The Beacon

RET IREMENT SERV ICES

GOP UNVEILS TAX REFORM PLAN:

SUMMARY OF THE IMPACT ON YOU AND

YOUR BUSINESS

On November 2, House Republicans released their long-

awaited plan to overhaul the tax code, proposing major cuts

to corporate and individual tax rates. The 429-page bill, called

the Tax Cuts and Jobs Act (the Act) represents the GOP’s

starting bid to rewrite the tax code for the fi rst time in more

than 30 years. The bill follows the plan that GOP leaders and

the White House outlined in September. It reduces the number

of individual tax brackets, slashes rates for businesses, and

eliminates a number of tax breaks. In order to offset the lost

tax revenue, the GOP is putting forward some proposals that

are sure to be controversial. Here is a summary of some of the

key provisions:

Reduces the corporate income tax rate—The Act reduces the corporate tax rate from 35% to 20%.

Reduces individual tax rates—Currently, there are seven marginal rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The top rate, in 2017, applies at $418,000 for singles and $470,700 for married couples. The Act reduces the number of marginal income-tax rates to four: 12%, 25%, 35%, and 39.6%. The Act preserves the current top rate, but the top rate would affect fewer households than it does currently. Here are the breakdowns of the income ranges:

12% bracket: For single fi lers, this rate applies starting at $12,000 of taxable income. For those married fi ling

jointly, it begins at $24,000.

25% bracket: Begins at $45,000 for single fi lers; $90,000 for married joint fi lers.

35% bracket: Begins at $200,000 for single fi lers; $260,000 for married joint fi lers.

39.6% bracket: Begins at $500,000 for single fi lers; $1 million for married joint fi lers.

AUTHOR

SAMUEL A. HENSON, JDSenior Vice President

Director of Legislative & Regulatory Affairs

EXECUTIVE SUMMARY

Reduces individual tax rates for most.

Reduces the corporate income tax

rate from 35% to 20%.

Does not impact pretax contributions

to 401(k) plans.

Retains many deductions, but

eliminates or reduces others.

2

Doubles the standard deduction—The Act raises the standard deduction for singles to $12,000 from $6,350 currently and for married couples fi ling jointly to $24,000 from $12,700.

Lockton’s take—This is intended to signifi cantly reduce the number of people who opt to itemize their deductions, as the only reason to do so is if your individual deductions, combined, exceed the standard deduction amount.

Eliminates personal exemptions—The Act eliminates the ability to claim a $4,050 personal exemption for yourself, your spouse, and each of your dependents.

Lockton’s take—For families with three or more kids, this could negate any tax relief they might enjoy as a result of other provisions in the Act.

Preserves 401(k) plans—There is no change to the pretax limit of 401(k) contributions.

Lockton’s take—While there was talk of discontinuing all pretax contributions to 401(k) plans, referred to as Rothifi cation, or capping the amount at $2,400, lobbyists from all sides of this issue pressured the GOP, saying that caps and elimination of pretax contributions would hinder workers’ ability to save for retirement.

Pass-through tax—A portion of net income distributed from a pass-through business to an owner would be treated as business income and taxed at a 25% rate instead of the current individual tax rate.

Offshore profi t treatment—The Act forces companies to pay a one-time 12% tax on liquid assets held overseas, like cash. The tax, which is reduced from the current 35% tax rate, would be payable over eight years. For illiquid assets, like equipment or property, the tax rate would be 5%. It would also force American subsidiaries of foreign-owned companies to pay a 20% excise tax on any payments sent back to foreign affi liates.

Estate tax—The Act doubles the estate tax exemption beginning in tax year 2018. The tax would be completely repealed after six years, beginning in 2024. The federal estate tax, levied at death, is currently 40%. It applies to estate values exceeding $5.49 million ($10.98 million for married couples). The Act also preserves the step-up in basis, which passes assets to a benefi ciary at fair market value upon death.

Lockton’s take—Today’s tax law affects just 0.2% of all estates, and only those with more than $5.5 million in assets (or $11 million if you leave a spouse behind). Nevertheless, Republicans still want to repeal it. The House bill, however, delays the repeal until 2024 and, in the meantime, doubles the exemption levels. Given that the White House and Republicans have promoted tax reform as a boon to the middle class and given that the estate tax exemption levels are high enough to protect the vast majority of family farms and businesses from having to pay it, this provision may face a steep climb to the fi nish line.

Gift tax—The top rate for the gift tax would be reduced to 35%, from the current 40%. The lifetime gift tax exemption would, similar to the estate tax exemption, double to almost $11 million.

AMT—The alternative minimum tax (AMT) would be repealed.

Lockton’s take—The AMT disallows many tax breaks with the intention of ensuring that the richest tax fi lers pay at least a minimum amount. It typically affects fi lers making between $200,000 and $1 million today. Those who make more than that usually fi nd that they owe more tax under the regular income tax code, so they end up having to pay that tab instead.

Tax experts often note that the AMT no longer meets its original purpose and further complicates an already complex tax code, but it’s been kept on the books because it raises a lot of revenue. Repealing it would reduce revenue by $440 billion in the fi rst decade, according to Tax Policy Center estimates.

