The Tax Cuts and Jobs Act “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (H.R. 1), a measure that has been characterized as the first major reform of the Internal Revenue Code in 31 years, received final approval from the House and the Senate on December 20, and was signed into law by President Trump two days later on December 22. The legislation slashes the top corporate tax rate to 21%, lowers the top marginal rate for individual taxpayers to 37%, eliminates or scales back several popular deductions, reduces taxes on business income earned by pass-through businesses, doubles the estate tax exemption, and substantially enhances immediate expensing of capital investments.
The legislation is expected to add around $1.5 trillion to the Federal deficit over 10 years, before accounting for any economic growth. Under the Senate’s budget reconciliation rules, the final bill could be approved by a filibuster-proof simple majority only if it added no more than $1.5 trillion to the Federal deficit over a decade.
The main provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 are as follows:
Reduction in the corporate tax rate: While both the Senate and the House bills called for a reduction of the maximum corporate tax rate to 20%, from 35% in 2017, the rate was lowered to 21% in the final version of the bill. The new rate, which goes into effect starting in 2018, is permanent.
Changes in tax brackets and the standard deduction: The law retains the same number of income tax brackets for individuals as under 2017 law, but imposes slightly lower marginal rates on slightly wider brackets. The revised rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top marginal rate applies to income over $500,000 for single filers and $600,000 for married filing jointly, up from the current threshold amounts of $418,400 and $470,700, respectively. The TCJA nearly doubles the 2017 standard deduction to $24,000 for married filing jointly, $12,000 for single filers, and $18,000 for heads of household, indexed for inflation based on the chained consumer price index. The law also eliminates the deduction for personal exemptions and the personal exemption phase-out. These reduced rates and changes to the standard deduction and personal exemption go into effect starting in 2018, and expire at the end of 2025.
Changes in the child tax credit: The TCJA increases the child tax credit from $1,000 per qualifying child in 2017 to $2,000, of which up to $1,400 is refundable. The law also raises the adjusted gross income (AGI) phase-out thresholds to $400,000 for married filing jointly and to $200,000 for all other filers. In addition, the legislation creates a new non-refundable $500 credit for dependents who are not qualifying children. These changes sunset at the end of 2025.
State and local tax (SALT) deductions capped: Starting in 2018, the legislation limits deductions for all non-business state and local taxes deductions, including property and sales tax deductions, to an exemption of up to $10,000 for most filers, or $5,000 for each married taxpayer filing separately. These deductions are reinstated after 2025, but the law contains a provision that discourages taxpayers from pre-paying their SALT taxes in 2017 by stipulating that SALT taxes assessed for the 2018 tax year are not deductible on 2017 returns.
Mortgage interest deduction reduced: The TCJA limits the mortgage interest deduction for the purchase of a home after December 15, 2017, to loans of $750,000 or less, down from a cap of $1 million in 2017. The law also scales back the mortgage deduction for second homes purchased after this date by limiting the total mortgage interest deduction a taxpayer can take to the $750,000 cap. The home equity interest deduction is repealed. These changes expire at the end of 2025.
Medical expense deduction enhanced: The law enhances the medical expense deduction by lowering the AGI threshold to 7.5% for 2017 and 2018, down from 10%.
Alternative Minimum Tax (AMT) retained with higher exemption amounts: The legislation retains the AMT for individuals with some modifications through 2025. The exemption amount is increased to $109,400 for joint filers and to $70,300 for other filers, while the phase-out thresholds are raised to $1 million for joint filers and $500,000 for other filers. The exemption and threshold amounts are indexed to inflation. The corporate AMT is repealed.
New tax breaks for pass-through businesses: Income earned by pass-through entities in 2017 (e.g., partnerships, S corporations, and sole proprietorships) is subject to the individual tax rates of the owners. The TCJA provides a deduction of 20% of qualified income for pass-through entities, with some limitations and qualifications. Certain professional services firms with incomes above specified thresholds are not eligible for these tax breaks. The provisions expire in 2025.
New estate tax provisions: The estate tax in 2017 applies a 40% tax rate to estates worth more than $5.49 million for individuals, or $10.98 million for married couples. The TCJA retains the estate tax, but doubles the current estate, gift tax, and generation-skipping transfer tax (GST) exemption amounts, indexed for inflation, starting in 2018. The lower thresholds are set to return after 2025.
Repeal of the Affordable Care Act (ACA) individual mandate: The TCJA repeals after 2018 the ACA individual shared responsibility requirement, which imposes a penalty payment on individual taxpayers who do not have health insurance.
Enhanced bonus depreciation and Section 179 expensing: The law increases bonus depreciation to 100% (from 50% in 2017) for qualifying property placed in service between September 27, 2017, and January 1, 2023 (with an additional year for certain property with longer production periods), followed by a phase-down period ending in 0% on January 1, 2027. The law also enhances the Section 179 expensing amount for small businesses, raising it to $1 million with a $2.5 million phase-out threshold from 2017 levels of $500,000 and $2 million, respectively
Interest deductions limited: The TCJA generally caps the deduction for net interest expenses at 30% of earnings before interest, taxes, depreciation, and amortization. The law provides for the exemption of small businesses with average gross receipts of $25 million or less.
The biggest news to come from the tax law changes is the reduction of the corporate tax rate from 35 percent to 21 percent. The question is, do these changes apply to all businesses? No, they don't. But there are significant changes for businesses, regardless of structure.
While the C Corporation tax rate has been reduced to 21%, the Pass-Through entities are eligible for a qualified business income deduction. Beginning this tax year, S-Corporations, Partnerships, Trusts, Estates & Schedule C (Sole Proprietors), and Schedule E filers might be eligible to a deduction of up to 20 percent of their qualified business income.
All these rate deductions sound great, but there are major shockers in what businesses will be able to write off as expenses under the new law.
One example: entertainment expenses will no longer be deductible under this new law. So whether you are buying season football tickets for clients to watch your favorite team, or going to the opera, these benefits are no longer write-offs on your tax return.
We are keeping up-to-date with new regulations as they come in and as additional guidance is issued. We are including the new tax laws in all our tax planning.
The Tax Cuts and Jobs Act was passed with little guidance provided to the IRS and professionals on the rules for applying the new requirements. We are constantly researching and seeking additional guidance on the implementation and will provide you with updates as we learn more. We highly recommend you consult with us regarding your tax planning to learn how this Tax Cuts and Jobs Act affects you.
For additional information regarding the Tax Cuts & Jobs ACT, here are some links that might be helpful: