The likelihood of passage of the Republican Tax Reform legislation moved up last week according to most pundits. They credit the improved odds on the passage of a budget reconciliation bill which allowed up to $1.5 trillion dollars to accommodate initial loss of revenues under the plan, and the agreement that the only committee hearings on the Tax Reform would occur in the House Ways and Means Committee.
Chances of passage are now 70% or better in my opinion, although some pundits seem certain it will pass, as the Republicans have everything at risk should it fail, especially with mid-term elections in 2018.
Few details are emerging, but expectations and some leaked discussions indicate the following:
– The corporate income tax rate will be capped at 20% and small business ‘pass through’ rates [for partnerships and S corps] will be at 25%. However, it is likely that professional services pass through businesses will remain taxed at the individual tax bracket level of the owners.
– There will be three brackets: 12% (with a doubled $24,000 standard deduction), 25% and a top bracket of 35%.
– Long term gains would stay at the 15% for most taxpayers, and it is undetermined if the higher 20% rate for higher income taxpayers would be retained, or the 0% rate for lower brackets. The 3.8% surcharge on investment income is likely to remain.
– Tax exempt municipal bond interest is expected to remain exempt.
– Pre-Tax Retirement contributions to plans such as a 401(k), will likely continue, but at a lower allowed amount than the $18,500 presently scheduled to be allowed in 2018.
– The Alternative Minimum Tax and the Estate Tax will be repealed. There is speculation that the Estate Tax will allow a ‘step up’ in the cost basis of inherited assets to continue for smaller estates, but that bequests in much larger estates would retain the decedents original cost basis, resulting in future capital gains when heirs sell that property.
– Congress has a goal of completing tax legislation late this year, but it is likely that it will not be done until early 2018. Will the legislation could be retroactive to the year 2017? Likely not.
– State income and property taxes and interest deductions (except for personal residence mortgage interest) would be nixed.
– Contributions would continue to be allowed, but may be more restricted or limited. The higher standard deduction will alleviate the need for many taxpayers to worry about itemizing.
– Business would be allowed generous write offs of all capital expenditures (except for buildings) over a five year period.
Details of the proposed legislation are scare and there are many things that we do not know, other than the broad plan outlines, some of which are discussed above. Principal among these unknowns is the income levels for the three tax brackets announced. It is difficult to project whether taxpayers will be better off or worse off without this one important fact.
Also, the deduction business interest may be eliminated (in favor of aggressive expensing of capital purchases) but we do not know how this will be handled. Will interest on existing debt be gradually ‘phased out’?
At Worley, Woodbery, & Associates, PA we plan to provide periodic updates as the legislation progress. For our client we expect to be able to provide an approximate comparison of their tax bill under the old law and the expected new law, as details become clearer.
Our firm is a strong advocate of planning and now is the time to consider the potential impacts of this legislation on next year’s taxes, and more importantly cash flow. If we can be of service, please make an appointment at 828-271-7997