The Senate passed their version of the massive tax bill late Friday night while Americans were asleep. By now you’ve heard about the passage of the Tax Cuts and Jobs Act by the House of Representatives last month. On Monday, the House and the Senate will come together to reconcile their differences to present a final bill for President Trump to sign into law. The biggest difference and what will become most contested is the individual mandate of the Affordable Care Act (Obamacare), which requires taxpayers to buy health insurance or pay a fine. What eventually becomes law is unknown, but the table below will help compare how the current tax rules differ under the bills passed by the House and the Senate.
The table is not all inclusive, but it does include some of the more commonly known provisions that affect a broad number of taxpayers. The table is also separated by individual and business taxation. The table only addresses pass-through business taxation because the majority of small businesses and our clients are pass-through entities. Because the tax code is very complicated and certain deductions offset others, each tax provision should be viewed independently.
What is a Pass-Through Entity?
This is a type of entity that does not pay tax on the entity level, instead, the net income from the entity passes through to its owners and the owners pay tax on that net income based on their own individual income tax rates which can currently be as high as 39.6. See table for examples of pass-through entities.
What is a Personal Service Corporation?
A business that provides services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, or any business where the principal asset is the reputation or skill of its employees.
As you can see from the vast proposed changes below and the uncertainty in the final version, the end result may have a taxing impact on your financial situation. Once a final bill is signed into law, we will schedule times with our tax clients to begin tax planning strategies for 2018.
| Individual Taxes | ||||
| Current Rule | House | Senate | Winners / Losers | |
| Tax Brackets | There are seven tax brackets: 10, 15, 25, 28, 33, 35, and 39.6 percent. | Consolidated into four broader brackets: 12, 25, 35, and 39.6 percent. | Remain at seven brackets: 10, 12, 22, 24, 32, 35, and 38.5 percent. | Winners: taxpayers because the brackets would be wider.
Loser: US Treasury |
| Standard Deduction | Single: $6,350Married Filing Joint: $12,700 | Increased to $24,000 for married and $12,000 for single. | Increased to $24,000 for married and $12,000 for single. | Winners: taxpayers who do not itemize.
Losers: US Treasury |
| Personal Exemptions | Taxpayer may claim a personal exemption of $4,050 for themselves, a spouse, and any dependent. | Repealed. | Repealed. | Winners: US Treasury
Losers: All taxpayers. |
| Affordable Care Act Individual Mandate | Taxpayers pay a fee if they do not have health insurance. | No change. | Repealed. | Winners: Taxpayers who cannot afford healthcare costs.
Losers: US Treasury |
| State and Local Income Taxes | State and local income and property taxes are deductible. | State and local income taxes are no longer deductible. Only $10,000 of property taxes are deductible. | Repealed. No deductions. | Winners: US Treasury
Losers: taxpayers in states with high real estate values or high income taxes, such as California. |
| Mortgage Interest | Mortgage interest on up to $1 million (plus $100,000 of home equity) indebtedness is deductible. | The $1 million limit would be reduced to $500,000 and the effective date would be 11/2/2017. | No change. | Winners: US Treasury
Losers: taxpayers with mortgages greater than $500,000. |
| Property taxes | Property taxes are deductible. | Property taxes are no longer deductible. | Property taxes are no longer deductible | Winners:
Losers: |
| Roth Recharacterization | Taxpayers are allowed to recharacterize (undo) a Roth IRA conversion. | Repealed. | Repealed. | Winners: US Treasury
Losers: Taxpayers whose converted Roth IRAs have declined in value. |
| Personal Casualty Losses | Taxpayers can deduct losses from theft, fire, or storms. | Repealed. | A loss can only be deducted if a disaster is declared by the president. | Winners: US Treasury
Losers: Taxpayers with casualty losses. |
| Medical Expenses | Out of pocket medical expenses in excess of 10 percent of AGI are deductible. | Repealed. | No change. | Winners: US Treasury.
