The Coming Revision of the U.S. Tax Code
Plan lowers corporate rate to 20% and reduces individual rates
The Senate of the United States Congress passed revisions to the U.S. tax code. The bill, which must be adjusted to the House of Representatives of the United States Congress version of tax reform, would lower the corporate rate to 20% from 35%, reshape international business tax rules and temporarily lower individual taxes.
The House and Senate still need to reconcile competing versions of the tax plan, something Congressional leaders hope to do by Christmas. The House and Senate bills overlap in many ways, and lawmakers expressed optimism about getting a final deal done.
Highlights of the Senate bill include bigger tax breaks for pass-through businesses such as partnerships and S corporations, a $10,000 deduction for property taxes, and an expanded deduction for people with large medical expenses. Additionally added were aggressive depreciation rules to encourage business investment after 2022.
Pass-through firms, which pay their business taxes through individual returns rather than corporate returns, won major concessions. They would get a 23% deduction from individual rates, with a top rate under 30%. More than half of U.S. business income goes to pass-throughs.
It is our opinion that this deduction opens new and unprecedented avenues for individuals likely seeking to declare as much of their income as possible as lower-taxed business profits.
Even in a bill that provides sizable tax cuts to many, some taxpayers are set to lose. The bill would prevent individuals from deducting state and local income taxes. That is likely to raise federal taxes on upper-middle-class wage earners in high-tax states, such as California, Connecticut, Maryland, New Jersey and New York.
The standard deduction would be nearly doubled and the child tax credit would rise, while personal exemptions would be repealed. For many households, that combination would modestly increase the amount of earnings that are not subject to income tax.
The bill also would push millions of households out of itemizing deductions. That would reduce the incentive to deduct mortgage interest and charitable contributions.
Debt-reliant businesses would lose, too, under a provision that limits interest deductions to 30% of income.
December 4, 2017
