Tax Notes logo

House Republicans Introduce Major Tax Reform Legislation

Posted on Nov. 2, 2017

House House Ways and Means Committee Chairman Kevin Brady (R-TX) introduced the Tax Cuts and Jobs Act, self-described as “bold legislation to overhaul America’s tax code for the first time in 31 years.”

Text of the bill is here; the press release is here.

There is not much in the legislation with a procedural or tax administration focus (with the exception of expanding IRS math error power when there is no SS# accompanying a CTC claim), though the scope of the changes for both individual and business taxpayers portends a major impact on tax administration.

For a summary in table form, see the Tax Foundation twitter post here

Some of the highlights on the individual side: eliminating the deduction for tax prep advice, alimony and personal casualty losses, and medical expenses. In addition it cuts back the mortgage interest deduction cap (tying it only to principal residence and halving the cap on the deduction), Section 121 exclusion on gain from principal residences (requiring a 5 out of 8 yr use/ownership rather than current 2 out of 5 years) and allows state and local property tax deductions but only up to $10,000.  In addition it boosts the standard deduction and eliminates the dependency exemption deduction (though the definition is still retained for credit purposes).

The Child Tax Credit is increased to $1,600; most of the increase is nonrefundable and the income phase out is also increased so it has little impact on moderate and low income workers, though the $1,000 refundable portion of the CTC is indexed to inflation.

On the pass through income side, an issue we previously discussed, the bill limits the top rate on pass through income to 25%; it has what appears to be a complex anti-abuse provision that is summarized by the Tax Foundation in its review  as follows:

Begins with assumption that 70 percent of income derived from a business is compensation subject to ordinary rates and 30 percent is business income subject to the maximum 25 percent rate for active owners. Businesses can “prove out” of the 70/30 split based on demonstrated return on business capital at the short-term applicable federal rate (AFR) plus 7 percent. Certain specified service industries, like health, law, financial services, professional services, and the performing arts are excluded from the 70/30 split and can only claim the benefit of the lower pass-through rate to the extent that they can “prove out” their business income.

Professor Batchelder on Twitter flags this “prove out” as “the heart of the pass-through loophole for the wealthy” and “great for gaming” and a provision that tax lawyers will “love.”

Copy RID