House Republicans have released their first draft of federal tax reform which includes doubling the standard deduction and lowering the corporate income tax rate to 20%.
The legislation is titled “The Tax Cuts and Jobs Act” and is designed to support middle-class families, defend workers and protect jobs. The bill calls for lowering the tax burden on middle-class families and low-income families, a reduction of the corporate income tax and end to incentives to ship jobs, capital and tax revenues overseas.
The bill was released in early November after weeks of negotiations by Republican leaders in the House, Senate and the White House. Rep. Peter Roskam, (R-Illinois), the chief tax writer on the House Ways and Means Committee, stated in a New York Times article that the bill is simply the starting point and that changes to the bill may occur as it goes through the legislative process.
Changes for Individual Taxpayers
The plan calls for the standard individual income tax deduction to double. Those married and filing jointly will be able to claim a $24,000 deduction under the plan, those filing single would receive a $12,000 standard deduction. The plan also calls for a consolidation of the current personal income tax brackets. The brackets would be reduced from seven to four with the new brackets being 12%, 25% and 35% and 39.6%.
Families that used to fall under the former 10% bracket are expected to be better off under the new bracket system because of the increase in the standard deduction as well as the increase in the child tax credit.
The legislation also looks to simplify the tax code. It has long been a goal of members in Congress to make taxes easy enough to file that the paperwork could fit on a postcard.
To accomplish this goal the plan seeks to eliminate many of the exemptions, deductions and credits that are currently on the books (doing so will allow for the increase in the standard deduction). The home interest deduction is preserved, although the cap on the deduction is moved from $1 million loans to $500,000 loans.
The charitable exemption is also continued. Deductions for state and local taxes are allowed to be written off but only on property taxes up to $10,000. The house bill also increases the child tax credit from $1,000 to $1,600.
Lower Corporate Income Tax Rate
Perhaps the most significant change that is being proposed is the change to the corporate income tax.
The proposal seeks to lower the corporate tax rate to 20%, which is below the 22.5% average corporate income tax rate among industrialized nations. This is monumental as it will begin the process of incentivizing companies to stay in the U.S. instead of looking for tax shelters in other areas of the world.
The legislation also limits maximum tax rates applied to business income of small and family-owned businesses that are conducted as sole proprietorships, partnerships and S-Corps.
These taxpayers would see a cap of 25% on the income tax related to their businesses. The bill does call for measures to be put in place for these types of taxpayers to prevent the re-characterization of personal income into business income to prevent wealthy individuals from avoiding higher personal income tax rates.
Businesses will also be able to immediately write off (or expense) the cost of new investments in depreciable assets other than structures for at least five years under the House GOP proposal. This policy represents an unprecedented level of expensing with respect to the duration and scope of eligible assets.
Just as many deductions are proposed to be eliminated in the individual income tax code, many eliminations of business deductions are also being considered.
However, there are two incentives highlighted as ones that won’t be eliminated. The first is the research and development deduction and the second is the low-income housing credit.
Other deductions may be considered as the bill is debated in the House and
The plan also transforms the existing “offshoring” model for businesses to an “American” model. The House plan calls for an end to the incentive to keep foreign profits offshore by exempting them when they are repatriated to the United States.
Costs for the Tax Cuts and Jobs Act are estimated to be more than $1 trillion. GOP leaders hope the tax plan can be on President Trump’s desk for his signature by the end of the year.