Tax Reform Side by Side NAIFA s advocacy, including politically knowledgeable members, professional staff and industry coalitions, continues to have a positive impact on tax reform. The tax debate isn t over, but some of the more notable results throughout the process so far include: Rothification was not included in the House or Senate bills. Increase in life insurance company taxes replaced with a placeholder. (House) Nonqualified deferred compensation tax provisions originally included in the House and Senate bills dropped from both. Current law retained. Pass-through enhancements excluded financial advisor services in both bills. Both bills now allow the financial services entities limited access. Catch-up retirement contribution provision that required means testing has been removed, and an amendment repealing post-tax catch-up contributions was pulled. (Senate) The Scott amendment (a package of life insurance company tax changes - policy reserves, DAC, and DRDs) was adopted. (Senate) Small business owners qualified business income increased deduction from 17.4% in the underlying bill to 23%. (Senate) Medical deductible, if they exceed 7.5% of a taxpayers adjusted gross income, rather than the 10% threshold under current law. (Senate) Rule Business Tax Package Tax rates 35% flat rate C-Corp 20% flat rate C-Corp 20% rate delayed until 2019 Capital gains/dividend Paid and Received Deduction 0%,15%, 20% capital gains and qualified dividends 3.8% net investment income (NII) for highest earners 80% dividends received deduction lowered to 65%, 70% DRD lowered to 50% Preserves net investment income 80% dividends received deduction lowered to 65%, 70% DRD lowered to 50% New dividends paid reporting 3 year holding period for certain partnership interests to qualify as long term capital gain Preserves net investment income
Cost of Recovery of Capital Investments Depreciation deductions over time 100% expensing for 5 years for qualified property acquired after 9/27/17 Increases 179 maximum expense to $5 million with phase-out increased to $20 million Maximum expense under Section 179 to $1,000,000, and increases the phase-out threshold amount to $2,500,000 Recovery period for depreciation deduction of nonresidential real and residential rental property shortened to 25 years Deduction allowed up to 30% of pretax, post-depreciation $25M or less, no limit No grandfather Deduction allowed up to 30% of pretax, post-depreciation Interest Expense Generally deductible Investments need to be held for 1 year to receive capital gains treatment Certain small businesses are exempt Special exclusion for utilities A special rule that applies to partnerships and S-Corps 5-yr carry forward Investments held for 3-yr minimum to qualify for capital gains treatment Exclusion from deductibility limit of net business provided for interest for taxpayers that paid or accrued interest on floor planning financing debt $15M or less, no limit No grandfather Certain small businesses are exempt Special exclusion for utilities Amount allowed may be carried forward indefinitely Small business may fully deduct interest on loans Reforms business-related deductions such as local lobbying and entertainment Reforms business-related deductions such as local lobbying and entertainment and Credits Numerous deductions and credits Section 199 repealed Research & Development tax credit preserved but requires certain expenditures to be amortized Limitation on deduction by employers of for fringe benefits Low income housing credit preserved
Repeals credit for clinical testing ; employer provided childcare credit, and work opportunity tax credit Research and development credit preserved Section 199 repealed and Credits Termination of New Markets and Historic Preservation tax credits Repeal of credit for expenditures to provide access to disabled individuals Modification of credit for clinical testing for certain drugs for rare diseases or conditions Employer provided paid family leave 12.5% credit Repeals transportation fringe benefits deduction Repeals transportation fringe benefits deduction Modification of employer tip credit Net Operating Loss (NOLs) NOLs carried back 2 years and forward 20 years Repeal of NOL carrybacks other than 1 year carryback of eligible disaster losses NOLs limited to 90% of taxable income Limits NOL deduction to 90% of taxable income (determined without regard to the deduction) Carryovers to other years are adjusted to take account of this limitation, and may be carried forward indefinitely Applies 50% limitation on business meals Corporate AMT Corps generally subject to AMT at flat rate of 20% Corporate AMT repealed Corporate AMT not repealed Pass-Through Changes Pass-Through Tax Rates (S-Corps, Partnerships, Sole Proprietor) Taxed at individual owners rates Top rate 25% New lower individual income tax rate (9% to be phased in over 5 years) for active owners of passthrough businesses for up to $75,000 of their net business income (for owners with taxable incomes less than $150,000 and then fully phased out at taxable income of $225,000) Creates a 23% deduction for the qualified business income of passthrough business income up to 50% of the W-2 of taxpayer. The 50% limit does not apply if taxable income less than $500,000 (married) 50% limit phases in as taxable income increases from $500,000 to $600,000 Pass-through business income deduction expires after 2025
