A Detailed Look at Tax Reform: Changes to Deductions and Credits

Tax reform cleared its first major hurdle in Congress on November 16 when the House passed its version of the bill by a 227-to-205 vote mainly along party lines. (No Democrats voted for it.) But the legislation, which would generally be effective for tax years beginning after 2017, still has a long way to go around the track before it hits the finish line.

The bill approved by the House contains many of the measures proposed during the past year by the Trump administration and GOP lawmakers. The following provisions may be of particular interest to your clients.

Individual Tax Provisions

Tax rates: The current tax rate structure of seven brackets would be replaced by just four brackets of 12%, 25%, 35% and 39.6%. (Note that the top rate will remain at 39.6%.)  In addition, a “bubble tax” of 6% would apply to a portion of adjusted gross income (AGI) above $1 million.

Standard deduction: The bill essentially doubles the standard deduction from $6,350 to $12,200 for single filers and from $12,700 to $24,400 for joint filers. Combined with other proposed tax law changes, many more taxpayers will be claiming the standard deduction in lieu of itemizing deductions.

Personal exemptions: Currently, a taxpayer is entitled to claim a personal exemption of $4,050 for himself or herself, a spouse and each qualified dependent. The bill eliminates all personal exemptions.

Itemized deductions: The bill repeals most itemized deductions while preserving tax breaks for charitable donations and disaster-area casualty losses. The deduction for mortgage interest would be reduced to cover $500,000 of acquisition debt, down from $1 million, but interest deductions for existing loans would be grandfathered. The state and local tax deduction, a lightening rod for controversy in high-tax states, would be limited to property taxes of up to $10,000.

Child tax credit: The child tax credit for children under age 17, which is currently $1,000, would be increased to $1,600, subject to certain restrictions. However, the extra $600 would not be refundable, unlike the $1,000 base credit.

Alternative minimum tax: The alternative minimum tax (AMT), which was designed to affect only the wealthiest taxpayers but has been a thorn in the side of millions of others, would be completely repealed.

Family tax credit: The new legislation would create a new $300 nonrefundable tax credit for each taxpayer as well as any non-child dependent such as an older child or an elderly relative. However, the credit would have a short shelf life and would expire after five years.

Recharacterizations: Although most retirement plan rules would remain intact, the House bill repeals the rule allowing a taxpayer to recharacterize a Roth IRA back into a traditional IRA. Typically, recharacterizations are used when the value of the taxpayer’s account drops. 

Business Tax Provisions

Corporate tax rates: One of the main tent poles in the new legislation is a reduction in the top corporate tax rate from 35% to 20%. After much debate, lawmakers made the corporate tax rate permanent.

Repatriation tax: Under the House-approved bill, a one-time tax of 14% would apply to existing foreign profits being held in offshore accounts. In addition, foreign profits invested in non-cash assets offshore would be taxed at the rate of 7%. The law gives companies up to eight years to pay up.

Pass-through entities: Currently, profits funneled through pass-through entities like S corporations and partnerships are taxed at individual tax rates as high as 39.6%. The new bill would limit the top tax rate on these earnings to 25%. It would also provide a lower rate of 9% for businesses earning less than $75,000.

Business deductions and credits: The new bill would add several key tax benefits for businesses while removing certain deductions and credits. For instance, it would effectively allow 100% Section 179 expensing of business property for a five-year period, but repeal the Section 199 manufacturing deduction and Work Opportunity Tax Credit (WOTC).

Finally, the new law would repeal the federal estate tax, a long-time target of GOP legislators, but not in one shot. The repeal would not completely take effect until 2024 and would be combined with a doubling of the estate tax exemption. Under current law, the exemption is $5 million (indexed to $5.49 million in 2017).

It’s still too early for your clients to take action based on these provisions, but the proceedings should continue to be monitored closely. Keep your clients informed about any significant developments.

Source: http://www.cpapracticeadvisor.com/

House passes tax reform bill (11-16-17)

House passes tax reform bill (11-16-17)

In a 227-205 vote today, the House passed the tax reform bill (the Tax Cuts and Jobs Act (H.R. 1)). The next hurdle will be passage of the Senate bill.

