Tax Law Changes – The Marathon Has Begun
Changing the tax law never seems to leave the national discussion. The tax law has the widest impact on the electorate of nearly any other governmental function. It is very predictable for the topic to move up the priority list throughout a presidential election campaign and as a new administration takes office. The current developments on tax law changes follow that predictable trend.
Tax law changes are often referred to as “reform.” Of course, “reform” is in the eyes of the beholder – the reason we refer to this process in its most basic definition as “change.” These proposed changes reflect a trend – broadening of the tax base (i.e. subjecting more income to tax by eliminating deductions, exemptions, etc.) and then reducing the tax rates on that broader base.
We have described this process as a marathon. A multitude of behind the scenes activity will take place before a final plan is enacted – if it ever is enacted. Some marathons are run slowly and others quickly – but they are all still 26.2 miles. The key items for change listed below are the first volley put forth by the House Ways and Means Committee. Stay tuned as the story unfolds.
Following is a brief summary of the proposed provisions that will have the widest impact.
Business/Tax Exempt Organization Provisions
- The tax rate for C corporations would be a flat 20% (25% for personal service corporations) vs. the current graduated rate structure ranging from 15% to 35%.
- The Section 179 deduction giving an immediate deduction for the purchase of equipment would be increased from the current level of $500,000 to $5 million.
- Taxpayer friendly changes would be made to accounting methods related to the cash method, inventories and long term contracts.
- Business with gross receipts in excess of $25 million would have limitations on the amount of interest expense they could deduct.
- Tax deferred 1031 exchanges would be limited to real estate only.
- Deductibility of entertainment expenses would be further limited.
- The deduction for domestic production activities would be repealed.
- Numerous tax credits would be repealed.
- Donor advised fund of tax exempt organizations would be subject to increased reporting requirements.
- The number of tax rate brackets would be reduced with decreases in some of the rates. Rates for top income earners would remain the same and additional phase out provisions for some of the rate brackets would add additional complication to tax calculations.
- A greater amount of capital gain income would be subject to lower rates.
- The standard deduction would roughly be doubled from its current level. As an example, for married couple filing a joint return, the standard deduction would increase from $12,700 to $24,000.
- The deduction for personal exemptions for taxpayers and dependents ($4,150 per person under current law) would be repealed.
- Business income would be taxed at a maximum rate of 25% under a complex set of rules.
- The existing child tax credit of $1,000 would be increased to $1,600.
- A variety of tax credits would be eliminated.
- A variety of education deductions, credits and exemptions would be changed.
- The deduction for charitable contributions would be slightly modified in a taxpayer friendly manner.
- The Alternative Minimum Tax (AMT) would be repealed.
- A variety of personal itemized deductions would eliminated or restricted:
- Home mortgage interest would be limited to loans up to $500,000 and only for newly purchased homes.
- No deduction would be permitted for state and local income taxes and sales tax.
- The deduction for property taxes would be limited to $10,000.
- A variety of deductions would be repealed: casualty losses, tax preparation expenses, alimony, moving expenses and medical expenses.
Estate and Gift Tax Provisions
- The base estate tax exclusion amount would be increased from $5.6 million to $10 million.
- The estate tax would be repealed after 2023.
Foreign Tax Provisions
- A variety of substantial and complex changes would be made to the taxation of foreign income.
Kirsch CPA Group is currently reviewing this legislation more closely and will be monitoring future developments. We will keep abreast of this proposal and future updates to analyze how these provisions might impact you. Contact us at 513.858.6040 if you would like to discuss how these changes may impact you.