Trump’s Tax Proposal (Part II) – Select Highlights

Earlier this year, we discussed the broad highlights of President Trump’s plan to reform the tax system.  As discussed back then the plan was very skeletal in nature.  Earlier this month, House Ways and Means Committee Chairman, Kevin Brady (R-TX), introduced a 429-page “Tax Cuts and Job Act” that would make major changes to the taxation of businesses and individuals.  Most of the changes would be made effective beginning after 2017.  Below is a summary of a few of the proposed changes…

Corporate Tax Rate – The top rate of 35% would be eliminated and corporate income would generally be taxed at 20%.  There would also be a 25% rate for certain personal service businesses (law, architecture, accounting, engineering health, actuarial services, performing arts, and consulting where services are substantially performed by employee-owners).

Alternative Minimum Tax – The alternative minimum tax would be repealed.

Full Expensing of Certain Property – The entire cost of certain depreciable assets acquired between September 27, 2017, and January 1, 2023, would become immediately deductible in full.

Interest Expense Limitation – Net business interest will be limited to 30 percent of the business’s adjusted taxable income.

Net Operating Losses – A net operating loss deduction would be limited to 90 percent of taxable income.  In addition, taxpayers will no longer be able to carry back net operating losses (currently net operating losses can be carried back two years), however, taxpayers will be able to carry them forward indefinitely (currently net operating losses can be carried forward twenty years).

Like-Kind Exchanges – The gain deferral rules on like-kind exchanges would only apply to exchanges of real property.

Tax Rates – The number of tax brackets would be reduced from seven to four.  The brackets would be as follows: (i) 12% ($0 to $45,000 for single taxpayers and $0 to $90,000 for married filing jointly); (ii) 25% ($45,001 to $200,000 for single taxpayers and $90,001 to $260,000 for married filing jointly); (iii) 35% ($200,001 to $500,000 for single taxpayers and $260,001 to $1,000,000 for married filing jointly); and (iv) 39.6% (over $500,000 for single taxpayers and over $1,000,000 for married filing jointly)

Standard Deduction – The standard deduction would be increased to $24,400 for joint filers; $12,200 for individual filers and $18,300 for single filers with at least one qualifying child.  Personal exemptions would be repealed.

Mortgage Interest – Interest would only be deductible if the mortgage is acquired in connection with the purchase of a primary residence (not for a second home) and only for amounts up to $500,000 (for married filing jointly).

State and Local Income and Sales and Property Tax – There would no longer be allowed a deduction for state and local income taxes.  There would no longer be allowed a deduction for sales tax itemized deductions for non-corporate taxpayers (unless related to carrying on a trade or business in connection with the production of income).  Additionally, the state property tax deduction would be limited to $10,000 (for married filing jointly).

Exclusion of Gain on Principal Residence – The capital gain exclusion of $500,000 (for married filing jointly) on the sale of a principal residence would be limited to taxpayers who own and use a home for five out of the eight previous years (it is currently two out of the previous five year).  The exclusion could only be used once every five years (instead of once every two years).

Estate, Gift, and Generation Skipping Taxes – The current tax rate of 40% would be maintained through the year 2023, however the exemption amount for each of these taxes would double to $10,000,000 (not including inflation adjustments).  After 2023 the estate and generation skipping taxes would be repealed and the gift tax would remain in effect with a 35% rate.  The current annual exclusion gifting rules and “step-up” in basis at death rules would remain in effect.

Retirement Plans and Life Insurance – The tax advantages currently associated with retirement plans and life insurance would remain as is.