Yesterday, the House GOP released a draft of its new tax reform bill called the Tax Cuts and Jobs Act. Keep in mind, this is just a draft of the bill. The final product must go through the laborious markup process in the House and Senate and gain final approval in both chambers. Changes are likely. The final bill may be very different from the current draft.
Currently, there are seven tax brackets – 15%, 20%,25% 28%, 33%, 35% and 39.6%.
|Tax Rate||Single||Married||Head of Household|
|10%||up to $9,375||Up to $18,650||Up to $13,350|
|15%||$9,326 to $37,950||$18,651 to $75,900||$13,351 to $50,800|
|25%||$37,951 to $91,900||$75,901 to $153,100||$50,801 to $131,200|
|28%||$91,901 to $191,650||$153,101 to $233,350||$131,201 to $212,500|
|33%||$191,651 to $416,700||$233,351 to $416,700||$212,501 to $416,700|
|35%||$416,701 to $418,400||$416,701 to $470,700||$416,701 to $444,550|
|39.60%||$418,401 or more||$470,701 or more||$444,551 or more|
The new proposal cuts that to four brackets as listed in the table below.
|Single||Married||Head of Household|
|12% >0||12% >0||12% >0|
|25% >$45,000||25% >$90,000||25% >$67,500|
|35% >$200,000||35% >$260,000||35% >$230,000|
|39.6% >$500,000||39.6% >$1,000,000||39.6% >$500,000|
|Head of Household||$9,350||$18,000|
Retains the mortgage interest and charitable deductions, as well as the property tax deduction (capped at $10,000), but repeals the remainder of the state and local tax deduction and other itemized deductions. Caps the mortgage interest deduction at $500,000 (currently $1,000,000) of principal for new home purchases. Eliminates the moving deduction, educator expense deduction, and exclusions for employer-dependent care programs, among others. Makes changes to the exclusion of capital gains on home sales.
Family Tax Credits
Replaces the personal exemption for dependents with an expansion of the child tax credit from $1,000 to $1,600, while increasing the phaseout threshold (from $115,000 to $230,000 for married filers). The first $1,000 would be refundable, increasing with inflation up to the $1,600 base amount. Also creates a new $300 nonrefundable personal credit and a $300 nonchild dependent nonrefundable credit, subject to phaseout. The $300 credit expires after 5 years.
Alternative Minimum Tax
Permanently reduces the corporate tax rate from 35% to 20%. Creates a 25% maximum “pass-through” rate (S-Corporations, LLCs, etc.). These are currently passed through and taxed at the taxpayer's ordinary income tax rate (maximum of 39.6%).
The current federal estate tax exemption is $5.49 million per individual, $10.98 million for couples. The new proposal calls for an increase of that amount to $11.2 million per individual and $22.4 million per couple. The tax would be repealed in 2024.
Retirement Plan Limits
There has been much discussion recently about lowering the contribution limits for 401(k), and 403(b) retirement plans. The final proposal did not include changes in contribution limits, currently $18,000 for employees under age 50. Those over age 50 can make a $6,000 catch up contribution for a total of $24,000.
More details of the corporate tax changes and other provisions of the proposed tax reform law can be found in the Tax Foundation analysis – Details of the Tax Cuts and Jobs Act. Michale Kitces takes an in-depth look at the law in his article, Evaluating The Proposed Individual Tax Reforms Under The House Republican Tax Plan
As more details become available and the law works its way through the approval process, I will provide updates here.
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