3-Myths About Tax Cuts

On Friday, I touched on the proposed “tax cut/reform” bill introduced by the House Ways and Means committee which is chaired by Congressman Kevin Brady. Some of the key highlights of the “House plan” are as follows (courtesy of Zacks Research):

  • No change to 401(k) contribution caps
  • Repeal the Alternative Minimum Tax (AMT)
  • Corporate tax rate at 20% (aims to be a permanent cut)
  • Top individual tax rate 39.6% threshold at $1 million
  • Cut the current 7 individual tax brackets down to 4:
    • 12% for $45,000 ($90,000 married) and lower
    • 25% for $45,001 – $200,000 ($90,000 – $260,000 married)
    • 35% for $200,000 – $500,000 ($260,000 – $1,000,000 married)
    • 39.6% for $500,000+ ($1,000,000+)
  • Estate tax threshold doubles and gets repealed starting in 2024
  • Deductions limited to $10,000 on property tax and 500,000 on “new mortgages”.
  • Pass-throughs
    • Passive owners of pass-through get 25% rate
    • Active owners have different standard
    • Presumes 70% of pass-through income is attributable to labor and would be taxable at higher individual income tax rates
    • For professional service firms default rate would be 100% of labor – no benefit from 25% rate
  • Repeals itemized deduction for medical expenses
  • Repeals credit for adoption
  • Child tax credit at $1600 and creates $300 credit for each parent – $300 credits expire after 2022
  • Repeals deduction for student loan interest
  • No expansion of charitable giving limits
  • For corporations, 10% tax on US companies’ high profit foreign subsidiaries calculated on global basis
  • Foreign companies operating in US face up to 20% tax on payments made abroad from US operations to prevent deduction load-up
  • Tax rate could be lowered by companies agreeing to increase US operations
  • Interest deductions capped at 30% of EBITDA – exemption for real estate firms and small businesses

While on the surface this tax proposal looks promising, when you dig into the details the outcome looks less robust.