New Potential Tax Law Changes

New Potential Tax Law Changes

Leaders in Congress and President Trump recently released a “framework” of the tax law changes that they would like to see happen.  As of right now, there are not a lot of specifics and a lot will change as the specifics are negotiated.

Here is a list of the proposed changes that will have the most effect on taxpayers and small to medium-sized business owners.

  • Individual tax rates compress to 3 tax rates from the current 5. The new rates would be 12%, 25%, and 35%.  There could also be a 0% rate, and I expect the final bill would keep the current top tax rate of 39.6%.
  • The standard deduction will double from $12,600 (married filing jointly) and $6,300 (single) to $24,000 (married) and $12,000 (single). Included in that doubling, though, is the elimination of the personal exemption for the taxpayer and spouse.
  • The child tax credit will be “significantly enhanced”. The expectation is that the income phase-out for getting the child tax credit will be much higher than the current limit of $110,000 (married filing joint) and $75,000 (single and head of house).  Additionally, the proposal calls for a $500 credit for “non-child dependents”.  So, that would bring some tax relief for taking care of aging parents or other relatives that qualify as a dependent
  • The framework calls for a repeal of the Alternative Minimum Tax (AMT) for individuals. Getting this tax repealed would be great because it has significantly increased the tax on some small business owners who have flow-through income from their S Corp or Partnerships
  • Small business owners with S Corps and Partnership interests would have a maximum tax rate on their business income of 25%. If this goes through, we can expect to have rules in place that try to prevent owners from having all of their income come from the S Corp in order to avoid the higher tax rates on their other income
  • Fixed asset purchases over $2,500 will continue to get the same treatment for the next 5 years. Currently, there is a limit of $500,000 of large purchases that we can expense in the first year the assets are placed in service.  The tax law framework will extend this for 5 additional years
  • The 9% net income deduction for manufacturers and a lot of construction contractors will be eliminated. Currently there is a deduction for about 9% of the net income for manufacturing and construction companies that would be eliminated.  Lawmakers see the deduction as not being needed any longer with the reduced tax rates
  • Repeal of the estate and generation-skipping taxes. Currently, there is an estate tax exemption for estates below about $5.5 million per person.  Repealing the estate tax would be wonderful for beneficiaries of estates larger than $5.5 million.

There are additional proposals in the framework related to how much a regular “C” Corporation can expense of their debt, an encouragement to bring income that is in foreign accounts to the US, and a reduced tax rate for C Corporations.

Whether or not you are affected by the new rules is really going to be a case-by-case calculation.  The larger standard deduction is a positive because taxpayers that don’t itemize will have a reduced tax bill.  But, losing the personal exemption for the taxpayer (and spouse) will offset some of the benefit from the larger standard deduction.

Fewer people will need to itemize on their tax returns making the returns simpler, which means that the realtors, home builders, mortgage, charitable groups, investment advisors, and gambling industries would be affected.

There is some talk about having future 401(k) and IRA contributions counted as Roth-style contributions only.  This means that contributions to a 401(k) or IRA would not be deductible from income in the year of the contribution.  Making that change would increase the current tax receipts to the federal and state governments substantially – hundreds of billions of dollars by one estimate.

Analysts currently think that a new tax law would be passed by the end of 2017 or the 1st quarter of 2018.  Either way, the rules will most likely take effect for years that begin after 12/31/17.

Currently, the biggest beneficiaries in the proposal would be S Corp and Partnership owners.  Currently, all of the income from the S Corp or partnership flows to the business owners’ return.  That income from the S Corp or partnership substantially increases the tax that the owners/partners have to pay.  Lowering the tax rate for that business income to no more than 25% would take a lot of their income out of the 28%, 33%, 35%, and 39% brackets.  This would give those owners additional cash to more effectively run their business.

There are still a lot of questions regarding details to the proposals.  If you have questions, we’ll be glad to give you a best guess answer.

UPDATE – The final tax bill was signed into law by President Trump near the end of 2017, and most provisions take effect with tax years beginning in 2018.  The final tax bill looks significantly different than the original framework originally proposed.  Please give us a call if you would like to discuss the changes and how they affect you.

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