House Ways and Means Committee Chairman, Dave Camp, has released the proposed Tax Reform Act of 2014,”with the goal to simplify the tax code and strengthen the economy. Below is a summary of the proposed individual and business-related tax provisions.
Individual Tax Provisions
Reduced Rates and Collapsed Tax Brackets: The existing seven tax brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) would be collapsed into three brackets of 10%, 25% and 35%.
- 10% rate would apply to single filers with taxable income below $37,400 and joint filers with taxable income below $74,800 (i.e., the current 10% and 15% brackets).
- 25% rate would apply to taxable income above these amounts
- 35% rate would begin at the same income levels as the current 39.6% bracket (above $400,000 for single filers and $450,000 for joint filers).
Capital Gains and Dividends: Long-term capital gains and qualified dividends would be taxed at the same rate as ordinary income, but with 40% of gains and dividends excluded.
- The 40% exclusion basically means gains and dividends that would otherwise be taxed at 10% would effectively be taxed at 6%, and gains and dividends that would otherwise be taxed at 25% would effectively be taxed at 15%.
Increased Standard Deductions: Standard deduction would be $11,000 for individuals and $22,000 for married couples (both indexed for inflation).
- The additional standard deduction for the elderly and blind would be eliminated.
- The Joint Committee on Taxation estimated these changes would result in nearly 95% of taxpayers not having to itemize.
Charitable Deductions: For taxpayers that continue to itemize, the charitable deduction would be available to the extent that contributions exceed 2% of income.
Increase and Expansion of Child Tax Credit: The child credit would be increased to $1,500 and would be allowed for qualifying children under the age of 18, and a reduced credit of $500 would be allowed for non-child dependents (both indexed for inflation).
Changes to Mortgage Interest Deduction:The current $1 million cap on the amount of mortgage interest that can be deducted beginning with new mortgages taken out in 2015 would gradually be reduced such that the limit for mortgages taken out in 2018 or later would be $500,000.
- Homeowners would still be able to deduct interest on first $500,000 of mortgage debt on a pro rata basis (i.e. taxpayer with $1 million mortgage could deduct half his mortgage interest).
Consolidation of Education-Related Credits: The existing 15 tax breaks for higher education would be merged into five.
Reformed EITC: Earned Income Tax Credit (EITC) would be reformed by making it a credit against actual employment (i.e. payroll and self-employment) taxes paid by or with respect to a taxpayer.
Retirement Savings: For future contributions, up to $8,750 (half of the contribution limit) would be allowed to be contributed either to a traditional or Roth account. Any contributions in excess of $8,750 would be dedicated to a Roth-style account, making these savings tax-free during retirement. The income eligibility limits for contributing to Roth IRAs would also be eliminated.
Business-Related Tax Provisions
Corporate Tax Rate: For tax years beginning after December 31, 2018, the maximum corporate tax rate would drop to 25% (from the current 35%). The decreased rate would be phased in:
| 33% for tax years beginning in 2015; |
| 31% for tax years beginning in 2016; |
| 29% for tax years beginning in 2017; and |
| 27% for tax years beginning in 2018. |
For each of these tax years, the 25% rate would apply to so much of the taxable income as does not exceed $75,000.
Depreciation Deduction: For property placed in service after December 31, 2016, the modified accelerated cost recovery system (MACRS) would be replaced with the straight line depreciation method for tangible property, with the applicable recovery period generally being the class life of the property.
Fourteen recovery periods would be specifically assigned for certain types of property. Under the proposal, the IRS would be required to develop a schedule of class lives for all tangible property, except property with a specifically assigned recovery period.
Expensing Deduction: For tax years beginning after December 31, 2013, a taxpayer could expense up to $250,000 of the cost of qualifying property placed in service for the tax year. The $250,000 amount would be reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $800,000. Both amounts would be indexed for inflation for tax years beginning after 2014.
NOL Deduction: In general, for tax years beginning after December 31, 2014, a corporation’s net operating loss deduction would be limited to 90% of taxable income (determined without regard to the deduction). Carryovers to other years would be adjusted to take account of this limitation. In addition, various special carryback provisions other than the provision relating to certain casualty and disaster losses would also be repealed.
Net Earnings from Self-Employment: For tax years beginning after 2014, the tax imposed under the Self-Employment Contributions Act (SECA) on self-employment income would apply to general and limited partners of a partnership (including limited liability companies), and shareholders of an S corporation to the extent of their distributive share of the entity’s income or loss. In determining net earnings from self-employment, they would be allowed a new deduction designed to approximate the return on invested capital.
Carried Interest:For tax years beginning after 2014, certain partnership interests held in connection with the performance of services would be subject to a rule that characterizes a portion of any capital gains as ordinary income. The rule would apply to partnership distributions and dispositions of partnership interests. An applicable partnership interest subject to this rule would include any interest transferred, directly or indirectly, to a partner in connection with the performance of services by the partner, provided that the partnership is engaged in a trade or business conducted on a regular, continuous and substantial basis consisting of: (1) raising or returning capital, (2) identifying, investing in, or disposing of other trades or businesses, and (3) developing such trades or businesses. The provision would not apply to a partnership engaged in a real property trade or business.
Low-income Housing Tax Credit: For allocations after Dec. 31, 2014, a low-income housing tax credit would only be allowed if the owner of a qualified building receives an allocation of qualified basis (rather than as currently, housing credits) from the State or local housing credit agency.
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Author:CJ Stroh, JD | [email protected]
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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