November 2nd finally brought the Republican Party’s long-awaited Tax Cuts and Jobs Act (HR 1). The 429-page bill is the first shot at significant tax reform in this country in the past 30 years. President Trump has requested an approved bill for his signing by Thanksgiving. House Ways and Means Committee Chair Kevin Brady, the author of the tax bill, said the bill could add $1.51 trillion to the federal deficit over the next 10 years. The Senate may utilize the budget reconciliation process to move the bill more quickly and avoid a Democratic filibuster. Brady, House Speaker Paul Ryan, and other House GOP leaders endorsed the bill in a press conference last week, arguing it would save the average family of four $1,182 a year on their taxes.
For Individuals, the Bill proposes to:
• Maintain the highest tax bracket at 39.6% – A fourth marginal tax bracket would apply to married couples making more than $1 million a year and single filers earning more than $500,000.
• Lower the individual tax rates for low-to-middle income taxpayers to 12%, 25%, and 35%.
- For joint filers, the 25 percent would start at $90,000
- $260,000 for the 35 percent bracket (half for single, individual filers).
• Increase the Standard Deduction from $6,350 to $12,200 for individuals and $12,700 to $24,400 for married couples
• Eliminate “special-interest deductions” , thereby simplifying the filing process. Eliminations include:
- Student-loan-interest deduction – The amount paid toward student loan interest can currently be deducted.
- Medical-expense deduction – Under current law, individuals who spend over 10% of their income on medical expenses are allowed to deduct part of those costs from their taxes. The proposed new bill would remove that deduction.
- Moving deduction – This allows anyone who moved to a new home in the past year to deduct moving expenses.
- Alimony– Payment deduction.
• Maintain the Charitable Contribution deduction
• Home Mortgages:
- Grandfather home mortgage interest deduction for existing mortgages up to the current $1 million debt limit
- Lower home mortgage interest deduction on newly purchased homes up to $500,000
• Establish a new Family Credit, which includes expanding the Child Tax Credit from $1,000 to $1,600, and providing a credit of $300 for each parent and non-child dependent to help all families.
• Eliminate personal exemptions
• Preserve the Earned Income Tax Credit
• Cap itemized state and local property taxes deduction up to $10,000 – Republicans and democrats in states like New York, New Jersey, and California have struggled with the proposed elimination of the state and local tax (SALT) deduction. The benefit allows people to deduct those taxes from their federal bill. This compromise could help.
• Retain 401(k)s and Individual Retirement Accounts advantages as they are currently structured
• Repeal the Alternative Minimum Tax (AMT) – This tax, which forces people who qualify because of an outsized number of deductions, is welcome news to many. Event President Trump will benefit as his own tax bill has been shown to be millions of dollars more because of the tax.
• Double the estate tax exclusion to $12 million per individual, with full repeal after six year.
For Businesses, the Bill proposes to:
• Cut the corporate tax rate to 20% immediately and permanently
• Create a top pass-through rate of 25% on small business income with safeguards against abuse. Instead of getting taxed at an individual rate for business profits, people who own their own business would pay at the so-called pass-through rate.
• Create a temporary 100% expensing write-off for qualified business property immediately. Companies will be able to deduct the cost of business investments from their tax bill in the year that they make them instead of spreading it out over multiple years.
• Make numerous changes to the taxation of foreign income and foreign persons/businesses
• Cap the deduction for net interest expenses at 30% of adjusted taxable income, except for small businesses.
• Modify the net operating loss deduction
• Allow for the temporary repatriation of foreign earnings (liquid assets) at a 12% rate. The repatriation rate will be a mandatory one-time tax on overseas assets for US companies. illiquid assets would be taxed at a 5% rate and spread out over a longer period than liquid assets like cash.
• Not repeal Obama care’s individual mandate – Despite the President’s advocacy to eliminate the penalty for not having insurance, no allowance was made for it.
• Large private university endowments tax – Private universities with assets of more than $100,000 per student will pay a 1.4% excise tax on their net investment income.
• Johnson Amendment repeal – The current rule prevents tax-exempt nonprofits from making explicit election endorsements.
• Interest deduction on bonds for sports stadiums eliminated – Currently, local governments issue bonds to pay for the construction of sports facilities and this proposal would prevent people from deducting interest income from these bonds on their federal taxes.
House Republicans have not yet reached consensus on the proposals within the bill, and GOP House leaders can only afford to lose 22 votes on the measure if the bill receives no Democratic support. Much of the immediate backlash within the Party centers on the elimination of the State and Local Tax (SALT) deduction in its current form, while capping the current property tax deduction at $10,000. As details of the bill began to trickle out, reactions poured in. The changes to the mortgage-interest deduction and other provisions sent stocks of home-builders sliding. The SPDR S&P Home-builders ETF was down roughly 2.5% Thursday morning and shares of major builders D.R. Horton, Pulte Group, and Lennar all slipped. Alternatively, companies with a higher effective tax rate and those with a lot of money held overseas rallied strongly on the release of the bill in anticipation of possible higher profits. Regardless of the initial reactions, one thing is for sure – all groups agree on the need for reform and when everyone is squabbling a little, a solution may be close at hand.
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