Tax Reform Road Map
The Tax Cuts and Jobs Act was officially introduced by the House Ways and Means Committee Chairman, Kevin Brady on 2 November 2017. The 429 page proposed legislation builds on the baseline framework that was introduced back in September.
There is a desire to get the bill passed by the end of the year but it remains to be seen whether the bill will pass in its current form or whether any adjustments will be needed to get the bill through both the House and the Senate.
If enacted in its current form, the following changes would be made:
1. A compression of the personal Income Tax bands
The bill outlines a reduction of the number of tax bands from seven to four. The new bands are proposed as follows:
- 12% – Single filers with income up to $45,000, Married Filing Joint filers with income up to $90,000
- 25% – Single filers with income up to $200,000, Married Filing Joint filers with income up to $260,000
- 35% – Single filers with income up to $500,000, Married Filing Joint filers with income up to $1,000,000
- 41% – Single filers with income above $500,000, Married Filing Joint filers with income above $1,000,000
The Standard Deduction would increase from $6,350 to $12,000 for individuals ($24,000 for joint filers) and the Personal Exemption would be eliminated.
2. Overhaul on Itemized Deductions
There are currently a number of different deductions available as offset to Federal income tax. Under the outlined plan, major changes would take place with what would qualify for an Itemized Deduction as follows:
- The following deductions would be eliminated:
- State and local income taxes paid
- Student loan interest deduction
- Moving deduction
- Alimony payment deduction
- Medical expense deduction
- State and local property taxes up to $10,000 would be allowed as a deductible expense.
- Charitable gift deductions would be preserved.
- Limit on the home mortgage interest deduction. For any new purchases the interest deduction would be limited to loans up to $500,000 as opposed to the current $1,000,000 threshold.
3. No proposed change to 401(k) plans
There has been recent press around the possibility of tax relief being limited under the proposed changes. However, changes to retirement savings accounts have been excluded from the proposed legislation in its current form.
4. The elimination of Federal Estate Tax
Beginning 1 January 2018, the estate, gift and generation skipping tax (GST) exemptions will increase to $10,000,000 plus the inflation adjustment figure applicable for the given year. This would make the new exemption figure for 2018 $11.2 million. Other than the annual inflation adjustment there will not be any other changes until 2024 when the estate and GST taxes would be repealed and the gift tax rate would drop from the current 40% to 35%. Notably, the step-up in basis for assets held at death would be retained.
5. A repeal of the Alternative Minimum Tax (AMT)
The AMT is a separate tax calculation that runs alongside the normal income tax calculation to prevent high income taxpayers from reducing their income too extensively through the use of available deductions. In this tax calculation certain types of deductions are added back to determine a minimum tax that must be payable. AMT would be eliminated under the legislation.
6. Changes to Corporation taxes
The current corporation tax rate will be permanently reduced from 35% to 20%. Additionally, the provisions allow for companies to expense the entirety of their business investments in the year the expense occurs, versus it being allocated across multiple years.
7. Repatriation tax on overseas assets for US companies
There will be a compulsory one-time tax on the overseas assets for US companies. Illiquid assets will attract a 5% tax and liquid assets will be taxed at a 12% rate.
8. A reduced tax rate for pass-through entities
Currently, most pass-through entities such as partnerships, S Corporations and single member LLCs pay tax at the individual level as opposed to the entity level. The bill outlines a pass-through tax rate of 25% and would require a classification between salary and business profit to ensure income is being taxed at the appropriate rates.
There will surely be further developments as certain provisions may ultimately evolve in the coming months. This remains a space to watch as there may be planning actions to take prior to year end and we will continue to provide updates as we know them. In the meantime, should you have any questions at all please do not hesitate to contact your MASECO Asia Wealth Manager.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO Asia Ltd. is authorised and regulated by the Securities and Futures Commission; the Securities and Futures Commission does not regulate tax advice. MASECO Asia Ltd. is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.