Many cases, 70% of income as wages and 30% as business income Pass-Through Tax Rates (S-Corps, Partnerships, Sole Proprietor) Professional services including financial advisors would not qualify for the rate, other than those qualifying for the new lower rate above Modifies treatment of S corporation conversions into C corporations Individual Tax Package Individual Rates 10%,15%, 25%, 28%, 33%, 35%, and 39.6% 12%, 25%, 35%, and 39.6% Wealthy Bubble Tax: Individuals: $1M to $1.2M 45.6% Joint filers: $1.2M to $1.4M 45.6% 10%, 12%, 22%, 24%, 32%, 35% and 38.5% Sunsets in 2026 Standard Deduction Individual: $6,350 Joint Filers: $12,700 Personal exemption is eliminated Individual: $12,000 Joint: $24,000 Single parent standard deduction increase from $9.3K to $18K Individual: $12,000 Joint: $24,000 Alternative Minimum Tax Separate tax calculations on some returns AMT Repealed AMT Repealed; expires 2026 Itemized deduction for state and local taxes paid Repeal state and local tax deductions Full repeal of state and local tax deductions $1,000 per child tax credit Property tax deductions up to $10K Property tax deductions up to $10K Credits and Deduct up to $1M in mortgage principal SALT deductions are an itemized deduction for taxes paid $1,000 per child tax credit Deduct up to $1M in mortgage principal Retain interest deduction for existing mortgages (principal residences only) Deduction for newly purchased homes up to $500K HELOC loan interest deduction disallowed Home mortgage interest deduction for existing mortgages Deduction for newly purchased homes up to $1M HELOC loan interest deduction disallowed Child tax credit doubles to $2,000 per child
Credits and Preserves the Earned Income Tax Credit Child Tax Credit: $1,600 and $300 credit for each parent and non-child dependent Eliminates most itemized deductions Repeals: Deduction for tax preparation Employee achievement awards Dependent care assistance programs Qualified moving expense reimbursement Adoption assistance programs Moving Medical expense deduction including long-term care premiums Property casualty loss deduction Electric Vehicle tax credit Allows ABLE account beneficiaries to claim the saver s credit for ABLE account contributions Medical expense deduction threshold reduced to 7.5% from 10% of AGI for 2017 and 2018 Preserves: Low-income housing credit Adoption tax credit Child and dependent care tax credit Electric Vehicle tax credit Earned Income Tax Credit Repeals: Taxes not paid or accrued in a trade or business Deduction for personal casualty and theft losses Deduction for tax preparation Increase percentage limit for charitable contributions of cash to public charities Termination of deduction and exclusions for contributions to medical savings accounts Low-income housing credits retained Estate, Gift, and Generation- Skipping Transfer (GST) Tax Basic exclusion amount of $5.49M per taxpayer in 2017; portability of unused exclusion to spouse; top tax rate of 40% on transfers in excess of $1,000,001 Doubles exemption to $11M (individuals) and $22M (married couple) Estate and GST repealed in 2024, but gift tax remains with top rate of 35%; maintains step-up basis and portability Delays implementation of state and gift tax reform for one year Doubles exemption to $11M (individuals) and $22M (married couple) Preserves the estate tax Maintains current law step up basis
Generally retains the present-law maximum rates on net capital gain and qualified dividends Capital Gains/ Dividend Paid and Received Deduction 0%,15%, 20% on capital gains and qualified dividends 23.8% net investment income tax for highest earners Unchanged remains at 23.8% The breakpoints between the zeroand 15-percent rates ( 15-percent breakpoint ) and the 15- and 20- percent rates ( 20-percent breakpoint ) are the same amounts as the breakpoints under present law, except the breakpoints are indexed using the chained CPI in taxable years beginning after 2017 ACA Individual Mandate Requires health insurance coverage No Mention Zeros out the penalty for failure to comply with the ACA individual mandate Employer- Sponsored Health Insurance Excluded from income tax No Mention No Mention Compensation and Retirement Savings Nonqualified Deferred Compensation Employee generally does not take compensation into income until the year received, and the employer s deduction is postponed until that time Retains current law on Nonqualified deferred compensation Retains current law on Nonqualified deferred compensation Worker Classification Confusing rule for distinguishing between employees and independent contractors No provision Establishes safe harbor based on specific requirements Retirement Plan Participant: $18,000 IRA: $5,500 Outstanding loans become income if not repaid within 60 days following a separation from service or a plan termination Retains IRA and 401(k) contribution limits Extends from 60-days to the date of filing of tax return for repayment of loans without triggering income. Re-characterization not permitted Retains IRA and 401(k) contribution limits Extends from 60-days to the date of filing of tax return for repayment of loans without triggering income. Re-characterization not permitted No hardship provision
Retirement Allows re-characterize a ROTH contribution to traditional contribution and traditional to ROTH Distributions from a defined benefit plan after age 59-1/2 not permitted while still employed Allows in-service distributions from defined benefit plans after age 59-1/2 Modifies hardship distributions Insurance Companies Insurance Company Variety of tax rules including net operation losses, tax reserves, dividends received deduction and policy acquisition Preserves current law treatment of deferred acquisition costs, reserves and pro-ration Includes 8% life insurance income surtax placeholder Lengthens amortization of policy acquisition from 10 to 15 years Changes calculation of policy reserves, policy reserve deductions and dividend received deductions