President Trump signed the sweeping tax reform bill “Tax Cuts and Jobs Act” on December 22, 2017, ushering in a broad range of changes including new tax rates and deductions, estate planning, corporation taxes and international taxes. The new bill represents the biggest changes to the US tax system in 30 years. The tax plan helps businesses more than individuals. Business tax cuts are permanent, while the individual cuts expire in 2025. Among individuals, it would help higher-income families the most.
Adjust Individual Tax Brackets and Lower Tax Rates
The new tax bill reduces several of the marginal income tax rates (see charts below). These new tax brackets and the other changes to the individual tax codes would all be temporary – expiring on December 31, 2025.
Comparison of Tax Brackets between 2017 and 2018-2025
The Tax Foundation said those in the 20-80 percent income range would receive a 1.7 percent increase in after-tax income. Those in the 95-99 percent range would receive a 2.2 percent increase.
The Act makes the U.S. progressive income tax more regressive. Tax rates are lowered for everyone, but they are lowered more for the highest-income taxpayers. The Tax Foundation said the Act would add almost $448 billion to the deficit over the next 10 years.
Deductions
New bill will eliminate the personal exemption and double the standard deduction which will be indexed to inflation. However higher standard deduction for people age 65 and older still exists. State and Local taxes will be capped at $10,000 and Other Itemized Deduction Items will be eliminated. Certain limitation on itemized deductions are also eliminated. There is an estimate that about 90% of the Americans will be taking standard deductions in 2018.
The chart below shows a quick comparison of Deductions and Credits between 2017 and 2018-2025.
Comparison of Deductions and Credits between 2017 and 2018-2025
| Deductions and Credits | 2017 | 2018-2025 |
| Standard Deductions | $6,350 Single; $12,700 MFJ; $9,350 HOH (Additional $1,500 for over age 65 for Single; $2,500 for MFJ, both spouses over 65) | $12,000 Single: $24,000 MFJ; $18,000 HOH (Additional $1,600 for over age 65 for Single; $2,600 for MFJ, both spouses over 65) |
| Personal Exemption | $4,050 per person | None |
| Child Tax Credit | $1,000 per child | $2,000 per child (with first $1,400 refundable) |
| Medical Expenses Deduction | Expenses greater than 10% of AGI are deductible | Expenses greater than 7.5% of AGI are deductible |
| State and Local Tax Deductions | Deductible | Maximum $10,000 |
| Mortgage Interest Deduction | Limit to $1,000,000 of loan principal and $100,000 of equity debt for primary and second homes | Limit to $750,000 of new loan principal for primary and second homes. No deduction for equity loan. |
| Charitable Deductions | Limited to 50% of inocme | Limited to 60% of inocme |
| Miscellaneous Deductions (including job expenses, tax preparation fees) | Expenses greated than 2% of AGI are deducitible | None |
| Limits on Itemized Deductions | Deductions will be phase out for single with income over $261,500 and $313,800 for MFJ | None |
| Alimony Payments | Deductible by payor and taxable to payee | None (for divorce finalized after 1/1/2018) |
| Moving Expenses | Deductible | Eliminated (except for active duty military) |
| Electric Vehicle Credit | $2,500 to $7,500 per new EV purchased for use in the US | $2,500 to $7,500 per new EV purchased for use in the US (limit to the first 200,000 cars sold by each manufacture) |
| Dependent Tax Credit | None | $500 per non-child dependent |
| Estate Tax Exemption | $5,490,000 per individual ($10,980,000 per married couple) | $11,200,000 per individual ($22,400,000 per married couple) |
| Sale of Principal Residence | $250,000 gain exclusions per individual; $500,000 for spouses under the 2 out of 5 year rule | Same |
| Long-term Capital Gain Tax Rates | 0% for single with taxable income under $37,501 and MFJ under $75,001; 20% for single above $112,499 and MFJ above $224,999; the rest 15% | 0% for single with taxable income under $38,601 and MFJ under $77,201; 20% for single above $425,800 and MFJ above $479,000; the rest 15% |
| Section 529 Tax-free Withdrawals | Can be used for private schools for college | Can be used for private schools K-12 through college (watch out for the state tax implication) |
| Alternative Minimum Tax | AMT exemption for Single is $54,300 (phase out at $120,700); for MFJ is $84,500 (phase out at $160,900) | AMT exemption for Single is $70,300 (phase out at $500,000); for MFJ is $109,400 (phase out at $1,000,000) |
| Obamacare Penalty | Assessed | Assessed only for 2018. No penalty for 2019 to 2025 |
Estate Tax
The law will double the federal estate tax exemption to $11 million per person ($22 million per couple). This change is not permanent and set to expire after 2025. Beneficiaries will still get a step up in basis and most likely no capital gain tax due on sale of inherited assets at the time of transfer.
