Update on the GOP Tax Bill

Last Thursday the tax community started buzzing with the release of the initial version of the GOP tax bill.  It is possible that reading the new tax bill did not make your top five list of things you wanted to do this weekend.  Fortunately, you have us for that! While the current bill gives us insight into the ultimate goal and intent of the bill, it is important to keep in mind that this is the very beginning of the process and there will most likely be modifications to come as the bill makes its way through the house, an alternative bill is initiated in the Senate, and a combination of the two is agreed upon and sent to the President to sign.   Having said that, we thought it important to provide you details of some of the most significant provisions as they pertain to your tax returns.

Summary of individual changes – Most to be effective for tax year 2018

  • The bill merges the prior seven tax brackets into four (12%, 25%, 35%, 39.6%) and adjusts the spacing between the four brackets. High income taxpayers will benefit as the top, 39.6% bracket, which currently begins at income of $467,000 for MFJ, would not kick in until a much higher income level of $1,000,000.
    • Note: Under the proposed brackets the 35% bracket is reached much sooner, however, the benefit received from the extension of the 25% bracket which eliminates the 28% and 33% brackets, will cause just about all taxpayers to save in taxes at all levels of taxable income.
  • The bad news…the formula for arriving at taxable income will change making it possible to produce a higher amount of taxable income in 2018 for income and expenses that are identical to 2017. Some of the proposed adjustments are listed below:
    • The standard deduction will increase from $12,200 to $24,400 drastically helping taxpayers in the lowest bracket
    • All personal exemptions are eliminated
    • Itemized deductions would be altered:
      • Deduction for state taxes will be repealed – painful for California and other high tax state residents
      • Property tax deduction retained but now subject to a maximum deduction of $10,000
      • Mortgage interest deduction retained but at a modified loan threshold of $500,000 for new mortgages entered into after November 2 of 2017. Previous mortgages retain the current deduction for loans up to $1,000,000
        • Mortgage deduction would be available for only one home and not two as is currently allowed
        • There would be no deduction for a home equity line of credit
        • The new $500,000 limit would apply to loans being refinanced after November 2
      • Most above the line deductions would be repealed
      • The credit for plug in electric drive motor vehicle credit would be repealed
      • Education credits: the current three education tax credits will be merged into an enhanced American Opportunity Credit worth 100% of first $2,000 of eligible expenses and 25% of the next $2,000.  The credit would be extended for one additional year from four to five and up to $500 of the credit would be refundable
      • Student loan interest deduction would be repealed
  • 25% rate on passthrough business income…kind of…:
    • Passthrough income from passive investments in an S-Corp or partnership will be taxed at a max rate of 25%.
    • However, there is some bad news here. As the bill stands passthrough income from an “active” activity (e.g. one in which you participate) may not qualify for this reduced rate.
      • For “active” business passthrough income a rate of 30% may be elected to be considered “business income” eligible for the reduced rate. The remaining 70% will be taxed at ordinary rates
      • This 30% exemption is not available to owners of personal service corporations which generally include lawyers, accountants, and, you guessed it… doctors.
      • There is an optional calculation that can be used that will measure a capital percentage based on a rate multiplied by the capital investments of the business.
    • Note: This provision is currently one of the most debated as it seems to exclude most small business owners from benefiting from the reduced business taxes that Trump wanted to implement. Stay posted for possible changes here which will impact a majority of our clients.
  • Gift tax exemption would be increased from $5M to $10M and the estate tax would repealed until 2023.
  • Exclusion on Gain from the sale of a personal residence would require living in the home residence for 5 out of last 8 years rather than the current requirement of 2 of last 5. The exemption would be set to phase out, dollar for dollar, for taxpayers with income over $500,000 for married taxpayers; $250,000 for singles.
  • Perhaps one of the most significant changes in the provision is the repeal of the AMT (alternative minimum tax). A large portion of our client base will stand to benefit a great deal from this provision.

Summary of business changes – Most to be effective for tax year 2018

  • A flat C-corporation tax rate of 20% would be implemented instead of the current graduated system which tops out at 35%. The tax rate would be 25% for Personal Service Corporations taxed as C-Corps
  • 100% bonus depreciation would be available for assets placed in service from 9/27/17 to 12/31/2022.
  • Section 179 deduction limit would be increased from $500,000 to $5,000,000
  • A limit on business interest expense (30% of adjusted taxable income) would be implemented for businesses with average gross receipts of $25,000,000 or more.
  • There would no longer be a deduction available for entertainment expenses. Due to past abuse and limited IRS ability to determine what is personal and what is business, deductions for entertainment expenses would be eliminated.
    • A deduction for meals will still be available, subject to the current 50% limit.
  • The Domestic Production Activities Deduction (DPAD) of 9% of production income would be repealed. This will impact many of our clients who use a CAD/CAM machine for milling their own crowns.
-David Knittel, Director of Tax, Practice CFO
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