Tax Cuts and Jobs Act

 In Tax News

The Tax Cuts and Jobs Act took effect on January 1, 2018.  While there were many changes, below are some of the key points:

Individual Tax:

The new tax bill made significant changes to the federal income tax brackets. The most notable was the highest marginal tax rate was reduced from 39.5% to 37%, including a slight reduction for all rates, and the marriage penalty was mostly eliminated. The marriage penalty is when a family with duo earners pays more tax filing jointly than if they had filed single. See table below for your reference.

Marginal Tax Rate Single Married, Filing Jointly Head of Household Married, Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700
22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500
24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500
32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-$200,000
35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$300,000
37% Over $500,000 Over $600,000 Over $500,000 Over $300,000

 

Additional Deductions:

  • The standard deduction was doubled. See below chart.
Single Married, Filing Jointly Head of Household Married, Filing Separately
$12,000 $24,000 $18,000 $12,000
  • Child Tax Credit. The child tax credit will be increased to $2,000 from $1,500 per qualifying child and will be refundable up to $1,400.

 

Eliminated or Reduced Deductions:

  • There will be no more personal exemptions. (Previously $4,150 per person in the household). For families of more than three people, this means that the removal of these deductions will more than offset any benefit from the increased standard deduction.  This was not discussed much, but overall is a very bad thing for families.
  • Mortgage interest is limited to mortgage debt of up to $750,000. (Previously $1,000,000).
  • Home equity debt interest is no longer deductible. (Previously deductible up to $100,000).
  • State and Local Tax deduction is limited to $10,000. (Previously no limitation).
  • Below deductions are eliminated:
    • Casualty and theft losses (except those attributable to a federally declared disaster)
    • Unreimbursed employee expenses
    • Tax preparation expenses
    • Other miscellaneous deductions previously subject to the 2% AGI cap: this included investment fees and expenses, convenience fees for using a credit or debit card to pay your taxes, and trustee fees for an IRA.
    • Moving expenses
    • Employer-subsidized parking and transportation reimbursement
    • Donations to colleges in exchange for athletic event seats.

 

Estate Tax:

The estate tax exemption was raised to $11.2 million per individual, and $22.4 for a married couple. This doubled the original estate tax exemption. This change is set to expire in 2025, which means it will revert back to the old exemption amount after 2025 adjusted for inflation. This is a window of opportunity for estate planners.

 

Pass-thru Tax:

Pass-thru entities include Sole-Proprietorships, Partnerships, S Corporations, and certain Schedule E Property Rental business. Owners of pass-thru entities will enjoy a deduction up to 20% of the Qualified Business Income of the pass-thru entity. There are various limitations and regulations, thus the final calculation will not be as simple. It creates planning opportunities for people who currently have a pass-thru entity.

 

Corporate Tax:

The corporate tax rate was dropped to a flat 21% on all profits.

The corporate alternative minimum tax of 20% was repealed.

Territorial tax system: There has not been a change to a territorial system.  However, U.S. corporations will now be able to repatriate dividends from a foreign subsidiary tax free, which resembles territorial tax principles.  To balance this new tax advantage there is a one-time repatriation tax on foreign accumulated earnings.  The tax will be 15.5% on foreign cash and equivalent foreign-held assets of U.S. companies, and 8% on illiquid assets like equipment, payable over an eight-year period.

 

International Tax:

Base Erosion.  The earnings strippings rules have mostly been eliminated, and in there place is a new set of base erosion rules.  These rules will review expense payments back to a foreign parent to determine if they are excessive and should be limited.

Subpart F Income.  A new category of Subpart F income was created for low-taxed intangible income.  Subpart F income is income of a foreign subsidiary that is immediately taxable to the U.S. parent.

Sale of U.S. Partnerships.   Sales of U.S. partnerships by foreigners used to be non taxable in the U.S.  However, cases were advancing through the court system to challenge this treatment.  The new law ends the litigation and treats sales of U.S. partnerships as U.S. source income, which is taxable to foreigners, to the extent that the sale of the partnership’s assets would generate U.S. source income.

 

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