It is important to note that state level estate tax exemptions are often much lower than the federal level and are unaffected by this law. (Link reference for state estate tax)
AMT
New tax bill makes changes designed to limit the impact of AMT by raising the minimum income level at which the AMT could apply by increasing the exemption amount from $50,600 to $70,300 for individuals and from $78,750 to $109,400 for couples married filing jointly.
New Corporate and Pass-through Tax Rate
New tax bill lower the maximum corporate tax rate from 35% to 21% (the lowest since 1939). This is a flat tax rate for corporations and the change is permanent effective January 1, 2018.
Pass-through businesses, businesses structured as sole proprietorships, partnerships, and S-corporations, will be taxed at individual tax rates, but will be able to deduct 20% of income. To prevent high-income individuals from taking advantage of this deduction, it would only be available to couples filing jointly with incomes below $315,000.For income above that level, the rules are complex but it appears that certain kinds of businesses might still be eligible for a partial deduction.
The plan would let businesses fully expense new equipment right away, but the provision would eventually expire.
| 2017 | 2018-2025 | |
| Tax Rates | 15% to 35% | 21% (flat rate) |
| Alternative Minimum Tax | Required to calculate | Eliminated |
| Interest Expenses Deduction | Deductible | limited to the sum of (1) business interest income; (2) 30% of the taxpayer’s adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year. |
| Net Operating Losses | Must carry back to 2 prior years before carry forward for 20 years followed | No 2-year carryback and for post-2017 losses, max offset 80% of taxable income |
| Pass-through Deductions | None | 20% for sole proprietorships, LLCs, partnerships and S corporations (subject to exceptions and income phase out) |
| Offshore Income | Taxed under worldwide income tax system | Taxed under territorial tax system (see separate article) |
New territory taxation for US multinational corporations
One of the major corporate tax cuts included in President Donald Trump’s and congressional Republicans’ tax plans is meant to reduce the U.S. tax rate on overseas corporate profits to zero, a proposal known as territorial taxation. The United States formally has a “worldwide” tax system for corporate profits. Under the existing tax code, U.S. corporations pay U.S. corporate income tax on both domestic and foreign profits.
Under the existing U.S. international system, U.S. multinationals have myriad opportunities to avoid paying taxes on their domestic profits by characterizing them as having been earned overseas. Multinational corporations through aggressive “transfer pricing” – manipulating the terms of intercompany transactions, transfer profits to foreign affiliates, so that appears to be earned out of the U.S.
Under new tax bill, a Territorial system of taxation for corporations is made into law and this territorial system of taxation is subject to new base erosion rules, including a base erosion and anti avoidance tax (BEAT) and foreign minimum tax rules on global intangible low-taxed income (GILTI).
There is one time repatriation tax on corporate earnings held overseas with different tax rate to liquid assets (at 15.5%) and non-liquid assets (at 8%), and payable over 8 years.
The corporation AMT and the Section 199 domestic manufacturing deductions with rules allowing for refunding prior year AMT credits are repealed.
There will be a 20% deduction (reducing the maximum marginal rate to 29.6 percent) on certain pass-through domestic-sourced (including from Puerto Rico) business income from sole proprietorships, partnerships and Subchapter S corporations and from qualified REIT or cooperative dividends. Estates and trusts also are eligible to claim the deduction. Non-corporate taxpayers are not permitted to deduct business losses in excess of business income plus $500,000 (for joint return filers).
