Tax reform has been a high priority for the Trump administration and the Republican party for several months.
The effort to significantly change the current tax code started in mid-November when the House passed its tax reform legislation. Additional steps were taken earlier this month when the Senate passed their tax reform legislation. While there were some differences between the two, it appears that the compromise process has been completed and a final tax reform bill is expected to be voted on this week. When passed, it will mark the most meaningful change to the tax code in modern history for both companies and individual taxpayers. Traditional tax planning strategies will also need to be changed to accommodate reform. To help clients, prospects and others understand the changes and how it will impact them, Hanson & Co. has provided a summary of the final tax bill below.
Business Tax Provisions
The bill represents a compromise between the two Chambers’ legislation, and there were some recent changes that appear in the final legislation, including:
- Corporate Tax Rate – The corporate tax rate will be adjusted to 21%. While this is higher than the original bill passed the by House, it puts the U.S. in alignment with the average tax rate on businesses in the industrialized world. There is no phase-in time for this change, so companies will enjoy a lower tax rate immediately.
- Pass-Through Entity Taxation – Owners of pass through entities such as S-corporations and partnerships currently pay tax on company earnings based on their personal tax rates. This means that the highest earners can pay a top rate of 39.6%. The bill creates a 20% deduction for pass-through income, which represents a decrease of 3% from the Senate bill and 5% from the House bill. It’s important to note that entities operating in health, law and financial services are exempt from this deduction unless taxable income is below $157,500 for single filers. There is also a process in place designed to prevent high-income earners from changing wage income to pass-through income to obtain the lower tax rate. This provision is set to expire in 2025.
- Foreign Earnings – In the original House bill, foreign earnings repatriated to the U.S. were to be taxed at a rate of 12%. However, the final bill changes that to 15.5% for cash or cash equivalents and 8% for reinvested earnings. This change will allow companies to repatriate profits domestically at a much lower rate than previously anticipated.
- Immediate Expensing – The bill permits the full expensing of capital investments for the next five years and then phases out the benefit 20% each year over the following five years. This will give companies the opportunity to immediately expense capital purchases that previously needed to be depreciated over a several year period (five years or longer). The result is an immediate tax benefit.
Individual Tax Provisions
- New Tax Brackets – Despite efforts to reduce the number of individual tax brackets, the final bill will keep seven, but most taxpayers will experience a reduction in overall taxes. The proposed brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The last bracket, down from 39.6%, will be for single taxpayers with income above $500,000 and couples with income above $600,000. It’s important to note that the brackets will expire in 2025 when Congress will have to act to extend them.
- Standard Deduction – Similar to what was proposed in the House bill, the standard deduction will double to $6,500 for individuals and $13,000 for couples. This change is designed to encourage more taxpayers to take the standard deduction versus itemizing, which is a common practice for many. These changes are scheduled to expire in 2025 and will need to be extended in order to go beyond that date.
- Expansion of Child Tax Credit – This credit will be increased from its current value of $1,000 to $2,000 per child with $1,400 of that amount being refundable. This was a late change that was added to win the support of Congressional holdouts.
- Mortgage Interest Deduction – Interest on mortgages up to $750,000 is deductible in the new legislation, which is a reduction from the current $1M cap. The new cap represents a compromise between the Senate and House, which wanted the cap lowered to $500,000.
- Estate Tax Repeal – While there won’t be a repeal of the estate tax, there have been changes. Under the final bill the estate tax will only impact the wealthiest taxpayers. The exemption is changing from $5.6M to $11.2M per individual that can be passed on without taxation.
- Education Incentives Remain – Despite efforts to eliminate the deduction on student loan interest and a waiver for graduate student tuition, it could not be done. There was too much concern from the academic community about the impact of the change and these incentives will remain untouched.
The new tax bill will likely be voted on and signed into law before the end of year. The shift to lower tax rates and elimination of incentives and other key programs represents a significant shift for most. If you would like to learn more about these changes or have questions about your tax situation, Hanson & Co. can help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.