Tax Reform Now: Part 8

On November 2nd, the House Ways and Means Committee unveiled the first draft of the “Tax Cuts and Jobs Act.” The House Ways and Means Committee will revise the “Tax Cuts and Jobs Act” during its mark-up session beginning on November 6th. However, the initial draft of the “Tax Cuts and Jobs Act” includes impactful changes to the Internal Revenue Code. “Tax Reform Now” will briefly highlight some relevant changes.

Corporate Income Tax Brackets

Current Law – There are seven income tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.

Proposed Law – There will be four income tax brackets: 12%, 25%, 35% and 39.6%.

Estate and Gift Tax

Current Law – A taxpayer can pass (during life or upon death) up to $5.49 million to his or her heirs without paying any federal estate tax (married couples can pass up to $10.98 million). If a taxpayer owns more than that, upon his or her death, the estate must pay a federal estate tax of 40%.

Proposed Law – The estate, gift and generation – skipping transfer tax exclusions doubles to almost $11 million beginning in 2018. That is, a taxpayer can pass up to $11 million to his or her heirs without paying federal estate tax and married couples will be able to pass up to $22 million. Please note that the estate tax will be phased out beginning in the 2024 tax year. Additionally, beginning in 2024, the top gift tax rate would be lowered to 35%.

Pass-through Businesses 

Current Law – Sole proprietorships, partnerships, limited liability companies, and S corporations are generally treated as pass-through businesses subject to tax at the individual owner or shareholder level. Thus, an individual owning an interest in a pass-through business is taxed on any business profits at their own individual income tax rate. The maximum individual income tax rate is 39.6%.

Proposed Law – For a pass-through business that distributes net income to an individual, a portion of the distributed net income will be treated as “business income.” The maximum tax rate on this portion of “business income” will be 25%. The remaining portion of net income distributed to an individual will be compensation subject to the individual income tax rates.

Corporate Income Tax Brackets

Current Law – The maximum corporate tax rate is 35%.

Proposed Law – Starting in 2018, the corporate tax rate will be a flat 20% rate.  However, personal service corporations will be subject to a 25% corporate tax rate.

State and Local Tax (“SALT”) Deduction

Current Law – An individual must itemize their deductions in order to take the SALT deduction. The SALT deduction allows an individual to deduct state and local property taxes along with state and local income taxes or sales taxes from their federal income tax bill.

Proposed Law – An individual can deduct state and local real property taxes up to $10,000. An individual will not be allowed to deduct state and local income taxes or sales taxes. By capping the amount of the SALT deduction, more individuals will switch from itemizing their deductions to utilizing the larger standard deduction.

401(k) Plans and Individual Retirement Accounts

The “Tax Cuts and Jobs Act” will not substantively alter the tax treatment of 401(k) plans and Individual Retirement Accounts.

We hope this update has been helpful. As always, please let us know if you have any questions.