House GOP Unveils Tax Bill

Posted November 3, 2017 at 1:06 pm

The long-awaited tax overhaul bill recently announced by U.S. Rep. Kevin Brady (R-TX) will keep the top individual rate at 39.6 percent for high-income earners, and will immediately and permanently cut the corporate rate to 20 percent.

The legislation seeks to revamp the tax code in a major way for the first time since 1986, incorporating long-sought goals to keep more money in the pockets of individuals and families, and boost incentives for businesses by closing loopholes. The bill would collapse seven tax brackets for individuals to four brackets with rates of 12, 25, 35 and 39.6 percent. The bill also would increase the standard deduction so single filers earning up to $12,000 and joint filers earning up to $24,000 would pay no income tax.

The measure includes an increase in the child tax credit from $1,000 to $1,600 per qualifying child. The child tax credit expansion is part of a new family credit that also includes a $300 credit for each parent and non-child dependent to help with everyday expenses. The mortgage interest deduction is maintained in full for existing mortgages, but future homebuyers would only be able to deduct interest paid on the first $500,000 of the total cost of their mortgage. Retirement incentives for 401(k)s and IRAs also are maintained. The estate tax, also known as the “death tax,” will be fully repealed under the plan, but not for six years. In the interim, the bill would double the estate tax exemption.

A provision that is expected to draw some opposition is the capping of a deduction for state and local property taxes at $10,000. The bill would eliminate the incentive that allows taxpayers to deduct state and local income or sales taxes.

Another issue that may plague the bill: placing limits on a proposed tax cut for many businesses organized as partnerships, limited liability companies and other so-called pass-throughs. Currently, such companies pass their earnings through to their owners, who are taxed at their individual income rates – which can be as high as 39.6 percent.

The bill would reduce the pass-through rate to 25 percent – but limit the kind of income that would qualify. “Professional services” – including doctors, lawyers, accountants and others – wouldn’t automatically qualify for the rate.

Other business owners could choose one of two options:

  1. Categorize 70 percent of their income as wages – and pay their individual tax rate on it – and 30 percent as business income, taxable at the 25 percent rate.
  2. Set the ratio of their wage income to business income based on the level of their capital investment.
     

The guidelines are aimed at preventing abuse of the 25 percent rate – such as high-earning individuals forming themselves into corporations to get a tax cut. President Donald J. Trump (R) and others have pitched the pass-through plan as a boon for small businesses – but pass-throughs can be for very large businesses in addition to mom-and-pop shops.

Rep. Brady, who is the House Ways and Means Chairman, has said he will consider feedback he receives as he looks to make additional changes in a chairman’s markup to be released in advance of the committee markup. The markup is scheduled to begin Nov. 6 and last for several days.

House GOP leaders want to hold a vote on the measure before Thanksgiving. To view the actual text of the legislation, click here. To read a summary of the legislation, click here.

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