Here are a few of the differences between the bills:

• The Senate bill's maximum individual rate is 38.5%, while the House bill's maximum is 39.6%; 
• The Senate bill has no itemized deduction for property taxes, while the House bill allows up to $10,000;
• The Senate bill's principal residence mortgage interest loan balance limit remains at $1 million with no equity debt allowed, while the House bill reduces the loan balance to $500,000 on the principal residence only with no equity debt allowed;
• Under the Senate bill, sole proprietorships, partnerships, and S corporations may deduct 17.4% of their domestic qualified business income, while the House bill has a complex rate structure for these businesses; and
• Under the Senate bill, there is a flat 20% corporate rate, including personal services, while the House bill has the same corporate rate but taxes personal service businesses at 25%.

House Ways and Means approves amended Tax Cuts and Jobs bill

The House Ways and Means Committee voted 24–16 on Thursday to send the Tax Cuts and Jobs Act, H.R. 1, to the full House for a vote. However, the bill, as marked up by the committee, contains many changes from the original version of H.R. 1 released last week. Reportedly, some of these changes were made to reduce the 10-year cost of the bill, and according to a preliminary estimate by the Joint Committee on Taxation, the net effect of the bill as marked up would be to reduce federal revenues by $1.437 trillion over 10 years.

Here is a list of changes in the version of the bill that the House will consider:

1. The amended bill would provide for a new 9% rate on the first $75,000 in net business taxable income passed through to an active owner or shareholder earning less than $150,000 in taxable income. The 9% rate would be phased out as taxable income approaches $225,000. The lower rate would be phased in over five years: It would be 11% in 2018 and 2019, 10% in 2020 and 2021, and 9% starting in 2022.
2. The current law rules on self-employment income received from a passthrough entity would be preserved.
3. The adoption tax credit would be preserved in its current form.
4. Taxpayers would be required to provide Social Security numbers for children before claiming the enhanced child tax credit.
5. Rollovers between Sec. 529 education savings accounts and Achieving a Better Life Experience (ABLE) Sec. 529A accounts would be permitted.
6. The exclusion for qualified moving expense reimbursements would be reinstated but only for members of the Armed Forces on active duty who move because of a military order.
7. The amendment would lower the dividend-received deduction from 80% to 65% and the 70% rate to 50%.
8. The amendment would change the limitation on deducting interest by businesses, but only for floor plan financing indebtedness (short-term debt used by retailers to finance high-cost items such as cars). Full expensing would not be available to these types of businesses.
9. The amendment would modify the treatment of S corporations that convert to C corporations after the bill is passed by allowing any Sec. 481 adjustment to be taken into account over a six-year period (Sec. 481 adjustments usually must be taken into account over four years).
10. For tax years after 2023, taxpayers would be required to amortize Sec. 174 research and experimentation expenses over five years (15 years for research outside the United States).
11. The amendment would disallow a current deduction for litigation costs advanced by attorneys representing clients on a contingent basis until the contingency is resolved.
12. The amendment would preserve current law treatment of nonqualified deferred compensation.
13. The amendment would clarify that holders of restricted stock units cannot make Sec. 83(b) elections.
14. The amendment would change the 12% and 5% rates on repatriated foreign income to 14% and 7%.
15.  The amendment would eliminate the markup on deemed expenses for foreign purposes, permit a foreign tax credit of 80% of the foreign taxes paid, and make other changes to the foreign tax credit calculation provisions in H.R. 1.
16. The amendment would subject to the 1.4% excise tax on investment income endowment funds held by organizations related to the universities and provide an exclusion from the excise tax for any educational institution unless the fair market value of the institution's assets (other than those assets used directly in carrying out its exempt purpose) is at least $250,000 per student.
17. The amendment would change the repeal of the Johnson amendment to clarify that all Sec. 501(c)(3) organizations (not just religious organizations) are permitted to engage in political speech if the speech is in the ordinary course of the organization's business and the organization incurs de minimis expenses related to the political speech. 
18. The amendment would require earned income tax credit claims to properly reflect any net earnings from self-employment, require employers to provide additional information on payroll tax returns, and provide the IRS with additional authority to substantiate earned income amounts.
19. The amendment would reinstate the $5,000 exclusion from income for employer-provided dependent care assistance through 2022 for children under 13 or spouses or other dependents who are unable to care for themselves.
20. The amendment would reinstate capital gain treatment for self-created musical works.
21. The amendment would require partners to hold their partnership interest received for performing services for three years to qualify for capital gain treatment.
22.  Employees who receive stock options or restricted stock units as compensation for services and later exercise them would be allowed to elect to defer recognition of income for up to five years, if the corporation's stock is not publicly traded.
23. The amendment would change the foreign base erosion rules.

Source:  https://www.journalofaccountancy.com/news/