Trump’s Tax Reform: What’s in the Final Version?

On December 19, 2017, with a vote of 227-203, the House passed the final tax reform bill and the Senate followed with a vote of 51-48.  Due to a technicality on the bill, on December 20 the House re-voted and passed the bill which is now ready to be signed by President Trump.  The conference report itself is a whopping 1097 pages; therefore, we are highlighting certain key provisions of the final bill below.  Many of the provisions of the tax reform will be effective for tax years beginning after December 31, 2017.

Individuals

• Seven individual tax rates. The tax rates will be: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top rate of 37% would be assessed on income over $600,000 for married couples and $500,000 for single.
• Increased standard deduction. The standard deduction will increase to $24,000 for a joint return, $18,000 for an unmarried individual with at least one qualifying child, and $12,000 for single filers.
  Elimination of personal exemptions. The bill suspends the personal exemption deduction until 2026.
• Alternative minimum tax (AMT). The bill increases the AMT exemption amounts to $109,400 for married filing jointly taxpayers, $70,300 for single taxpayers, and $54,700 for married filing separately. The bill also increases the AMT phase-out exemptions to $1,000,000 for married taxpayers filing jointly, and $500,000 for single taxpayers.
• Medical expense deduction. The bill will reduce the medical expense deduction floor to 7.5% of your adjusted gross income (AGI). This is only temporary as the 10% of AGI floor returns in 2019.
• Mortgage interest deduction. The mortgage interest deduction will be allowed for debt up to $750,000 on debt incurred after December 15, 2017. Mortgages incurred prior to the December 15, 2017, date are grandfathered and subject to the $1 million limitation. The deduction for home equity interest will be suspended.
• State and local income tax and real estate tax deductions. The state and local deduction originally scheduled to be eliminated is now grouped together with the real estate tax deduction. Taxpayers may elect to deduct sales, income or property taxes up to $10,000 ($5,000 for married filing separately).
• Charitable contribution limitations will be increased on cash contributions. The current deduction is limited to 50% of adjusted gross income. This will be increased to 60% of AGI.
• Miscellaneous itemized deductions. These deductions, normally subject to 2% of your AGI, will be suspended until 2026.
• Alimony payments. The bill would eliminate the current above-the-line deduction for alimony payments and make alimony payments non-taxable to the payee. The effective date for this provision would be for divorce agreements executed after December 31, 2018. Divorce decrees entered into prior to this date are grandfathered. One should be careful amending grandfathered divorce decrees in subsequent years.
• Enhanced child tax credit. The bill will increase the child tax credit to $2,000 (with up to $1,400 refundable). The bill will also increase the AGI thresholds for claiming the credit.
• Family Tax Credit. The bill will provide a new family tax credit of $500 for each dependent, other than a qualifying child.
• Gain on the sale of your primary residence. The current law allows a couple filing a joint return a $500,000 gain exclusion as long as the home was the primary residence for two of the past 5 years. This will remain the same going forward.
• Estate tax exemption will be increased. Currently the federal estate and gift tax exemption is $5.49 million per person. This will be increased to $11.2 million (with inflation adjustments) effective for decedents dying and gifts made after 2017.
• Individual health care mandate. There is no longer a penalty for failure to have the required health insurance under the American Care Act effective after December 31, 2018.

Pass-through entities

• Pass-through deduction of 20% added for owners of certain pass-through entities. This deduction will not reduce AGI but will reduce taxable income whether or not you itemize deductions. The language is very awkward. For taxpayers above certain levels of AGI, the deduction will be limited to 50% of the taxpayer’s share of W-2 wages paid by the entity. The AGI phase out limits start at $315,000 for married filing joint or $157,500 for single. The deduction for specified service businesses will also be limited based on your AGI.
• Net losses from pass-through entities cannot exceed $500,000 ($250,000 single) in one year. If your net losses from all your trades or businesses is greater than the limits above, any excess losses will convert to a net operating loss and be used to offset future business income.
• Carried interest holding period extended to 3 years to retain capital gain treatment.

Businesses

• Corporate tax rate – a flat rate of 21% beginning in 2018. In addition, there will be no special rate for personal service corporations.
• Expands bonus depreciation to temporarily permit 100% first year depreciation for qualified property placed in service after September 27, 2017 through December 31, 2022. After this period, the bill keeps bonus depreciation, gradually reducing the percentage, through December 31, 2026.
• Section 179 limitations increased. Increases expense and investment limitations to $1,000,000 and $2,500,000. The bill also expands the definition of qualified real property.
• Rules for cash method of accounting expanded. Businesses can elect cash basis of accounting, even if they hold inventory, as long as gross receipts are under $25 million.
• Limits interest expense deduction to 30% of adjusted taxable income, business interest income, and floor plan financing interest. The bill exempts businesses with average annual gross receipts of $15 million or less.
• Keeps the same depreciable lives for nonresidential and residential real property. Currently, these are generally depreciated over either 39 years for nonresidential, and 27.5 years for residential. However, the bill will generally exclude real property from bonus deprecation. Qualified improvement property (QIP) will have a 15 year life. QIP is any improvement to the interior of non-residential real property.
• Repeals the domestic production activity deduction. Effective for tax years beginning after 2017.
• Repeals alternative minimum tax after 2017. The prior year minimum tax credit will continue to be allowed to offset the taxpayer’s regular tax liability. Also for tax years 2018-2020 the minimum tax credit would be refundable up to 50% of the excess credit. In 2021, the remaining credit would be allowed.
• Entertainment expenses will be eliminated as a deduction. No deduction would be allowed for entertainment. The current 50% limitation will continue to apply to meals incurred in carrying on a trade or business.
• Keeps the research and development credit.
• Net operating losses (NOL). The bill will limit the NOL deduction to 80% of taxable income. No carrybacks of net losses are allowed, but they can be carried forward indefinitely.

International

• Modified allocation of interest expense amongst members of the U.S. affiliated group to adjusted tax basis of assets. Currently, the allocation is based upon fair market value.
• Foreign-sourced dividends. Adds 100% deduction for specified foreign-sourced dividends paid from 10% or more owned foreign corporations to U.S. corporate shareholders. A 6-month holding period is required.
• Imposes mandatory tax on certain accumulated foreign earnings held in cash or illiquid assets of 15.8% and 8%.

If you have questions on how tax reform will affect you, your business or tax filing, contact us.