In the short span of six weeks, Republicans in the Senate and the House agreed to the most sweeping change in the Nation’s tax laws since the Tax Reform Act of 1986. The Tax Cuts and Jobs Act (“TCJA” will be passed without a single Democratic vote pursuant to the same Budget Reconciliation Rules used by the Democrats when they passed the Affordable Care Act — without a single Republican vote — which reformed our Nation’s health care system. Most of its provisions will take effect on January 1, 2018.
Here are key changes to U.S. tax law for individuals and businesses under the TCJA:
Individual Tax Rates
(Note: Individual rate cuts would expire after 2025.)
Seven rates, starting at 10 percent and reaching 39.6 percent for incomes above $418,401 for singles and $470,701 for married, joint filers.
Seven rates, starting at 10 percent and reaching 37 percent for incomes above $500,000 for singles and $600,000 for married, joint filers.
For joint filers:
10 percent: $0 to $19,050
12 percent: $19,050 to $77,400
22 percent: $77,400 to $165,000
24 percent: $165,000 to $315,000
32 percent: $315,000 to $400,000
35 percent: $400,000 to $600,000
37 percent: $600,000 and above
For single filers:
10 percent: $0 to $9,525
12 percent: $9,525 to $38,700
22 percent: $38,700 to $82,500
24 percent: $82,500 to $157,500
32 percent: $157,500 to $200,000
35 percent: $200,000 to $500,000
37 percent: $500,000 and above
Corporate Tax Rate
Current law: 35 percent
New law: 21 percent, beginning in 2018.
Corporate Alternative Minimum Tax
Current law: Applies a 20 percent rate as part of a parallel tax system that limits tax benefits to prevent large-scale tax avoidance. Companies must calculate their ordinary tax and AMT tax, and pay whichever is higher.
New law: Repealed.
Individual Alternative Minimum Tax
Current law: Individual AMT can apply after exemption level of $54,300 for singles and $84,500 for married, joint filers, and the exemptions phase out at higher incomes.
New law: Increase the exemption to $70,300 for singles and $109,400 for joint filers. Increase the phase-out threshold to $500,000 for singles and $1 million for joint filers. The higher limits would expire on Jan. 1, 2026.
Current law: Businesses must take depreciation, spreading the recognition of their equipment costs for tax purposes over several years.
New law: Businesses can fully and immediately deduct the cost of certain equipment purchased after Sept. 27, 2017 and before Jan. 1, 2023. After that, the percentage of cost that can be immediately deducted would gradually phase down.
Current law: The U.S. taxes multinationals on their global earnings at the corporate rate of 35 percent, but allows them to defer taxes on those foreign earnings until they bring them back to the U.S., or “repatriate” them.
New law: U.S. companies’ overseas income held as cash will be subject to a 15.5 percent rate, while non-cash holdings will face an 8 percent rate.
Current law: Pass-through businesses, which include partnerships, limited liability companies, S corporations and sole proprietorships, pass their income to their owners, who pay tax at their individual rates.
New law: Owners can apply a 20 percent deduction to their business income, subject to limits that will begin at $315,000 for married couples (or half that for single taxpayers). The tax rate for most qualifying pass-throughs will drop from 39.6 percent to around 30 percent.
Professional service pass-throughs, including consulting firms, will not be able to use the deduction.
Obamacare Individual Mandate
Current law: An individual who fails to buy health insurance must pay penalties of $695 (higher for families) or 2.5 percent of their household income — whichever is higher, but capped at the national average cost of the most basic, low-premium, high-deductible plan.
New law: Repeal the penalties.
Standard Deduction and Personal Exemptions
Current law: $6,350 standard deduction for single taxpayers and $12,700 for married couples, filing jointly. Personal exemptions of $4,050 allowed for each family member.
New law: $12,000 standard deduction for single taxpayers and $24,000 for married couples, filing jointly. Personal exemptions repealed.
Individual State and Local Tax Deductions
Current law: Individuals can deduct the state and local taxes they pay, but the value is subject to certain limits for high earners.
New law: Individuals can deduct no more than $10,000 worth of the deductions, which could include a combination of property taxes and either sales or income taxes.
Mortgage Interest Deduction
Current law: Deductible mortgage interest is capped at loans of $1 million.
New law: Deductible mortgage interest for new purchases of first or second homes will be capped at loans of $750,000 starting on Jan. 1, 2018.
Medical Expense Deduction
Current law: Qualified medical expenses that exceed 10 percent of the taxpayer’s adjusted gross income are deductible.
New law: Reduces the threshold to 7.5 percent of AGI for 2017 and 2018.
Child Tax Credit
Current law: A $1,000 credit for each child under 17. The credit begins phasing out for couples earning more than $110,000. The credit is at least partially refundable to qualified taxpayers who earned more than $3,000.
New law: Doubles the credit to $2,000 and provides it for each child under 18 through 2024. Raises the phase-out amount to $500,000, and caps the refundable portion at $1,400 in 2018.
Current law: Applies a 40 percent levy on estates worth more than $5.49 million for individuals and $10.98 million for couples.
Proposed: Double the thresholds so the levy applies to fewer estates. The higher thresholds would sunset in 2026.
Base Erosion and Anti Abuse Tax (BEAT)
Current law: No provision
New law: 20 percent of all business tax credits, except for R&D, taken by foreign corporations or foreign affiliates of US corporations, will be included in a new minimum tax calculation. After 2015, all tax credits, including R&D, will be included in the tax calculation.
Although the TCJA is the most significant change in our Nation’s tax laws since 1986, it is not the last word on tax legislation. There will be technical corrections legislation introduced as early as next year, and the expiration of the individual tax rates, as well as other provisions, after 2025 assures major legislation in the near future.
James F. Miller
Tax Legislative Solutions, LLC
Phone: 202 489 3711