Tax Cuts and Jobs Act Impacts Businesses and Individuals

Congressional Republicans have been working on a bill to simplify the tax code and reduce the tax liability for many middle-class Americans. Yesterday, the Tax Cuts and Jobs Act released by the House Ways and Means Committee claims to reduce taxes by $1.5 trillion. Remember, this is a bill and not law.

The bill will have to overcome some significant hurdles, including reconciliation with the soon-to-be released Senate version, before passage. While we don’t yet know what any final legislation may look like, a lot of changes are included in this 429 page bill.

The following are some key highlights that would take effect Jan. 1, 2018:

For Your Business

  • Corporate tax rate is reduced to 20 percent, permanently.
  • Pass-through entities (S-corps and partnerships) will have a top rate of 25 percent; however, this rate is only available if you are “active” in the business. Further, personal service companies (e.g. law firms and doctors) will not qualify for the 25 percent rate.
  • The domestic production activities deduction (DPAD) will be eliminated.
  • Research and development tax credits will be preserved.
  • Low-income housing credits are retained.

For You and Your Family

  • The number of tax brackets you could fall under has been reduced from seven to four as follows:
Rate12 Percent25 Percent35 Percent39.6 Percent
Married$24,000 to $90,000$90,000 to $260,000$260,000 to $1 millionmore than $1 million
Single$12,000 to $45,000$45,000 to $200,000$200,000 to $500,000more than $500,000
  • The standard deduction increases by nearly 50 percent to $12,000 for individuals and $24,000 for married couples.
  • The child tax credit increases from $1,000 to $1,600; however, the additional $600 is not refundable. And the phase-out threshold increases significantly to $115,000 for individuals and $230,000 for married couples.
  • Itemized deductions that go away include:
    • State and local taxes; however, property taxes up to $10,000 can still be included.
    • Medical expenses
    • Tax preparation fees
  • Mortgage interest deductions will be lowered. You would only be able to deduct up to $500,000, which is less than the $1 million allowed today.
  • The estate tax exemption will double to approximately $11 million before being phased out in six years.

On the Chopping Block

  • Alternative Minimum Tax (AMT)
  • Deductions for:
    • Student loan interest
    • Moving expenses
    • Personal exemption
  • Adoption tax credit
  • Exclusion for dependent flexible spending accounts

What Stays

  • Affordable Care Act (ACA) individual healthcare mandate
  • Tax breaks for 401(k) plans, IRAs and popular retirement savings options
  • Charitable deduction

This is not an exhaustive list of the changes. More details can be found in the section-by-section summary.

Many of the items contained in the Tax Cut and Jobs Act are controversial and will likely change. We’ll continue to monitor tax reform developments and share updates as they become available. For questions about how any of these changes may impact you personally, reach out to a PBMares tax professional.