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Tax Reform Observations and What To Expect Next



Annette Nellen, Tax Advisor

What an exciting month so far for tax reform! We have an amended bill passed by the House Ways and Means Committee (by vote of 24-16). The bill, H.R. 1, Tax Cuts and Jobs Act, was introduced just one week earlier. On November 9th, the Senate Finance Committee also released a 253-page summary by the Joint Committee on Taxation (most of the pages describe current law).

Observations  

– The House calls for individual rates of 12%, 25%, 35%, 39.6% and a surtax on the top rate because the benefit of the 12% bracket will phase-out for those in the top bracket (over $1 million of income).

– The Senate rates are 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%.

– Both change the corporate rate to a flat 20% (rather than today’s top rate of 35%). The Senate delays this rate until 2019.

– Both bills reduce the maximum rate on business income of pass-through entities, other than professional service firms, but in different ways, and both with some complexity!

– The standard deduction in increased with most itemized deductions other than mortgage interest and charitable contributions remaining. The Senate retains the medical expense deduction.

– Personal and dependency exemptions are repealed. Both bills have a higher child credit amount and a credit for non-child dependents ($300 in House and $500 in Senate).

– Increased expensing amounts for limited time periods.

– Section 199 is repealed.

– Section 1031 would only apply to real property (other than dealer property).

– The estate tax exemption is doubled. The House repeals the estate and GST after 2023; the Senate does not.

– The corporate system is moved to a territorial system with provisions to prevent base erosion.

And there is more. The House bill is scored to cost $1.5 trillion over ten years as allowed by the recent budget bill. Next steps is for the House to vote and the Senate Finance Committee to amend its bill and vote and then have it go to the full Senate. Then a conference committee is needed to work out differences to get one bill to go to House and Senate for vote.

What To Expect Next

– What all will be temporary due to reality that this will be enacted via budget reconciliation so only 51 votes needed in Senate rather than 60. But bill cannot increase deficit after ten years.

– Anything new to be added to help reduce cost, if necessary.

– Whether simplification is possible. While many individuals will move from itemizing to taking the standard deduction, there are still a variety of complex provisions for individuals and businesses.

There will be some discussion of tax reform at the CalCPA Federal, State, Local and International Tax Conference on November 15 – 17 at Universal City (and webcast). I will be providing a federal tax update at the start of the program. I’m focusing on cases and rulings and regulations, but will note where tax reform might change something. Other speakers will likely do the same. And, for a good discussion of tax reform and the process, Mel Schwarz of Grant Thornton will be talking about tax reform on Wednesday afternoon. Stay tuned!

Have a question! Contact Annette Nellen 

Your comments are welcome!

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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