On December 19, 2017, the Conference Committee between the House and Senate concluded and their final version of the Tax Cuts and Jobs Act was released to the public. This pending legislation is very complex and wide-ranging, affecting individuals, business and also estates and trusts. Following are the highlights of some of the provisions that would affect most individuals and businesses.
- Income Tax Rates and brackets – The final tax bill keeps the seven income tax brackets but lowers tax rates. These rates will revert to the current rate in 2026. Until then, the plan creates the following chart:
|Income Tax Rate||Income Levels for Those Filing As:|
|Current Law||Pending Bill||Single||Married-Joint|
- Itemized Deductions – The bill eliminates most itemized deductions (including moving expenses, except for members of the military). Taxpayers paying alimony will lose their deduction. This change begins in 2019 for divorces signed in 2018. The bill keeps deductions for charitable contributions and limits the deductions for property taxes, mortgage interest and state and local taxes.
The bill expands the deduction for medical expenses for 2018. It allows taxpayers to deduct the medical expenses that are 7.5 percent or more of income. Currently, taxpayers can deduct medical expenses that are 10% or more of income.
|Itemized Deductions||Current Law||Pending Bill|
|State and local tax deduction||Income or sales and property taxes are deductible||All state and local and real estate tax deductions limited to $10,000|
|Mortgage interest deduction||Can deduct interest payments on up to $1.1 million of debt||Limited to payments on $750,000 of debt for mortgages originated after 12/31/2017|
|Medical expenses deduction||Can deduct out-of-pocket expenses in excess of 10% of adjusted gross income||Expands by reducing threshold to 7.5% of income.|
- Standard Deductions – The bill approximately doubles the standard deduction for everyone. A single filer’s deduction increases from $6,350 to $12,000. The deduction for married and joint filer’s increases from $12,700 to $24,000. It reverts to current levels in 2026.
- Alternative Minimum Tax (AMT) – The plan keeps the AMT, however it increases the exemption, which results in fewer taxpayers paying it.
- Personal Exemptions – The plan eliminates the personal exemption for 2018 and onwards. For 2017, there is a personal exemption of $4,150 per taxpayer and dependent, which is partially or completely phased out with certain level of income.
- Child and Elder Care Deductions – The final bill increases the Child Tax Credit from $1,000 to $2,000. This credit will be refundable up to $1,400. It also proposed $500 credit for each non-child dependent. The credit helps families caring for elderly parents.
- Health Insurance – Contrary to 2017, the plan does not mandate health insurance. There will not be any penalty for not having health insurance, starting in 2019
- Pass-through Income (S-Corp, Partnership & Sole Proprietorship) – The bill provides a 20% deduction for income from pass-through businesses. The deductions are limited once the pass-through income reaches $157,500 for singles and $315,000 for joint filers, although income in excess of the threshold may be eligible for the deduction, subject to a further formula. Pass-through businesses also include real estate companies, hedge funds, and private equity funds. In effect, only 80% of these profits (up to the thresholds) will be subject to tax.
- Corporate Income Tax Rates – The final tax bill lowers the maximum corporate tax rate from 35% to 21%
- Business interest deduction – The bill limits the corporation’s ability to deduct interest expenses to 30% of income (EBITDA). As per current law, generally, business interest is fully deductible.
- Alternative Minimum Tax (AMT) – The bill eliminates the corporate AMT. Currently, the corporate AMT had a 20% tax rate that kicked in if tax credits pushed the effective tax rate below that level.
- Depreciation – The bill allows business to deduct the cost of certain depreciable assets in one year instead of amortizing them over several years.
- Section 179 expensing for certain assets – The bill raised the small business-expensing limit to $1 million from $500,000.
- Net Operating Losses (NOL) and carrybacks – The bill has limited the deduction of net operating losses to 80% of the taxable income. Per the current law, businesses can deduct net operating losses to fully offset the taxable income. In addition, the bill eliminates the NOL carrybacks. From 2018 and onwards NOLs can be carried forward indefinitely. For 2017, there is a carryback of 2 years and forward 20 years.
Since the Conference Committee meeting concluded yesterday, there is a possibility that there may be additional changes to the above listed provisions before they become law. There are many provisions in the pending Bill that may affect the individual or corporate taxpayers, and the details pertaining to many issues are still evolving.