The U.S. House of Representatives unveiled their tax plan last week, The Tax Cuts & Jobs Act (TCJA). Their plan, as advertised, will create more jobs, fairer taxes, and larger paychecks.  In addition, the TCJA will overhaul the U.S. tax code for the first time since President Reagan’s landmark Tax Reform Act of 1986.

The Senate Finance Committee, the counterpart to the House Ways and Means Committee, will be working on a bill next week with a vote by the full Senate by the Thanksgiving holiday.

Before reviewing some of the TCJA’s highlights, it is essential to understand the necessary items that must occur before it becomes law, including negotiations between the House and Senate on the differences between their bills.

The TCJA includes the following provisions for individuals:

Tax Brackets:

Married:

  • 12% up to $90,000
  • 25% up to $90,001 to $260,000
  • 35% up to $260,001 to $1 million
  • 39.6% over $1 million

Single:

  • 12% up to $45,000
  • 25% up to $200,000
  • 35% up to $500,000
  • 39.6% for amounts over $500,000

Note: The 12 percent bracket would be phased out as adjusted gross income exceeds $1.2 million if married filing joint or $1 million for single filers.

Standard deduction: Increase to $12,000 for single filers and $24,000 for married couples. This means the first $12,000 or $24,000 of income will not be taxed.

Family Credit: Increases the Child Tax Credit to $1,600 and a credit of $300 for each parent and non-child dependent.

Higher education: Streamlined benefits for college tuition and other education expenses.

Charitable contributions: Remain deductible

Home mortgage interest: Remains deductible, but newly purchased homes may only deduct interest on mortgages up to $500,000.

Real estate tax deductions: Limited to $10,000, but other state and local income taxes will no longer be deductible.

Repeal of:

  • Overall limitation of itemized deductions
  • Personal casualty and theft losses
  • Deductions for tax preparation, medical, trade or business of being an employee & educator
  • Deduction for alimony payments and corresponding inclusion in income
  • Moving expenses
  • The Alternative Minimum Tax
  • The deduction for personal exemptions
  • Credits for the elderly and disabled, adoption expenses, & plug-in electric vehicles
Limitation of wagering losses
The Estate, Gift and Generation Skipping Tax exemptions are doubled and then repealed after 2023. 

The TCJA includes the following provisions for corporations:

The corporate tax rate: Decreased to 20%

Tax rate on flow-through income from partnerships and S Corporations: Decreased to 25%, but that rate will not apply to personal service businesses, including attorneys, doctors and accountants.

New equipment purchases:
  • Full write off
  • Increase write-off of non-new equipment purchases to $5 million with a phase-out beginning at $20 million and expansion to include qualified energy efficient heating and air conditioning property

Continuation of the Research & Development Tax Credit

Repeal of:

  • Alternative Minimum Tax
  • Like-kind exchanges deferral except for real property
  • 9% deduction for Domestic Production Activities
  • Deduction for employer-provided qualified transportation and parking
  • Technical termination of partnerships
  • Business credits including work opportunity, new markets and others

Small business accounting method reform and simplification

Net interest deductions: Limit to 30% of adjusted taxable income with carryforward of denied deductions and exceptions for small businesses

Modification of net operating loss deduction

Taxation of exempt organizations: Changes, including simplification of excise taxes on private foundation investment income and private colleges and universities

How Will the TCJA Affect your Tax Costs?
Each circumstance is unique. To determine the change in your taxes, a combination of income by type and deductions has to be analyzed. At this point, we wanted to present the proposed changes and will be carefully watching for the Senate version and subsequent negotiations. Stay turned to Barnes Wendling on our social media for all updates as they arise.