Summary of Important Provisions
Tax rates on all income ranges have been lowered and the top rate reduced from 39.6% down to 37%.
The bill does not change the 15%/20% tax rates applicable to capital gains and qualified dividends.
The 3.8% Obamacare tax on investment income and the additional 0.9% Medicare tax on high salary income are also left unchanged.
2018 income tax brackets are as follows:
Rate Joint Individual
10% $ 0 - $ 19,050 $ 0 - $ 9,525
12% $ 19,050 - $ 77,400 $ 9,525 - $ 38,700
22% $ 77,400 - $165,000 $ 38,700 - $ 82,500
24% $165,000 - $315,000 $ 82,500 - $157,500
32% $315,000 - $400,000 $157,500 - $200,000
35% $400,000 - $600,000 $200,000 - $500,000
37% Over $600,000 Over $500,000
The standard deduction, which can be claimed in lieu of itemized deductions, has been increased significantly to the following levels beginning in 2018:
Married $ 24,000
Head of household 18,000
The additional standard deduction for the elderly and the blind is $1,300 for married persons and $1,600 for single filers.
The bill eliminates the deduction for personal exemptions (currently $4,050 per person).
The home mortgage deduction is limited to interest on $750,000 of acquisition debt. The limit for acquisition debt incurred before December 15, 2017 is $1 million. No deduction will be allowed with respect to interest on home equity loans used to obtain refinance proceeds.
The deduction for state and local income taxes is limited to $10,000. This applies to state and local income, sales, and property taxes claimed as itemized deductions. The limitation is not applicable to taxes paid in connection with rental and business activities.
The bill repeals all miscellaneous itemized deductions that are subject to the two-percent floor under current law. This will include investment advisory fees.
The medical expense deduction is enhanced for 2017 and 2018 by reducing the threshold amount from 10% down to 7.5% of adjusted gross income. Medical expenses above the old threshold levels will continue to be deductible in 2019 and later years, the same as under the old rules.
Credits and Deductions
The child tax credit is increased from $1,000 up to $2,000 per qualifying child (under age 17 at year-end). Up to $1,400 of the credit is refundable. The bill also raises the adjusted gross income phase-out thresholds, starting at $400,000 for joint filers and $200,000 for individuals.
A new $500 credit will be allowed for qualifying dependents other than qualifying children.
Section 529 college savings plans are modified to allow for annual payouts of up to $10,000 per beneficiary, per year, for tuition at an elementary or secondary public, private, or religious school.
The deductibility of alimony payments and their inclusion in the income of the recipient has been repealed effective for divorces after 2018.
The bill repeals the rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions to unwind a Roth conversion.
Estate, Gift, and Alternative Minimum Taxes
The combined exemption from the federal estate and gift tax has been doubled. Now up to $11,000,000 for decedents dying and gifts made after December 31, 2017. Heirs will continue to receive a “stepped-up, date of death” basis for inherited assets.
The alternative minimum tax exemption amount is increased to $109,400 for married and $70,300 for individual taxpayers. The bill also raises the exemption phase-out levels so that the AMT will become applicable above income levels of $1 million for joint filers and $500,000 for individuals.
Requirement to Buy Health Insurance is Repealed
The requirement that individuals either have health insurance or pay a penalty (the ‘individual shared responsibility requirement’ under the Affordable Care Act) has been repealed for years beginning after 2018.
The receipt of a profits interest in a real estate or business venture is often referred to as a ‘carried interest’. These interests in future profits are usually issued to persons organizing and managing private equity activities and are not taxable upon receipt. Carried interest is often subject to restrictions like ‘hurdle rates’ and ‘claw-back’ risks, which distinguish them from ordinary compensation arrangements. The carried interest is usually about 20% of net profits, and is vested over a number of years and received as earned after that point. Under the new law, the holding period for long-term capital gains has been increased to three years with respect to partnership interests transferred in connection with these services.
Corporations and Business Income & Deductions
The corporate tax rate is decreased from 35% down to a flat rate of 21%. The low 15% rate on the first $50,000 of corporate income has also been eliminated.
C corporations are generally allowed to exclude a large portion of the income received in the form of dividends from taxable income. Under the bill, the amount that can be excluded is decreased from 80% down to 65%.
