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A Peek at the Republican Tax PlanSubmitted by Townsend Asset Management Corp. on November 3rd, 2017
The U.S. House of Representatives released the Republican party’s proposed tax plan on November 2nd. Called the “Tax Cuts and Jobs Act,” if enacted, it would be the most significant change in taxes since the Tax Reform Act of 1986.
Not surprisingly, major rewritings of tax laws are greeted with howls of protest from lobbyists representing groups impacted negatively or even groups who believe they deserve even greater benefits.
Given recent failures to implement changes to health care, one might wonder if anything at all will ultimately emerge from the Congress or just how altered a tax bill will be if and when it stumbles through the political process.
Regardless, some version of the plan may emerge, so let’s highlight a few of the key points:
- Personal Tax Rates - Personal tax rates would change from the current seven brackets to just four: 12%, 25%, 35% and 39.6%.
- Investment Income – The bill calls for the tax rates on dividend income and capital gains (currently 0%, 15% and 20%, depending on income) to remain unchanged.
- Corporate Tax Rates - Corporate taxes would drop from 35% to 20%. Corporations would be able to bring back overseas cash at a rate of 12% and the entire business tax system would change from a worldwide to a territorial system where mostly just money made in the U.S. is taxed, not overseas earnings.
- Pass-Through Earnings - The top rate on “pass-through” income (such as S Corporation profits) would drop to 25%, but this would apply to just 30% of the earnings, with the remainder subject to the highest individual rate.
- Standard Deduction - The standard deduction would almost double, increasing to $12,000 for individuals and $24,000 for married couples. At the same time, personal exemptions would disappear.
- Home Mortgage interest - For existing home mortgages there would be no change, but for new home purchases, interest would be deductible only on loans up to $500,0000, down from the current $1 million.
- Real Estate Property Taxes - Local property taxes would continue to be deductible, but only up to $10,000.
- State and Local Income Tax - A real hot potato, particularly for those living in high tax states, but federal deductions for state and local income and sales taxes would be eliminated.
- Medical Expenses – No longer allowed as an itemized deduction.
- Alternative Minimum Tax - would be repealed.
- Estate Taxes - The current $5.49 million exemption would be doubled to $11.2 million, with plans to fully repeal the estate tax as of 2024.Retirement Savings - Despite earlier proposals to cap the maximum amount that could be invested pre-tax in 401(k) plans, the bill makes no changes and leaves the current law intact.
Stay tuned, there will be a lot of political theater coming.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm located in Raleigh, North Carolina. Email: Gerald@AssetMgr.com