The Final Tax Bill

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The much anticipated tax bill is finalized and has significant changes to personal and business tax laws, both in terms of tax structure and rules. Below is a summary of the key provisions in their final form compared to current tax law.

Income Tax Rates

Overall, the bill reduces individual income tax rates; however, these cuts expire after 2025. The alternative minimum tax is retained, but the exemptions are increased so fewer taxpayers will be subject to it.

Current Law 
(as would be for 2018)
New Bill
Tax Brackets 10% $0 – $19,050 10% $0 – $19,050
15% $19,090 – $77,400 12% $19,050 – $77,400
Married Filing Jointly 25% $77,400 – $156,150 22% $77,400 – $165,000
28% $156,150 – $237,950 24% $165,000 – $315,000
Income Brackets Presented 33% $237,950 – $424,950 32% $315,000 – $400,000
35% $424,950 – $480,050 35% $400,000 – $600,000
39.6% $480,050 and up 37% $600,000 and up

 

Standard Deduction and Exemptions

The bill provides for nearly doubling the standard deduction, but also eliminates personal exemptions. Overall, the result will be significantly fewer taxpayers itemizing deductions as they will no longer exceed the new, higher standard deduction.

  Current Law New Bill
Standard
Deduction
$6,500 – Single

$13,000 – MFJ

$12,000 – Single

$24,000 – MJF

 

Itemized Deductions

Strongly tied to the change increase in the standard deduction are alterations to itemized deductions. The limits on state and local tax deductibility will impact those in high state income and real estate tax states, as well as those where property values and thus mortgages are high.

  Current Law New Bill
State and local tax deduction Income or sales tax and property taxes:  unlimited All state and local tax deductions are capped at $10,000
Mortgage interest deduction Interest payments are limited to $1mm in debt Interest payments are limited to $750k of mortgage debt
Moving expenses Personal, non-reimbursed moving expenses (subject to mileage differential) Eliminated, military members exempted
Medical expenses Out-of-pocket expenses in excess of 10% of AGI are deductible Out-of-pocket expenses in excess of 7.5% of AGI are deductible (applies to 2017 & 2018)

 

Inflation

Many provisions in the tax code, including most of the above, are tied to inflation indexes that drive their annual increase. Currently, the Consumer Price Index (CPI) is used; however, the new bill will move this to the Chained CPI (C-CPI). The C-CPI generally results in lower inflation increases and will thus be less generous to taxpayers’ overtime.

Child Tax Credits

While the removal of personal exemptions appears to impact larger families, this is somewhat overridden by changes to the child tax credits.

  Current Law  New Bill
Child Tax Credit $1,000 $2,000
Refundable Portion 15% of earnings > $3,000 Up to $1,400
Other Dependent Credit n/a $500
Phase Out (Single/MFJ) $75,000 / $110,000 $200,000 / $400,000

 

Education Provisions

Despite earlier versions of the bills, there are little to no changes in education deductions and credits. The following provisions remain unchanged versus current law: education credits (American Opportunity Tax Credit, Lifetime Learning Credit and Hope Scholarship Credit), student loan interest deduction, graduate tuition wavier and classroom expense deduction.

The one thing that did change is the education savings plans rules, which now expand to allow the use of 529 college savings accounts for K-12 private school tuition.

Other Individual and Pass-Through Tax Changes

The new tax bill changes a number of other tax laws impacting individuals, including those related to the ACA, the estate tax and pass-through businesses where taxes are paid at the individual level.

  Current Law New Bill
Individual

ACA mandate

Penalty for not having health insurance Eliminated
Estate tax Top rate of 40% on estates above $5.6mm Top rate stays the same, however the threshold it applies to doubles to $11.2mm
Pass-through income Taxed at individual rates 20% deduction;

Phased out beginning at $315k (MFJ)

Capital gain treatment Top rate of 23.8%
(inclusive of net investment tax)
No change

 

Business Taxes and Credits

The new law creates a number of changes to business taxation as well. The changes will impact all aspects, including tax rates, deductions and credits. The main drivers are a lower over corporate tax rate, offset by more restrictive or eliminated deductions.

  Current Law New Bill
Top corporate rate 35% 21%
Business interest deduction Generally fully deductible Limited to 30% of income (does not include depreciation)
Alternative minimum tax Business calculation exist Eliminated for business, reduced for individuals
Section 179 deduction Small business expensing limit capped at $500k Limit increased to $1mm
Net operating losses Deductible from income in other years, income is reducible to zero Deduction is limited to 80% of taxable income
Research and development expenditures Immediately deductible Gradual write-off rules

 

International corporations

The new law alters the landscape for multi-national corporations from a worldwide tax system to a territorial system that only taxes domestic profits.

  Current Law  New Bill
Taxation of multinational companies Worldwide system with deferrals and credits for taxes paid to other countries Modified territorial system accompanied by anti-abuse tax provisions
One-time repatriation N/A One time tax of 7.5% (14.5% for cash)

 

As always, contact one of our tax professionals who can help you decipher how these changes affect you.