This is a follow up to our earlier communication which is intended to summarize at a “high level” some of the more important items where Congress needs to reconcile their respective bills (House passed Nov. 16. and Senate on Dec. 2nd). We focused on some of the provisions that impact individuals and flow-through entities. There are numerous other business and international provisions that are not addressed in this communication. Please keep in mind that most of the provisions that impact individuals will “sunset” in 2025.
We are monitoring the tax reform act developments and are available to discuss at any time. This is only a sampling of the new provisions included in the proposed bills that are currently being reconciled. Please reach out to your contact at Miller Cooper & Co. for more information.
| Topic | House | Senate |
| Individual Income Tax Rates – Generally | Four tax brackets: 12%, 25%, 35%, and 39.6%; retains the 0%, 15%, 20% capital gain and qualified dividend rates. | Seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%; retains the 0%,15%,20% capital gain and qualified dividend rates. |
| Individual Alternative Minimum Tax (“AMT”) | The proposal would repeal the existing individual AMT. | Retains individual AMT. Increase the AMT exemption as follows:
· $109,400 for married taxpayers filing jointly or for surviving spouses; · $70,300 for single taxpayers; and · $54,700 for married taxpayers filing separately. Increases the phase-out of exemption amounts as follows: · $208,400 for married taxpayers filing jointly or for surviving spouses; · $156,300 for single taxpayers; and $104,200 for married taxpayers filing separately. |
| State Income Tax Deduction for Individual Taxpayers | Repeals the deduction for state and local income taxes.
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Repeals the deduction for state and local income taxes and eliminate the election to deduct state and local sales taxes in lieu of state and local income taxes. |
| Real Estate Tax Deduction for Individual Taxpayers | Limits the deduction for state and local real property taxes at $10,000 ($5,000 for married taxpayers filing separately) (other than taxes which are paid or accrued in carrying on a trade or business). | Same as the House Bill |
| Medical Expense Deduction for Individual Taxpayers | Repeals the itemized deduction for medical expenses for tax years beginning after 2017. | Reduces the medical expense deduction floor to 7.5% of adjusted gross income and eliminates the minimum tax preference. |
| Mortgage Interest Deduction for Individual Taxpayers | Reduces the mortgage interest deduction limitation to $500,000 for debt incurred after Nov. 2, 2017, and the interest would only be deductible on a taxpayer’s principal residence. | Retains the deduction with respect to interest on acquisition indebtedness of up to $1,000,000 ($500,000 for a married person filing a separate return). Repeals the mortgage interest deduction with respect to interest on home equity indebtedness. |
| 2% Itemized Deductions for Individual Taxpayers | Not directly addressed. Repeals deductions for expenses attributable to the trade or business of performing services as an employee, except, for reimbursed expenses included in an employee’s income. | Suspends all miscellaneous itemized deductions that are subject to the 2% floor under present law for tax years beginning after Dec. 31, 2017.
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| Alimony Payments | Repeals the current above-the-line deduction for alimony payments. Alimony would be tax free to the payee. These provisions would be effective for divorce agreements after 2017. | Not addressed. |
| Estate and Gift Taxes | Increase the federal estate and gift tax unified credit exclusion amount to $10 million (with inflation adjustments). The bill would repeal the federal estate tax, effective for decedents dying after 2024 (while retaining the “step-up” income tax basis at death). The House lowers the federal gift tax rate from 40% to 35%, effective for gifts made after 2024. | Increases the federal estate and gift tax unified credit basic exclusion amount to $10 million (with inflation adjustments). The bill does not provide for a repeal of the estate tax at any point in the future. |
| Generation Skipping Transfer Tax (“GST”) | Increases the federal GST exemption amount to $10 million (with inflation adjustments), effective for generation-skipping transfers made after 2017. The bill would repeal the federal generation-skipping transfer tax, effective for transfers made after 2024. | Increases the federal GST exemption amount to $10 million (with inflation adjustments), effective for generation-skipping transfers made after 2017. The bill does not provide for repeal of the GST. |
| Cost Basis of Specified Securities
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Not addressed. | Requires that the cost basis of any specified security sold, exchanged, or otherwise disposed of after Dec. 31, 2017, be determined on a first-in first-out basis except to the extent the average basis method is otherwise allowed. The Senate would exempt RICs from the first-in first-out rule. |
| Pass-Through Tax Treatment | After 2017, 25% maximum tax rate on portion of pass-through entity net income distributions treated as business income (remaining portion of distributions would be treated as wage income subject to individual income tax rates). Owners or shareholders receiving distributions from active business activities would be able to elect to: (1) treat 30% as business income and 70% as wage income, or (2) determine ratio of business income to wage income based on capital investment. Owners or shareholders receiving distributions from passive business activities would be able to treat 100% as business income. Certain personal services businesses would not be eligible for the pass-through rate. The bill would provide a 9% tax rate, in lieu of the proposed 12%, for the first $75,000 ($37,500 for unmarried individuals, $56,250 for heads of household) in net business taxable income of an active owner or shareholder earning less than $150,000 ($75,000 for unmarried individuals, $112,500 for heads of household) in taxable income through a pass-through business. As taxable income exceeds $150,000, the benefit of the 9% rate relative to the 12% rate would be reduced, and it would be fully phased out at $225,000. The 9% rate would be phased in, so that the rate for 2018 and 2019 would be 11% and the rate for 2020 and 2021 would be 10%. | After 2017, would allow a new deduction of 23% for taxpayers who have domestic “qualified business income” (“QBI”) from a partnership, S corporation, or sole proprietorship. The 23% deduction is also allowed for a taxpayer’s qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. Specified agricultural cooperatives would also qualify for the 23% deduction. QBI would be defined as all domestic business income other than investment income (e.g., dividends (other than qualified REIT dividends and cooperative dividends), investment interest income, short-term capital gains, long-term capital gains, commodities gains, foreign currency gains, etc. Deduction would generally be limited to 50% of the taxpayer’s allocable or pro rata share of “W-2 wages” paid by the partnership or S corporation, or 50% of the “W-2 wages” of the sole proprietorship. The “W-2 wage” limit would not apply to a taxpayer with taxable income not exceeding $500,000 (for married individuals filing jointly) or $250,000 (for other individuals), and the application of the “W-2 wage” limit would be phased in for individuals with taxable income exceeding these amounts. Deduction would apply to taxpayers with income from specified service businesses whose taxable income does not exceed $500,000 for married individuals filing jointly or $250,000 for other individuals (indexed for inflation). |
| Limitation on Losses for Taxpayers Other than Corporations | Not addressed. | For tax years beginning in 2017, would disallow an excess business loss of a taxpayer other than a C corporation. An excess business loss could be treated as part of the taxpayer’s net operating loss carryover to the following year. An excess business loss for the tax year would be the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount ($500,000 for married taxpayers filing jointly; $250,000 for all other taxpayers (indexed for inflation)). The limitation would apply at the partner or S corporation shareholder level. |
