UPDATE: The House made several amendments to this bill subsequent to this article being published. See this link for a discussion of the more significant amendments.
The House of Representatives Ways & Means Committee released the draft text of its tax plan, and it contains important proposed changes to the U.S. tax code. Those changes largely follow the Unified Framework that was issued in late September. The proposed bill includes a mixture of tax cuts and revenue raisers. While we continue to unpack the details and the potential impacts, here's our initial take on some key provisions as they relate to both businesses and individuals.
For individual taxpayers, the proposed plan would:
- Reduce the number of brackets from seven to four — 12, 25, 35, and 39.6 percent. The Framework originally projected three tax brackets, but the top tax bracket would be retained under the new legislative text for income in excess of $1 million for married taxpayers filing jointly.
- Significantly boost the standard deduction in 2018 to $12,200 (single) and $24,400 (married couples). The tradeoff is that the personal exemption would be eliminated, along with a number of specific itemized deductions. Taken together, this appears likely to lower the number of taxpayers who would claim itemized deductions.
- Increase child and dependent care tax credits. These credits may help mitigate the impact of the elimination of itemized deductions and the personal exemption.
- Repeal deductions on state and local (income and sales) taxes and limit deductions on property taxes paid, up to $10,000. This is going to cost taxpayers in high-tax states — think New York, New Jersey, and California, among others — so expect to see plenty of pushback.
- Reduce the benefit of provisions related to home ownership. The current home mortgage interest deduction would be maintained for existing mortgages (up to $1 million) but would cap the deduction on mortgage loans up to $500,000 for future purchases. Additionally, the exclusion of gain from the sale of a primary residence would become more restrictive. Real estate and construction industry groups have expressed concerns about the impact on homeowners, homebuyers, and the housing market in general. Accordingly, these provisions will be subject to significant lobbying efforts.
- Nearly double the estate tax exemption from the current $5.49 million in 2017 for an individual to $10 million, indexed for inflation. The estate tax would be eliminated entirely by 2024, but the beneficiary’s stepped-up tax basis in estate property would still be maintained.
- Reduce the maximum gift tax rate to 35 percent with a $10 million exclusion. Repeal the alternative minimum tax (AMT). Many taxpayers won't be sad to see it go, but repealing it would reduce U.S. Treasury revenue by over $400 billion, according to one estimate.
- Generally maintain current retirement savings plans, including 401(k) plans. There were previously concerns that the Ways & Means Committee would make changes, but the draft legislative text appears to have largely left those provisions intact.
Many taxpayers won't be sad to see the AMT go, but repealing it would reduce U.S. Treasury revenue by over $400 billion, according to one estimate.
Domestic business taxation
For business entities, the proposed plan would:
- Create a flat corporate tax rate of 20 percent. This is decreased from the current graduated rate structure that tops out at 35 percent.
- Create a 25 percent rate on business income from a pass-through entity. Professional services would be excluded from this pass-through rate. Moreover, the plan includes provisions to determine the portion of pass-through income that qualifies for the lower rate versus income that is more appropriately characterized as compensation, subject to the individual rates.
- Repeal the AMT for corporations in addition to individuals.
- Eliminate net operating loss carrybacks and modify the application of carryforwards.
- Enable businesses to immediately write off the full cost of new equipment through 2022.
- Reduce the deductibility of business interest by limiting net interest deductions to 30 percent of adjusted taxable income. However, this limitation would not apply to businesses with less than $25 million in gross receipts, public utilities, and real property trades or businesses.
- Keep the low-income housing tax credit and the R&D tax credit. However, most other credits would be eliminated, such as the new market tax credit, historic rehab tax credit, and the work opportunity tax credit.
- Repeal the domestic production activities deduction.
The estate tax would be eliminated entirely by 2024, but the beneficiary’s stepped-up tax basis in estate property would still be maintained.
With respect to international taxation, the proposal would:
- Shift the Unites States to a “territorial” system in which U.S. corporations do not pay tax on profits earned in foreign subsidiaries. Note that this would not apply to individual shareholders of foreign corporations who would still pay tax on dividends received.
- As part of the transition to a territorial system, any current untaxed earnings in foreign subsidiary entities would be subject to an immediate tax of 12 percent for liquid assets and 5 percent for illiquid assets.
- Impose a current U.S. income tax on earnings in foreign subsidiaries deemed to be “excess returns” based on a routine expected return on tangible assets.
- Impose a 20 percent excise tax on deductible payments to foreign-related parties if the related parties are otherwise not subject to U.S. income tax on the payments received.
- Deny treaty withholding benefits to foreign-related parties in certain situations when the ultimate parent company is not eligible for treaty benefits.
Not surprisingly, reactions to the bill have been mixed. From here, the bill will go to markup next week and faces an uncertain future. Stay tuned for additional updates as the bill progresses.