and 2021 and 9% for tax year 2022 and beyond.
Low-income Housing Tax Credit. Remains.
Research & Development Tax Credit. Remains.
Work Opportunity Tax Credit. Repealed.
Endowment Assets. A 1.4% excise tax is imposed on investment income derived from endowment funds at private schools (colleges and universities). An exclusion is provided for an institution whose endowment (fair market value) is less than $250,000 per student.