It’s Too Soon to Predict How the Tax Changes Will Affect You

THERE IS STILL A LONG WAY TO GO BEFORE ANY ACTUAL TAX LAW IS FINALIZED. The tax bill unveiled by the House Ways and Means Committee on Thursday, November 2nd was just the beginning of a long process to create the widely anticipated tax reform legislation promising to reduce rates and simplify the tax law.

This initial bill incorporates many of the provisions listed in the Republicans’ September tax reform framework while providing much needed new details. Some key provisions for individuals and businesses that we’re following include:

Individuals

  • New tax rates. The bill would impose four tax rates on individuals (12%, 25%, 35% and 39%). The current tax system is one consisting of seven brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
  • Standard deduction increase and personal exemption is eliminated. The standard deduction would increase from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,000 for married couples filing jointly. The deduction for personal exemptions would be eliminated.
  • Most itemized deductions for individuals would be repealed. Deductions would be repealed for medical expenses, tax preparation expenses, moving expenses, and most personal casualty losses, unless the loss is related to special disaster-relief legislation.
  • The deduction for state and local income taxes would be eliminated. While, the deduction for state and local property taxes would be capped at $10,000.
  • A lower limit on the deductibility of home mortgage interest. The home-mortgage interest deduction would be reduced for new purchases to $500,000 from the current $1 million. Older mortgages already in place would be grandfathered in.
  • Repeal of the Alternative Minimum Tax (AMT). This 47-year-old tax was originally targeted at the super-wealthy when it came out. Currently, taxpayers with lots of itemized deductions must figure their tax returns twice and pay whichever is higher: the AMT or their regular tax. The AMT denies deductions for things such as dependents and payments for real estate and state taxes. Overtime it has been argued that the AMT has evolved into a surtax on the middle and upper middle class.
  • By 2023 the Estate Tax would be eliminated. The estate tax would be repealed with the step-up in basis for inherited property retained. The estate tax exclusion amount would double. The top gift tax rate would be lowered to 35%.
  • A portion of your business related “Pass-through Income” (30%) may be taxed at no more than the 25% tax rate. The remaining 70% would be taxed at your regular tax rate. That is below the 39.6 % top individual income rate that now applies to all pass-through income.

 

Businesses

  • Higher expensing levels. The bill would provide a 100% expensing of qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. It would also increase tenfold the Sec.179 expensing limitation ceiling and phase out threshold to $5 million and $20 million respectively.
  • Cash accounting method more widely available.The bill would increase to $25 million the current $5 million average gross receipts ceiling for corporations generally permitted to use the cash method of accounting and extend it to businesses with inventories. Such businesses also would be exempted from the uniform capitalization (UNICAP) rules. The exemption from the percentage-of-completion method for long-term contracts of $10 million in average gross receipts would also be increased to $25 million.
  • Deductions of net operating losses (NOLs) would be limited to 90% of taxable income. NOLs would have an indefinite carry forward period, but carrybacks would no longer be available for most businesses.
  • Like-kind exchanges limited to real estate. The bill would limit like-kind exchange treatment to real estate, but a transition rule would allow completion of currently pending Sec. 1031 exchanges of personal property.
  • Business and energy credits curtailed. Offsetting some of the revenue loss resulting from the lower top corporate tax rate, the bill would repeal a number of business credits, including:
    • The work opportunity tax credit (Sec. 51).
    • The credit for employer-provided child care (Sec. 45F).
    • The credit for rehabilitation of qualified buildings or certified historic structures (Sec. 47).
    • The Sec. 45D new markets tax credit. Credits allocated before 2018 could still be used in up to seven subsequent years.
    • The credit for providing access to disabled individuals (Sec. 44).
    • The credit for enhanced oil recovery (Sec. 43).
    • The credit for producing oil and gas from marginal wells (Sec. 45I)

Many More Details and Discussions To Come!

The Senate Finance Committee is expected to unveil its version of tax reform legislation this week. It is unclear how much that bill will differ from the House bill just released. At 429 pages, there’s much in the bill that isn’t set. KatzAbosch will continue to monitor these provisions and others. We will continue to notify you on these significant changes as they become more established.   PLEASE REMEMBER THIS IS JUST THE BEGINNING OF THE TAX LEGISLATIVE PROCESS AND MUCH OF WHAT IS DISCUSSED ABOVE MAY BE ELIMINATED OR CHANGED IN THE FINAL TAX PACKAGE.

In the meantime, if you have any questions or concerns about any part of the legislation and how it may affect your tax planning for 2018, please don’t hesitate to contact your KatzAbosch representative; or call us  at 410.828.2727 and ask to speak to our tax department chairs: Michael Agetstein or Ryan Sturm.

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