House Republicans Release Tax Reform Plan
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House Republicans finally unveiled the details of their tax reform plan, “Tax Cuts and Jobs Act.” The plan will now go to the Ways and Means Committee for “mark-up” on November 6. This means the Committee will allow members to offer amendments to the plan. The mark-up process is expected to last at least a week.
On the other side of House, Senate Republicans are expected to announce their version of the tax reform plan in mid-November and put their proposal before the Senate Finance Committee before Thanksgiving. I expect the Senate version to vary from the House plan. Republican leaders will then go to conference in December to iron out the differences in their respective plans and produce a final bill for passage. Reconciling major differences between the House and Senate bills is a grueling process of negotiation. The outcome must be a single tax reform plan that can pass by simple majorities in the House and Senate. In the end, Senate Republicans will have an outsized influence in the outcome because they have less leeway to negotiate with a mere two seat majority.
Republicans will use the budget reconciliation process to move the bill through and House and Senate. This means Senate Republicans will not need the usual 60 votes to pass tax reform — a simple majority of 51 will do. On October 26, the House and Senate reached agreement on a budget bill clearing the path to use the reconciliation process. The total tax cut package is estimated to be $5.5 trillion. This consists of about $4 trillion of tax cuts that will be offset by tax increases in the plan plus $1.5 trillion in tax cuts that will not be offset by revenue. In other words, Congress can increase the deficit by $1.5 trillion. If Congress passes the plan it will be the largest tax cut in U.S. history.
House and Senate tax committees will operate via regular order and permit members to offer amendments. This means the proposals are likely to change as they work their way through the respective House and Senate tax writing committees. Thus, it is important to follow committee action on proposals that are important to you and your business.
Now let’s review the core elements of the Ways and Means proposal ahead of committee action. I note areas where the Senate is likely to take a different position than the House. Most of the provisions are effective for the 2018 tax year.
Individual Tax Provisions:
- Collapses seven tax rates into four for the 2018 tax year. The income thresholds for taxpayers filing jointly: 25% beginning at $90,000, 35% at $260,000, and 39.6% at $1 million.
- Maintains capital gains rates at 23.8%.
- Almost doubles the standard deduction from $6,300 to $12,000 for individuals and $12,700 to $24,000 for married couples and repeals personal exemptions.
- Change in tax treatment for alimony: Payments no longer tax deductible for divorces finalized after December 31, 2017.
- Limits the state property tax deduction to $10,000. The deduction for state and local income taxes is eliminated. The Senate is likely to propose a more generous deduction of property taxes.
- Repeals the alternative minimum tax.
- Repeals many itemized deductions except home mortgage, investment interest, charitable contributions among others.
- Limits the home mortgage deduction to $500,000 of acquisition indebtedness on a primary residence. The provision applies to debt incurred after November 2, 2017. I expect the Senate to propose a more generous home mortgage deduction.
- Repeals the estate, gift, and generation-skipping tax beginning 2024 while retaining the step-up in basis. Before 2024, the value of the estate that is excluded from these taxes is doubled to $10 million for a married couple and indexed for inflation. The Senate may not adopt full repeal of the estate tax.
- Imposes limitations on non-qualified deferred plans by high paid employees. Common types of deferred compensation plans that coordinate with 401(k)s and defined benefit plans would be eliminated. Existing plans are grandfathered for eight years.
Corporate Tax Provisions:
- Drops the corporate tax rate to 20% beginning 2018. The Senate could adjust this rate upward.
- Permits immediate expensing of qualified property purchased and placed in service after September 27, 2017 and before January 1, 2023.
- Limits the deduction for business interest to 30% of business AGI. Businesses with average gross receipt of $25 million or less would be exempt.
- Imposes a 12% tax on most foreign earnings that are brought back to the U.S.
Small Business Tax Provision:
- Proposes a top tax rate for pass-through businesses like partnerships, Subchapter S corporations, limited liability companies and sole proprietorships of 25%. However, the special rate does not apply to businesses where most of the income is earned from labor (e.g., law, accounting, consulting, engineering, financial services, or performing arts) as compared to investment in plant and equipment. For businesses that generate both passive and part business income, the proposal creates a complicated formula for determining the portion of the net income from active business that would receive the 25% rate.
Provisions Affecting Retirement Plans (note, the plan does not require Roth contributions or cut contributions to plans):
- Permits employees’ taking hardship distributions from their 401(k) to continue making contributions to the plan.
- Hardship distributions could be increased to include account earnings and employer contributions.
The House Republican plan starts the race for tax reform which Congress hopes to finish by year-end. There will be many fits and starts to the plan as it winds through the House and Senate and many provisions will change. The process is designed to work that way.
Now is the time to focus on the process and substance of the proposals and how they may impact you and your business. Our next article will outline the results of the Ways and Means mark-up and provide hints on what the Senate may include in its reform plan.
Source: Doug Fisher, American Retirement Association
Wall Street Journal, November 2, 2018
Business Insider, November 3, 2018
Boston Private is pleased to announce a partnership with Doug Fisher, a Washington Policy expert, who will offer a series of insights into a number of reform proposals making their way through Congress in 2017. Doug is Director of Retirement Policy at the American Retirement Association. In this role, Doug works with the ARA membership to protect, advise and grow their businesses through ideation and advocacy in the benefits area. Before joining ARA, Doug led Fidelity's legislative policy and thought leadership development teams involving retirement, health and welfare benefit plans. Doug has advised many Fortune 1,000 companies on the impact of legislation and regulation on the design and delivery of benefits. Before joining Fidelity, Doug served as tax counsel to the U.S. Senate Finance Committee and was involved in writing the pension, health and insurance provisions of the Small Business Job Protection Act of 1996; the Balanced Budget Act of 1997, including the Roth IRA, Simple retirement plan, medical savings account (predecessor to the health savings account); and the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
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- Tax Planning