Summary of Proposed Tax Reform Legislation

Significant tax reform may actually be passed this year, and it looks possible that it will offer the greatest sweeping changes to the US tax code in more than 30 years.

The US House of Representatives recently released their first draft of congress' much anticipated tax reform bill (H.R. 1). Although H.R. 1 is likely to see many changes before becoming law and its passage is uncertain, taxpayers should be aware of what has been released by congress and how it may impact them.

As CPAs experienced in tax law application, the firm believes that significant time and resources are wasted due to tax code complexity. While generally supportive of simplification efforts, H.R. 1 does very little to create the much-needed tax simplification. The proposal does modestly simplify individual returns through higher standard deductions and elimination of certain itemized deductions, but complexity increases for business entities, particularly pass-through structures in the service sector.

Individual Tax Impacts

• Consolidates seven tax brackets into four: 12%, 25%, 35%, and 39.6%

• Repeals the Alternative Minimum Tax

• Approximately doubles the Standard Deduction to $24,000 (married filing jointly), $18,000 (heads of households), and $12,000 (single filers)

• Eliminates personal exemptions while increasing child tax credit to $1,600 per child and creating $300 credits for adult dependents

• Caps property tax deduction at $10,000; repeals state and local income tax and sales tax deductions

• Modifies mortgage interest deduction capping to $500,000 of debt on primary residences only

• Eliminates medical expense, alimony, and moving expense deductions

• Increases charitable contribution deductions to 60% of AGI (from 50%)

Business Tax Impacts

• Reduces C-Corporation rates to 20% and caps pass-through entity rates at 25%, except for service sector businesses

• Increases Section 179 limits to $5,000,000 with phase-out at $20,000,000

• Limits business interest deductions to 30% of taxable income for businesses exceeding $25,000,000 in gross receipts

• Reduces Net Operating Loss deductions to 90% of taxable income

• Establishes one-time repatriation tax on offshore earnings: 12% on liquid assets, 5% on other holdings

The firm emphasizes early tax planning remains important as legislation details continue evolving.