Federal Tax Reform: Tax Cuts and Jobs Act

On November 1, 2017, the House Ways and Means Committee released an initial draft of tax reform legislation known as the Tax Cuts and Jobs Act. The House proposal makes several changes to business and individual taxation.  On November 9 the Senate released its plan for tax reform which departs from the House Bill on many issues.  Several of the House and Senate proposals follow:
  • Businesses:
    • For multinational corporations, the House Bill imposes a one-time “repatriation” tax of 12% on accumulated offshore earnings.
    • Both plans lower the corporate tax rate from 35% to 20%.  The House Bill makes this rate reduction immediate while the Senate plan delays the cut until 2019.
    • The House Bill provides for a 25% tax rate for certain business pass-through income (from S Corporations and partnerships).
      • The Senate proposal treats certain nonservice pass-through income differently by providing a 17.4% deduction from non-wage income.
    • The Senate Bill includes a new 12.5% tax on patents and other intellectual property filed outside of the U.S.
  • Individuals:
    • The House plan reduces the number of tax brackets from seven (7) to four (4).  The four brackets are 12%, 25%, 35%, and 39.6%.
      • The Senate plan retains seven brackets with slight modifications – 10%, 12% (currently 15%), 22.5% (currently 25%), 25% (currently 28%), 32.5% (currently 33%), 35%, and a top rate of 38.5% (currently 39.6%).
    • Both plans repeal the Alternative Minimum Tax.
    • Both the House and Senate plans repeal the itemized deduction for State and Local taxes.
      • However in the House Bill, itemized property tax deductions are restored for property taxes up to $10,000.
    • Both plans nearly double the Standard deduction.
      • For singles, the standard deduction was raised from $6,350 to $12,000, and for married couples filing jointly, the standard deduction was raised from $12,700 to $24,000.
      • However, all Personal Exemptions eliminated.
    • The House plan repeals many other deductions, such as those for medical expenses, tax preparation fees, student loan interest and moving expenses
      • The Senate plan retains deductions for medical expenses.
    • Under the House plan, alimony payments would no longer be deductible, but alimony received would remain taxable.
    • The House Bill repeals credits the Lifetime Learning Credit and the Work Opportunity Credit.
    • The House plan repeals the estate tax beginning in 2024.
      • In the meantime, the lifetime exemption level has been doubled (from approximately $5.4 Million to $10.8 Million per person).
      • The gift tax is not repealed.
      • The Senate plan keeps the estate tax and gift tax in place, but doubles the lifetime exemption like the House Bill.
    • The House plan limits mortgage interest deduction to interest on mortgage debt of up to $500,000 (current limit is $1,000,000).
      • Only one qualified residence per taxpayer.  No vacation home mortgage interest deduction available.
      • Current mortgages, however, would be grandfathered in and would not be affected.
    • The Senate plan leaves the current mortgage interest deduction unchanged.

The stated goal of the President and Congressional Republicans is to finalize the legislation by the end of the year.  Given the significant differences between the House and Senate Bills, Congress has its work cut out for it to meet the self-imposed deadline.  It is likely that many of the provisions above may change or be eliminated in coming days and weeks as this is only the beginning of the process of tax reform.

For more information about the Tax Cuts and Jobs Act, please contact attorneys Kevin Israel or Laura DeGeer. Links to their contact information are listed below.

This material is for informational purposes only.  It is not and should not be solely relied on as legal advice in dealing with any specific situation.