Tax Cuts and Jobs Act Preliminary Analysis

In light of the Tax Cuts and Jobs Act released on December 15, 2017, here is a high-level list of changes that may impact you or your business.

This legislation is not yet law. The House is set to vote on the bill on December 19, followed by a scheduled Senate debate and vote. Assuming this becomes law, the changes would generally not go into effect until 2018 or later.

We will send out a more detailed analysis following the House and Senate vote. As this is not a complete list of the changes, please feel free to contact your advisor with questions regarding your specific circumstances.

Tax Reform Changes for Individuals

  • The top individual tax rate would be lowered from the current top rate of 39.6 percent to 37 percent. Seven brackets would remain ranging from 10 percent to 37 percent.
  • Individual AMT remains, but the exemption would increase substantially.
  • The deduction for alimony payments would be repealed alongside the treatment of alimony as part of gross income for a divorce/separation instrument executed after December 31, 2018.
  • The standard deduction would increase to $24,000, $18,000 or $12,000 based on filing status.
  • The allowable indebtedness related to the mortgage interest deduction would be reduced from $1 million down to $750,000. Home acquisition debt would be grandfathered under the $1 million rule if it was incurred on or before December 15, 2017.
  • Mortgage interest on home equity debt would no longer be deductible.
  • The charitable deduction threshold would be increased to 60 percent versus the current 50 percent rule.
  • Charitable contributions for payments made in exchange for college athletic event seating rights would be fully disallowed as a deduction.
  • Medical expense as an itemized deduction would remain with a 7.5 percent deductible threshold.
  • The deduction for state and local income taxes and property taxes would be capped at $10,000.
  • The deduction for miscellaneous itemized deductions would be suspended.
  • The overall limitation on itemized deductions would be suspended.
  • The deduction for personal exemptions would be suspended.
  • The child tax credit would increase from $1,000 to $2,000, with the refundable part increasing to $1,400.
  • The penalty for lack of essential healthcare coverage (the healthcare mandate) would be repealed after December 31, 2018.
  • The gift and estate tax exemption would double and be adjusted for inflation.

Corporate Tax Reform

  • Beginning January 1, 2018, the corporate tax rate would be changed to a flat 21 percent rate, replacing the current graduated rate structure.
  • Corporate AMT would be fully repealed.
  • Businesses would immediately be able to expense the cost of certain new or used equipment purchased after September 27, 2017 and before January 1, 2023.
  • Like-kind exchanges would be disallowed on property other than real property.
  • Business interest would be limited. In general, it would be limited to 30 percent of EBITDA through 2021 and EBIT from 2022 forward.
  • Entertainment expenses would not be deductible.
  • Domestic production deduction (DPAD) would be repealed.
  • Net Operating Losses (NOLs) arising in tax years after 2017 would not be allowed to be carried back, and the portion carried forward would only offset 80 percent of taxable income.
  • The Work Opportunity Tax Credit and the New Markets Tax Credit would remain.
  • A new temporary tax credit would be created for employers who provide paid family and medical leave.

Pass-Through Business Tax Reform

  • Many individuals with pass-through businesses would be allowed to deduct up to 20 percent of the income. Some limitations would exist based on the wages paid by the business. Specified service businesses such as law firms and medical offices would only be able to take the 20 percent deduction if they make under $315,000 (married).
  • Electing small business trusts would also qualify for the 20 percent deduction.

International Tax Reform

  • The bill would move the United States from a worldwide tax system to a participation exemption (territorial) system in which corporations would receive a 100 percent dividends received deduction for dividends paid by a controlled foreign corporation.
  • To transition to the new system, the bill would impose a one-time deemed repatriation tax on unremitted earnings and profits to be paid over eight years. Illiquid assets would be taxed at eight percent, while cash and cash equivalents would be taxed at 15.5 percent.
  • The agreement establishes the Senate’s Base Erosion Anti-Abuse Tax (BEAT), with a tax rate of five percent in 2018 and 10 percent thereafter.

If you have any questions, please contact your advisor here.