November 3, 2017

Authored by: Charles Lin

House Republicans released their new tax bill on November 2, 2017.  As expected for such a significant proposal, the final bill, if passed, will likely look different.  Nonetheless, the bill, in its current form, provides the base starting point from which the House GOP intends to negotiate, both within their party and without.

The changes in the tax bill related to transfer taxes are as follows:

  • The transfer tax exemption for gift, estate, and GST purposes is doubled in 2018, from $5,000,000 per person to $10,000,000, as previously indexed for inflation – $11,200,000 per person – and indexed from there.
  • The estate and generation-skipping transfer tax will be fully repealed on January 1, 2024.
  • “Step-up” basis on death for income tax purposes of inherited property (presumably other than retirement plan benefits and other items of “income in respect of a decedent”) would remain in effect, even after 2023, despite the estate tax having been repealed.
  • The gift tax remains in effect after 2023, with a top rate of 35% and an exemption of $10,000,000 as previously indexed, and indexed from there.

Other notable changes proposed are as follows:

  • The number of income tax brackets is lowered from seven to four, beginning with 12% on the first $45,000 of income for individuals and $90,000 for married couples filing jointly, and ending with 39.6% on income starting at $500,000 for individuals and $1,000,000 for married couples.
  • There will also be four income tax brackets for trusts and estates: 12% on the first $2,550 in income, 25% on income starting at $2,550 up to $9,150, 35% on income starting at $9,150 up to $12,500, and 39.6% on all income above $12,500.
  • The standard deduction is nearly doubled, from $6,350 to $12,000 for singles and from $12,700 to $24,000 for married couples filing jointly.
  • Personal exemptions are eliminated.
  • Instead of being taxed at an ordinary rate for business profits, passive owners of pass-through businesses would pay a 25% rate. However, the bill presumes that for those actively involved in the business, 70% of the pass-through income is attributed to labor, which would be subject to higher ordinary income rates. This results in a top mixed rate of about 35%. For personal service companies, such as law firms, the bill presumes that 100% of the pass-through income is attributed to labor.
  • The deduction for state and local property taxes is capped at $10,000.
  • State income taxes can no longer be deducted.
  • The corporate tax rate is lowered to 20% from 35%.
  • The home mortgage interest deduction will apply only to loans up to $500,000 for new homes, down from the current $1,000,000 limit. The existing structure for current mortgages is preserved.
  • The alternative minimum tax is repealed.
  • The child tax credit is increased from $1,000 to $1,600, but the $600 increase will not be “refundable”, i.e. if your income tax bill is zero, you will not receive a check for the credit.

Note that there are no changes to pre-tax 401(k) plans, contrary to previous discussions reported.