Losers: individuals with high medical expenses, usually elderly. |
| Alternative Minimum Tax (AMT) | AMT is a supplemental tax originally adopted to tax the wealthy, but has recently affected more middle class taxpayers. | Repealed. | Repealed. | Winners: middle income and wealthy taxpayers. |
| Alimony | Alimony payments are deductible by the payor and taxable to the recipient. | Neither deductible to the payor nor taxable to the recipient. | No change. Alimony payments would still be deductible to the payor and taxable to the recipient. | Winners: US Treasury
Losers: Payers of alimony, if passed. |
| Moving Expenses | Moving expenses are deductible, if for a job that’s more than 50 miles away. | Repealed. | Repealed. | Winners: US Treasury.
Losers: Taxpayers who have to move for their jobs and have to pay the expenses themselves. |
| Estate Tax | Estate tax is subject to top rate of 40% on estates over $5 million. | Tax applies to estates over $10 million and in 2023 the estate tax will be completed repealed while maintaining the step-up in basis for the beneficiary. | Tax applies to estates over $10 million and would not be completely repealed as under the House bill. | Winners: Taxpayers with large estates.
Losers: US Treasury. |
| Sale of primary residence | To qualify for the $500,000 ($250,000 if single) capital gains exemption, taxpayers must live in the property for 2 out of 5 years. The taxpayer can use this exclusion once every 2 years. | To qualify, the taxpayer must live in the property 5 out of 8 years and can use this exclusion once every 5 years. | Same as House bill. To qualify, the taxpayer must live in the property 5 out of 8 years and can use this exclusion once every 5 years. | Winners: US Treasury
Losers: Taxpayers who sell their home for a gain in a short period of time. |
| Charitable Contributions | Charitable contributions are deductible up to 30 or 50 percent of AGI, depending on the charity. | Increased to 60 percent of AGI. | Increased to 60 percent of AGI. | Winners: Taxpayers who make large cash donations.
Losers: US Treasury. |
| Businesses | ||||
| Pass-Through Entities | Not-Pass-Through | |||
| Entity | Sole-Proprietor | S-Corporation | Partnership / LLC | C-Corporation |
| Examples | Someone with a W-2 day job, but sells a few pieces of jewelry from their home at night. | PSC: A CPA or Medical CorporationGeneral Corp: Appliance Store | Partnership/LLC formed to own an apartment building | |
| Tax Reporting Form | On 1040, through Schedule C | 1120S | 1065 | 1120 |
| Net income of these entities flows through to the individual on their 1040 | ||||
| Taxation of Pass-Through Entities | |||
| Activity | Current Structure | House Plan | Senate Plan (proposed) |
| General S-Corporation | Net income taxed at individual’s ordinary income tax rate. Maximum rate is 39.6% | Taxed at the favorable 25% tax rate. | The individual may deduct 17.4% of domestic qualified business income from the partnership, S-Corp, or sole-proprietorship. The deduction is limited to 50 percent of W-2 wages. |
| Personal Service Corporation (PSC) | Net income taxed at individual’s ordinary income tax rate. Maximum rate is 39.6% | Still taxed at ordinary tax rates. Not eligible for the favorable 25% tax rate. | The 17.4% deduction does not apply unless taxable income is less than $150k (MFJ) |
| Passive Net Income | Net income taxed at individual’s ordinary income tax rate. Maximum rate is 39.6% | Treated entirely as “business income” and fully eligible for the 25% maximum rate. | The individual may deduct 17.4% of domestic qualified business income from the partnership, S-Corp, or sole-proprietorship. The deduction is limited to 50 percent of W-2 wages. |
| Active Net Income | Net income taxed at individual’s ordinary income tax rate. Maximum rate is 39.6% | 30% taxed at 25% rate and 70% taxed at ordinary income tax rate. | |
| Meals and Entertainment | Businesses can deduct 50 percent of the cost of meals and entertainment. In office meals are 100 percent deductible. | Repealed | Repealed |
ACap Asset Management, Inc. is a “Fee-Only” investment management firm headquartered in Los Angeles, CA specializing in helping doctors and healthcare professionals make sound financial decisions.
Contact ACap Asset Management at info@acapam.com or 818-272-8511.