The 50% bonus depreciation allowance is increased to 100% for property placed in service after September 27, 2017. And for the first time, the allowance is available for used, as well as new, property.
Bonus depreciation is allowable on all assets that have a depreciable life of 20 years or less. This will often include a significant segment of the cost of new and used buildings. So, there will be big upfront depreciation deductions associated with the purchase of business and rental real estate.
On a related matter, the limitation on Section 179 expensing has been increased from $500,000 up to $1 million. And the phase-out investment limitation has been raised to $2.5 million.
The difference between bonus depreciation and Section 179 expensing has been narrowed, now that both offer 100% write-offs for new and used property. However, there are advantages and disadvantages for each. Section 179 deductions are subject to recapture if business use of a property during a tax year falls to 50% or less; but Section 179 also allows for expensing of only particular assets within any asset class.
The 9% domestic production activities deduction, formerly available to U.S. manufacturing companies, has been eliminated.
Like-kind exchanges are now limited to real estate transactions. Personal property, such as automobiles and airplanes, no longer qualifies for Section 1031 exchange treatment.
Research and development expenditures can no longer be expensed as incurred. R & D costs must now be amortized over five years. The traditional tax credit for increasing research and experimentation expenditures has been retained.
There is a new tax credit for employers paying employees who are on family and medical leave.
There is a new cap on the amount of interest expense that a business can deduct. Starting in 2018, the interest deduction will generally be limited to 30% of EBITDA. There are exceptions for small businesses with average gross receipts of $25 million or less.
Business Pass-Thru Deduction
Owner’s of pass-thru entities will be allowed a deduction equal to 20% of the combined qualified business income (QBI) from such entities.
The deduction is generally phased-out beginning at taxable income levels above the following threshold amounts:
Married couples $315,000
However, for taxpayers above these income levels, the 20% QBI deduction will still be allowed for each pass-thru trade or business to the extent that 20% of QBI does not exceed the greater of the following two amounts:
(1) 50% of the W-2 wages paid by the qualified business, or
(2) the sum of 25% of the W-2 wages plus 2.5% of the acquisition cost of the depreciable property of the business.
The 20% pass-thru deduction is not allowed on income from service-based activities in the following fields if the owner’s taxable income exceeds the aforementioned $315,000/$157,000 threshold amounts:
Performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services,
(Note that engineering and architectural services are specifically excluded from the list of proscribed services).
Any trade or business where the principal asset of such business is the reputation or skill of one or more of its employees, or
Which involves the performance of services that consist of investing and investment management, trading, or dealing in securities.
Qualified REIT dividends and income from publicly traded partnerships also qualify for the 20% pass-thru deduction, subject to the forgoing limitations. As noted above, the fields of architecture and engineering are not subject to the strict personal service income restrictions.
Net Operating Loss Restrictions
Net operating losses arising in years beginning after December 31, 2017, will be limited to 80% of taxable income. The carryback of such losses will no longer be allowed. The new law provides for an indefinite carryforward period.
There was no repeal of any of the existing energy credits. So, the bill retains the credit for plug-in vehicles.
Regarding taxation of international earnings, the bill moves the United States to a territorial system. Multinational businesses headquartered here will no longer be subject to U.S. tax on their worldwide income. The bill achieves this result through creation of a dividend-exemption system for taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when the earnings are distributed.
The foreign tax credit and Subpart F rules are modified.
The Look-Through Rule for related controlled foreign corporations is made permanent.
The Look-Through Rule (§954(c)(6)) provides that a CFC that receives dividends, interest, rents, or royalties from a related CFC is not required to report the income as foreign personal holding company income if the income is attributable to income of the payer that is not Subpart F income and not treated as effectively connected with a business in the U.S.
Retained earnings held overseas will be taxed at a reduced rate if repatriated to the U.S. Repatriated cash assets will be taxed at 15.5% and illiquid assets, at 8%.
Foreign tax credit carryovers remain fully available, and foreign tax credits triggered by the deemed repatriation will be partially available, to offset the U.S. tax.
Meals & Entertainment Expenses
The new bill retains the 50% deduction for food and beverage expenses. However, no deduction will be allowed with respect to an activity generally considered to be entertainment, amusement, or recreation. Likewise, no deduction will be allowed with respect to any club organized for business, pleasure, recreation, or other social purposes.
Please note that this information will be updated and enhanced as more details become available.