November 2, 2017, the House Ways and Means Committee Chairman, Kevin Brady, introduced a draft tax reform bill titled "Tax Cuts and Jobs Act." This proposed bill would overhaul the federal tax code with a majority of the provisions effective starting in 2018. Below is a brief summary of some of the proposed legislation.
Individual Income Taxes
Consolidates the current seven brackets into four, with a bottom rate of 12 percent (aided by a higher standard deduction) while retaining the current top marginal rate of 39.6 percent. An income capture provision (“bubble rate”) will phase out the 12 percent bracket for filers with income in excess of $1,000,000 ($1,200,000 for joint filers).
Tax Brackets
Single Married Head of Household
12.0% > $0 12.0% > $0 12.0% > $0
25.0% > $45,000 25.0% > $90,000 25.0% > $67,500
35.0% > $200,000 35.0% > $260,000 35.0% > $230,000
39.6% > $500,000 39.6% > $1,000,000 39.6% > $500,000
- Indexing Provisions:
Indexes tax bracket and other provisions to the Chained CPI measure of inflation. - Standard Deduction:
Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers (currently $6,350 for single filers, $9,350 for heads of households, and $12,700 for married filers). Eliminates the additional standard deduction and the personal exemption. - Itemized Deductions:
Retains the mortgage interest and charitable deductions, as well as the property tax deduction (capped at $10,000), but repeals the remainder of the state and local tax deduction and other itemized deductions. - Other Deductions and Exclusions:
Caps the mortgage interest deduction at $500,000 of principal for new home purchases. Eliminates the moving deduction, educator expense deduction, and exclusions for employer-dependent care programs, among others. Makes changes to the exclusion of capital gains on home sales.
Business Taxes
- Corporate Tax Rate:
Lowers the corporate income tax rate from 35 to 20 percent. - Pass-Through Rate:
Creates a new 25 percent maximum tax rate on pass-through business income, subject to anti-abuse rules. - Pass-Through Anti-Abuse Rules:
Begins with an assumption that 70 percent of income derived from a business is compensation subject to ordinary rates and 30 percent is business income subject to the maximum 25 percent rate for active owners. Businesses can "prove out" of the 70/30 split based on demonstrated return on business capital at the short-term applicable federal rate (AFR) plus 7 percent. Certain specified service industries, like health, law, financial services, professional services, and the performing arts are excluded from the 70/30 split, and can only claim the benefit of the lower pass-through rate to the extent that they can "prove out" their business income. - Capital Investment:
Allows full expensing of short-lived capital investment (currently subject to "bonus" depreciation), such as equipment and machinery, for five years. Increase Section 179 expensing from $500,000 to $5 million and increases the phase-out threshold from $2 million to $20 million. - Net Operating Loss Provisions:
Allows Net Operating Losses (NOLs) to be carried forward indefinitely and increased by a factor reflecting inflation and the real return to capital, while restricting the deduction of NOLs to 90 percent of current year taxable income and eliminating NOL carrybacks, except for one-year carrybacks for certain disaster losses.
Other Taxes
- Increases the estate tax exemption to $10 million, which is indexed for inflation, and repeals the estate tax after six years.
You may review the entire release by the House Ways and Means Committee.
The Tax Cuts and Jobs Act represents an overhaul of the U.S. tax code, which has not taken place in 31 years. The model is designed to boost long-run GDP by 3.9 percent and produce 975,000 new jobs. According to Congress's official revenue estimates, the House bill would reduce federal revenue by $1.5 trillion over the decade, with some of the revenue loss coming from one-time transitional costs. The House Ways and Means Committee was scheduled to begin marking up the bill on November 6, 2017.
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