Its been a long journey, but it looks like the final version of tax reform has been agreed upon.
There is a lot going on here. We will get more details out as we unpack the specifics of what has been agreed upon and once passed. The specifics of what has been agreed upon is more complicated then it appears on the surface. Once we get a final passed bill we will distribute the specifics and model the impact for our clients. There is a finite period of time for businesses to react in order to take advantage of the new law for 2018. It is important for your CPAs as the recognized tax professional to guide you through this complicated transition while minimizing your tax burden and risk. We are well prepared and excited to help our clients navigate this new law.
Here is a brief overview of the highlights of the agreement. It includes links to the specific agreement which is around 1,100 pages giving some insight into the complication of some of these matters.
Republican leaders in Congress unveiled the merged version of the House and Senate Tax Cuts and Jobs Act (HR 1) late on December 15. The final bill reflects the work of a House-Senate Conference Committee over the past week to iron-out differences between the House and Senate. GOP leaders predicted swift passage of HR 1.
The bill text and the “Joint Explanatory Statement of the Committee of Conference” (which begins on page 510) were released late on December 15. The Conference bill, which will be put to a vote during the week of December 18, addresses the following provisions, among many others:
Individual tax rates. The Conference bill calls for a maximum individual tax rate of 37 percent. The House bill would have set the top rate at 39.5 percent. The Senate bill provided for a 38.5 percent top rate.
Standard deduction. The Conference bill follows the Senate bill in increasing the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation for tax years after 2018. The additional standard deduction for the elderly and the blind is not changed. All increases will end after December 31, 2025.
Personal exemptions. The personal exemption amount ($4,050 for 2017) is repealed for tax years starting in 2018, but only through 2025. Although wage withholding rules under Code Sec. 3402 are determined based upon personal exemptions, the Conference bill would allow, but not require, the IRS to postponed implementation of a new withholding regime for 2018.
Passthroughs. The conference bill generally follows the Senate’s approach to the tax treatment of passthrough income but with some changes, including a reduction in the percentage of the deduction allowable under the provision to 20 percent (not 23 percent), a reduction in the threshold amount above which both the limitation on specified service businesses and the wage limit are phased in and a modification in the wage limit applicable to taxpayers with taxable income above certain threshold amounts. The details of the anti-abuse provisions will need to be vetted in more detail to see the specific impact .
Student loan interest. The Conference bill, unlike the House, does not repeal the deduction for student loan interest.
Mortgage interest deduction. The conference bill limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), for tax years beginning after December 31, 2017, and before January 1, 2026. For acquisition indebtedness incurred before December 15, 2017, the current-law limitations of $1,000,000 ($500,000 in the case of married taxpayers filing separately) remain. However, no interest deduction is allowed for interest on home equity indebtedness for tax years beginning after December 31, 2017, and before 2026.
State and local taxes. The Conference bill limits deductions for nonbusiness state and local taxes deductions, including property taxes, to an aggregate amount equal to $10,000 ($5,000 for married taxpayer filing a separate return). It also contains a provision that disallows in 2017 the prepayment of state and local taxes to avoid the new dollar limitation.
Miscellaneous itemized deductions. The Conference bill repeals all miscellaneous itemized deductions that are subject to the two-percent floor under current law.
Medical expenses. Rather than repeal the medical expense deduction as would have been done in the House bill, the Conference bill follows the Senate bill in not only retaining it, but also lowering the threshold for the deduction to 7.5 percent AGI, for tax years 2017 and 2018.
Alimony. The Conference bill repeals the deduction for alimony payments and the inclusion in the income of the recipient. However, it only applies this provision to any divorce or separation instrument executed after December 31, 2018.
Estate and gift taxes. The Conference bill follows the Senate bill in not repealing the estate tax but doubling the estate and gift tax exemption for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026.
Corporate tax rate. The Conference bill provides for a 21-percent corporate rate effective for taxable years beginning after December 31, 2017.
Full expensing. The Conference bill increases the 50-percent “bonus depreciation” allowance to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). It also removes the requirement that the original use of qualified property must start with the taxpayer. Graduate student tuition waiver. The Conference bill does not repeal the existing tax treatment of graduate student tuition waivers.
Exempt organizations. The Conference bill does not include modification or repeal of the so-called “Johnson amendment.” The “Johnson amendment” generally prohibits exempt organizations from political activity.
Affordable Care Act. The Conference bill effective repeals the ACA’s individual mandate by making any required payment $0. The Conference bill follows the Senate bill in making this provision effective with respect to health coverage status for months beginning after December 31, 2018. The conference committee did not address other ACA taxes, such as the medical device excise tax and the excise tax on high-dollar health plans. Separate legislation has been introduced in Congress to extend the current suspensions of those ACA taxes, along with the health insurance provider fee.
The Conference bill must still be approved by both the House and Senate. Immediately following release of the Conference Report, HR 1 was filed with the House Rules Committee. GOP sources indicate at this time that a vote will be held in the House on Tuesday, December 19, followed by the Senate that same week. The GOP currently has a 52-48 majority in the Senate. At the time the Conference Committee report was released, all 52 GOP senators had committed to voting for the bill.
To win support in the Senate, the conference committee did not repeal the medical expense deduction, as was proposed in the House bill. The conference committee also enhanced the child tax credit. Florida Republican Senator Marco Rubio, who had called for a more generous child tax credit, had been a holdout until the afternoon of December 15, when he signaled that he would support the compromise legislation. In addition, Sen. Bob Corker, R-Tenn., the only GOP senator to vote against the Senate’s initial bill, announced immediately before release of the Conference Report that he would support the tax compromise.
If you have any questions regarding the provisions of this bill or its impact on your specific situation, please do not hesitate to contact us. We will keep everyone informed as this bill moves quickly through Congress.