House of Representatives Tax Plan Overview – Fiscal Policy

The House Of Representatives released highlights of proposed tax cuts and tax policy reform, known as The Tax Cuts & Jobs Act. The proposals are still preliminary and only a draft until modified and formally signed into law. It is expected that the final version may have numerous revisions as the proposal goes through the negotiating process.

Below are proposed key provisions:

• The current seven tax brackets would be reduced to four: 12 percent, 25 percent, 35 percent, with the top rate of 39.6 percent remaining for those earning above $1 million. There would be no income tax for those earning up to $24,000;

• Corporate taxes would drop from 35 percent to 20 percent;

• Taxes pass-through (S Corps, LLCs, Sole proprietorships, partnerships) business income at a maximum rate of 25 percent;

• Standard deductions would nearly double from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples;

• The Child Tax Credit would increase from $1,000 to $1,600;

• Federal deductions for state and local income and sales taxes are to be eliminated, but local property taxes can be deducted up to $10,000;

• No changes on contribution limits to 401(k) retirement plans;

• The Alternative Minimum Tax (AMT) is to be repealed;

• The estate tax exclusion would increase from $5.49 million to $11.2 million, and be completely repealed as of 2024;

• Corporate profits generated overseas would be subject to a 12% tax;

• Home mortgage interest deductions will stay in place for existing homeowners, but will be capped for new homeowners at $500,000, down from the current $1 million limit.

A number of popular taxpayer deductions may also be reduced or eliminated. The idea presented is to simplify the tax filing process by eliminating multiple, tedious deductions and replace them with a single, larger standard deduction. Some of the deductions targeted as proposed in the draft of the bill include:

• Repeal personal casualty loss deductions;

• Limitation on wagering (gambling) loss deductions;

• Limit charitable contributions;

• Repeal deduction for tax preparation expenses;

• Repeal medical expense deductions;

• Repeal deduction for alimony payments;

• Repeal deduction for moving expenses;

Effect of Tax On Overseas Cash Held By US Corporations

The effect on U.S. companies should the proposals for corporations be approved are expected to apply primarily to larger U.S. multinationals. These companies will no longer be able to avoid taxes on profits earned overseas sitting in cash. The proposed tax rate of 12% would apply to over $3 trillion currently overseas. Under current law, U.S. taxes on global earnings by U.S. companies are deferred until brought back to the U.S. or otherwise known as “repatriated”. Bringing back overseas cash in order to tax has never been mandatory.

The 12% rate encourages companies to bring cash back to the U.S. rather than investing it in other countries. In addition, the 12% rate is lower than the current corporate rate approaching 35% for many companies. Should the provision become law, the Joint Committee on Taxation estimates that it would raise $223 billion over the next decade.

Sources: House of Representatives, Tax Policy Center