Tax Cuts and Jobs Act – H.R 1

On November 2, 2017, the House Ways & Means Committee released H.R.1, “The Tax Cuts & Jobs Act.” The 429-page bill includes five sections:

1. Tax Reform for Individuals;
2. Repeal of the Alternative Minimum Tax (AMT);
3. Business Tax Reform;
4. Taxation of Foreign Income; and
5. Exempt Organizations

While all five sections are important and have far-reaching impact, this memo deals primarily with the first three, since these are the most likely to impact our clients.

This proposed legislation is simply the beginning of a long process. It is certain that when (if) a tax bill is signed into law (this year or sometime in the future), it will differ from what is currently included in H.R. 1.

Major Elements of the Tax Cuts & Jobs Act

1. The Mortgage Interest Deduction is capped at $500,000 of debt for future purchases of principal homes. This would not apply to people who currently own first and second homes.
2. There would be four tax brackets under the new law:
   1. Income of $24,000 or less: no tax;
   2. Income of $24,001 – $90,000: 12%;
   3. Income of $90,001 – 260,000: 25%;
   4. Income of 260,001 – $1,000,000: 35%; and
   5. Income of more than $1,000,000: 39.6%
3. The standard deduction would be increased to $24,400 for married couples and $12,200 for individuals.
4. There would be no change from current law for the treatment of 401k plans.
5. There would be a significant reduction in medical expense deductions (as noted below).
6. Deductions for property tax would be capped at $10,000, with no deduction for other state or local taxes.
7. The bill repeals the Alternative Minimum Tax (AMT). This will result in huge savings for persons with very high incomes.
8. Only 60% of charitable contributions would be deductible, but non-deducted contributions could be carried forward for five years.
9. There would be no deduction for contributions to medical savings accounts and amounts contributed by the employer will be taxable to the employee.
10. Historic Tax-Credits would be repealed.
11. The New Market Tax Credit would be repealed.
12. Private Activity Bonds (Tax-exempt bonds) would be terminated.

As currently proposed, the tax changes would result in a significant reduction in the number of affordable housing units developed over the next ten years (some estimates are as high as one million units). The primary drivers of this reduction are (1) the 20% corporate tax rate; and (2) elimination of tax-exempt bonds. The repeal of Historic Tax Credits and to a lesser degree the New Market Tax Credits will also impact the number of affordable housing units.

There are less publicized areas of the bill that will impact a fairly substantial number of people. These are worth mentioning:

1. Adoption tax credits of up to $13,750 per child will end;
2. For divorce decrees issued after 2017, alimony will no longer be deductible for the person paying, but will not be counted in the income of the recipient;
3. Teachers will no longer be able to deduct the cost of school supplies they purchase with their own money;
4. Under current law, losses from theft or natural disasters that exceed 10% of adjusted gross income are deductible. This bill repeals that deduction except for disasters given special treatment by a prior act of Congress, such as losses from Harvey, Irma, and Maria (which was sponsored by Rep, Kevin Brady (R-Texas), who just happens to be the chairman of the House Ways and Means Committee, and is the primary author of the bill);
5. Cash awards from employers to employees for employee achievement awards will no longer be deductible;
6. Under current law, major medical costs exceeding 7.5% of adjusted gross income are deductible; this is repealed under the bill;
7. The cost of moving expenses for a new job more than 50 miles from a current home is no longer deductible;
8. Companies will no longer be able to claim a credit of 25% of the expenses for employee childcare;
9. A credit for 50% of the cost of clinical testing of drugs for rare diseases and conditions would be repealed;
10. Interest on the bonds issued by State and local governments for sports stadiums will no longer be tax-free; and
11. Tax preparation fees will no longer be deductible.

The bill makes no mention of the Low-Income Housing Tax Credit (LIHTC). This is good, in that it leaves the program as it currently exists untouched. But, as noted above, the lowering of the corporate tax rate will have a market-driven impact on LIHTC housing, and elimination of the tax-exempt bond program would be devastating. Anyone who believes that the development of affordable rental housing is important should contact their elected representatives and make it clear that the elimination of Tax-Exempt Bonds and Historic Tax Credits will have an unacceptable impact on the availability of affordable housing.