Tax Reform is Coming

The House of Representatives and the Senate both have approved a new tax reform bill.  Now what?  The versions are similar, however, they are different.  Now they will both send their people to a joint committee on tax to hash out the differences to come to common ground.  Then they both vote again.  Once approved by both the House and the Senate and signed by the President the tax bill will become law.

Both sides may promote that this is a long time coming and this tax reform will be good for the american people, and american companies.  However, it is only good until a future congress decides to change our tax laws again.

The Tax Foundation has provide a good chart to see the difference between the two bills.

Provision House Version Senate Version
Individual Income Tax Rates and Brackets Consolidates current seven income tax rates into four, while retaining the top marginal rate of 39.6 percent and including an income recapture provision which phases out the effect of the 12 percent bracket for high earners, sometimes called a “bubble rate”

Single Filer Rate Schedule

12% > $0
25% > $45,000
35% > $200,000
39.6% > $500,000
Retains seven brackets while reducing rates, bringing the top marginal rate to 38.5 percent and avoiding a bubble rate; individual income tax rate changes sunset at the end of 2025

Single Filer Rate Schedule

10% > $0
12% > $9,525
22% > $38,700
24% > $70,000
32% > $160,000
35% > $200,000
38.5% > $500,000
Standard Deduction $12,200 for single filers, $18,300 for heads of household, and $24,400 for joint filers, indexed to chained CPI $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers, indexed to chained CPI
Child and Family Tax Credits Increases child tax credit value to $1,600, with the phaseout for joint filers beginning at $230,000, while creating a new $300 per-person family tax credit for those not eligible for the child tax credit, to expire after five years Increases credit value to $2,000, with the phaseout for joint filers beginning at $500,000; provision sunsets at the end of 2025
Medical Expense Deduction Repeals Retains, and for tax years 2017 and 2018, allows it to be taken if eligible expenses exceed 7.5 percent of AGI rather than 10 percent under current law
Mortgage Interest Deduction Limits the mortgage interest deduction to the first $500,000 in principal value Keeps the mortgage interest deduction for acquisition debt, but eliminates the deduction for equity debt
Graduate Student Income Treats graduate student tuition waivers as taxable income Not included in Senate version
Treatment of Pass-Through Income Caps the pass-through rate at 25 percent, then setting anti-abuse rules that begin with the rebuttable presumption that 70 percent of pass-through income is wage income (subject to the regular rate schedule), while 30 percent is business income (subject to the lower rate cap), while excluding many professional service companies from the preferential rate Adopts a 23 percent deduction for pass-through income (limited to 50 percent of wage income) for qualifying businesses, including publicly traded partnerships but with a slightly longer list of ineligible service providers; the provision expires at the end of 2025
Corporate Rate Reduction Timing Cuts rate to 20 percent, effective tax year 2018 Cuts rate to 20 percent, delayed to tax year 2019
Capital Investment Allows full expensing of short-lived capital investment, such as machinery and equipment, for five years; increases the Section 179 small business expensing cap from $500,000 to $5 million, with the phaseout beginning at $20 million, and maintains current depreciation schedules for real property Allows full expensing of short-lived capital investment, such as machinery and equipment, for five years, then phases out the provision over the subsequent five; raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million, and shortens the depreciation of real property to 25 years
Alternative Minimum Tax Repeals both the individual and corporate alternative minimum taxes (AMTs) Retains the corporate AMT in its current form, and retains the individual AMT with higher exemption amounts (about 40 percent higher than current law)
Tax Treatment of Interest Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) Caps net interest deduction at 30 percent of earnings before interest and taxes (EBIT)
Net Operating Losses Eliminates net operating loss (NOL) carrybacks while providing for indefinite net operating loss carryforwards, increased by a factor reflecting inflation and the real return to capital, while restricting the deduction of NOLs to 90 percent of current year taxable income Eliminates net operating loss carrybacks while limiting NOL carryforwards to 80 percent of taxable income
Cash Accounting Increases small business eligibility for small businesses, from $5 million to $25 million Increases small business eligibility for small businesses, from $5 million to $15 million
Business Credits and Deductions Eliminates credits for orphan drugs, energy, private activity bonds, rehabilitation, and contributions for capital, among others Modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while also limiting the deduction for FDIC premiums and retaining certain other preferences eliminated in the House version
International Income Moves to a territorial system with base-erosion rules including the inclusion of 50 percent of excess returns by controlled foreign corporations in U.S. shareholders’ income, and an excise tax on payments made to foreign firms unless claimed as effectively connected income Moves to a territorial system with anti-abuse rules and a base erosion minimum tax of the excess of 10 percent of modified taxable income over an amount equal to regular tax liability
Deemed Repatriation Enacts deemed repatriation of currently deferred foreign profits at a rate of 14 percent for liquid assets and 7 percent for illiquid assets Enacts deemed repatriation of currently deferred foreign profits at a rate of 14.49 percent for liquid assets and 7.49 percent for illiquid assets
Estate Tax Increases exemption to $10 million, indexed for inflation, with repeal after six years Doubles the estate tax exemption
Individual Mandate Penalty No change Reduces the individual mandate penalty to $0

IRS extends upcoming deadlines, provides tax relief for victims of Hurricane Florence

Hurricane Florence victims in parts of North Carolina and elsewhere have until Jan. 31, 2019, to file certain individual and business tax returns and make certain tax payments, the Internal Revenue Service announced today.

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently, this only includes parts of North Carolina, but taxpayers in localities added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Sept. 7, 2018 in North Carolina. As a result, affected individuals and businesses will have until Jan. 31, 2019, to file returns and pay any taxes that were originally due during this period.

This includes quarterly estimated income tax payments due on Sept. 17, 2018, and the quarterly payroll and excise tax returns normally due on Oct. 31, 2018. Businesses with extensions also have the additional time including, among others, calendar-year partnerships whose 2017 extensions run out on Sept. 17, 2018. Taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018 will also have more time to file.

In addition, penalties on payroll and excise tax deposits due on or after Sept. 7, 2018, and before Sept. 24, 2018, will be abated as long as the deposits are made by Sept. 24, 2018.

The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2018 return normally filed next year), or the return for the prior year (2017). See Publication 547 for details.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

See also the Hurricane Florence Information Center.