3

Roth IRA conversions—Taxpayers may currently “recharacterize,” or undo, a conversion from a traditional (or pretax) IRA to a Roth IRA. This Act would repeal these conversions.

Nonqualifi ed deferred compensation (NQDC) plans—The Act moves the taxation point of most forms of deferred compensation from the time of actual payout to the executive, which is generally the case under the current rules, to the point at which the executive need no longer perform substantial services in order to receive the compensation; e.g., the point at which the funds vest. The Act appears to grandfather all existing NQDC plans until 2026, after which all account balances will be taxed under the new rule, regardless of the date the plan was created.

Lockton’s take—This timing issue would remove much of the appeal of deferred compensation plans, as it affects not just deferrals of cash compensation but also equity forms of compensation, such as stock options and stock appreciation rights. It appears that this provision was a last-minute addition, probably in place of the 401(k) limits, as it looks to raise approximately $16 billion over the next decade.

State and local tax deduction—Individuals would not be allowed an itemized deduction for state and local income and sales taxes. However, they would be allowed deductions for state and local taxes on business income. Taxpayers can continue to claim an itemized deduction for property taxes, with a cap of $10,000.

Lockton’s take—The original GOP proposal was to fully repeal the state and local tax deduction, which lets fi lers deduct their property taxes as well as their state and local income or sales taxes. But it was met with strong opposition from lawmakers in high-tax states and cities. So, the GOP made a concession. The House bill restores an itemized property tax deduction for property taxes up to $10,000. Blue-state Republicans have fought to preserve that deduction, which is important to their constituents. It’s not clear how receptive they will be to the compromise.

Mortgage deduction—The Act preserves the mortgage deduction as it is currently structured for existing mortgages. But for mortgages on newly purchased homes going forward, you would be able to claim a deduction for interest you pay on mortgage debt up to only $500,000, down from $1 million today.

Charitable deduction—Several changes are made to charitable deductions, including adjusted gross income limits for cash contributions, college athletic event seating rights, and charitable mileage rate adjusted for infl ation.

Eliminates special interest deductions—The Act calls for the elimination of so-called “special interest deductions,” such as a tax credit for adopting children, the itemized deduction for medical expenses, the deduction for student loan interest, and the deductions for tax preparation fees, alimony payments, and moving expenses.

Expands the child tax credit—The Act increases the child tax credit to $1,600, up from $1,000, for any child under the age of 17.

Lockton’s take—That $600 increase wouldn’t be available to the lowest-income families who don’t end up owing federal income taxes. That’s because, unlike the fi rst $1,000, the extra $600 wouldn’t be refundable. “Refundable” means that if your federal income tax bill is zero, you get a check from the government because of the credit. The bill lets more people claim the child tax credit. The income level where the credit starts to be phased out would increase to $115,000 for single parents, up from $75,000 today, and to $230,000 for married parents, up from $110,000.

New family credits—The Act creates two different $300 tax credits, but they would be in effect for only fi ve years and would not be refundable. The fi rst would be for nonchild dependents—for instance, any son or daughter over the age of 17 whom you’re supporting, an ailing elderly mother, or an adult child with a disability. The second is a credit for each spouse if the couple fi les jointly or, in the case of single parents, the head of the household.

The communication is offered solely for discussion purposes. Lockton does not provide legal or tax advice. The services referenced are not a comprehensive list of all necessary components for consideration. You are encouraged to seek qualifi ed legal and tax counsel to assist in considering all the unique facts and circumstances. Additionally, this communication is not intended to constitute US federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party.

This document contains the proprietary work product of Lockton Investment Advisors, LLC, and is provided on a confidential basis. Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited.

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Eliminates dependent care assistance accounts—The Act repeals the ability to save $5,000 in a dependent carefl exible spending account pretax.

Next StepsThe Act is estimated to cost $1.5 trillion over a decade, and lawmakers must keep it at that amount in order to pass

it along party lines and avoid a fi libuster by Democrats. Lawmakers have been scrambling for days to fi nd revenue to

offset tax cuts, and that has prompted a host of changes on the individual side, including repealing tax breaks for things

like medical expenses, moving expenses, student loan interest, and adoption, as well as making some business tax

breaks temporary.

The House Committee on Ways and Means intends to start markup over the next few days, with the goal of passing the

Act by Thanksgiving, and then the Act will face more potential challenges in the Senate. The President said that he hopes

to sign the Act by Christmas, which is a very aggressive timeline for a controversial bill. Signifi cant challenges to the Act

remain, from worries about how tax reform might increase the defi cit to battles over specifi c tax provisions, notably the

mortgage interest deduction and the deduction of state and local taxes. But the importance of passing tax reform for the

GOP cannot be understated. After the failure to repeal Obamacare, tax reform is seen as the last, best hope for Trump to

score a big legislative win for next year’s midterm elections.

Lockton is committed to bringing you timely, accurate, and helpful information about tax reform. We will be

publishing issue-specifi c content in the upcoming days pertaining to the impact on the market, retirement

plans, and nonqualifi ed deferred compensation. If you have questions, please contact your Lockton Retirement

Services team.