The Tax Cuts and Jobs Act has been approved by Congress and signed by President Trump. While the tax reform bill has seen various modifications and transformations, it now appears it has reached it’s final form as it was signed into law by President Trump December 22, 2017.
updated 12/29/17 | updated 12/27/17
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The House had initially passed the bill on December 19, and it had been expected that the Senate would quickly take up and approve the measure. However, a number of procedural rules forced the Senate to remove a number of provisions from the House-passed bill, including a provision allowing Section 529 account funds to be used for homeschool expenses, and a provision that excepted certain schools from a new excise tax on the basis of what proportion of its students were “tuition-paying.” The provision designating the short title of the bill was also found to have violated one of the Senate Parliamentarian rules, so, while the bill is commonly known as the “Tax Cuts and Jobs Act,” it has formally been redesignated as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” These changes meant that the measure required a second House vote.
The bill will soon be sent to President Trump for his expected signature. However, it’s unclear how soon he will be signing the bill. According to White House economic advisor Gary Cohn, under the sequestration rules, the president’s signature before year-end could trigger automatic spending cuts. If this “trigger” can be waived, the president is expected to sign the bill introducing some of the biggest tax reform our nation has seen into law before the end of the year.
A Few Key Points Under the New Tax Reform Act
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Lower tax rates coming
The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.
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Individual Tax Cuts will “Sunset” if not renewed
In order to comply with certain budgetary constraints, individual tax breaks contained a “sunset,” or an expiration date, for many of its provisions (meaning they apply for tax years beginning before Jan. 1, 2026.) Meeting these budget constraints is key as it allows the Senate to pass the bill under reconciliation procedures, requiring only a bare majority vote is required instead of the 60-vote threshold that typically applies.
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New Income Tax Rates & Brackets
To determine regular tax liability, an individual uses the appropriate tax rate schedule. The Code provides four tax rate schedules for individuals based on filing status (i.e., single, married filing jointly/surviving spouse, married filing separately, and head of household) each of which is divided into income ranges which are taxed at progressively higher marginal tax rates as income increases. The Act also provides four tax rates for estates and trusts. Below is an example of Married, Filing Jointly.
| Married, Filing Jointly | ||||
| Current Law | New Law | |||
| Tax Bracket | Taxable Income | Tax Bracket | Taxable Income | |
| 10 % | Up to $18,650 | 10 % | Up to $19,050 | |
| 15 % | $18,651-$75,900 | 12 % | $19,051-$77,400 | |
| 25 % | $75,901-$153,100 | 22 % | $77,401-$165,000 | |
| 28 % | $153,101-$233,350 | 24 % | $165,001-$315,000 | |
| 33 % | $233,351-$416,700 | 32 % | $315,001-$400,000 | |
| 35 % | $416,701-$470,700 | 35 % | $400,001-$600,000 | |
| 39.6 % | Over $470,700 | 37 % | Over $600,000 | |
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Personal Exemption Suspended
Under the new law the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero.
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Capital Gains Provisions Conform
The adjusted net capital gain of a noncorporate taxpayer (e.g., an individual) is currently taxed at maximum rates of 0%, 15%, or 20%. The Act generally retains present-law maximum rates on net capital gains and qualified dividends. It retains the breakpoints that exist under pre-Act law, but indexes them for inflation using C-CPI-U in tax years after Dec. 31, 2017.
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Child Tax Credit Increased
Under pre-Act law, a taxpayer could claim a child tax credit of up to $1,000 per qualifying child under the age of 17. Under the new law the child tax credit is increased to $2,000, and other changes are made to phase-outs and refundability during this same period.
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State and Local Tax Deduction Limited
Under the new act a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of State and local property taxes not paid or accrued in carrying on a trade or business or activity described in Code Sec. 212; and State and local income taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted.
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Mortgage & Home Equity Indebtedness Interest Deduction Limited
Under pre-Act law, a taxpayer could deduct as an itemized deduction qualified residence interest, which included interest paid on a mortgage secured by a principal residence or a second residence, limited to underlying indebtedness of up to $1 million and home equity indebtedness of up to $100,000. Under the new law the deduction for interest on home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately) for indebtedness incurred after December 15, 2017.
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Medical Expense Deduction Threshold Temporarily Reduced
The threshold on medical expense deductions is reduced to 7.5% for all taxpayers. In addition, the rule limiting the medical expense deduction for AMT purposes to 10% of AGI doesn’t apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019.
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Charitable Contribution Deduction Limitation Increased
For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations is increased to 60%.
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Alimony Deduction by Payor/Inclusion by Payee Suspended
Under pre-Act law, alimony and separate maintenance payments were deductible by the payor spouse and includible in income by the recipient spouse. Under the new law, for any divorce or separation agreement executed after Dec. 31, 2018, or executed before that date but modified after it, alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. Rather, income used for alimony is taxed at the rates applicable to the payor spouse.
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Repeal of Obamacare Individual Mandate
Under the new act, the amount of the individual shared responsibility payment is reduced to zero. The Act leaves intact the 3.8% net investment income tax and the 0.9% additional Medicare tax, both enacted by Obamacare.
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Alternative Minimum Tax (AMT)
The new Act increases the AMT exemption amounts for individuals ($109,400 for joint returns, $70,300 for single and $54,700 for married filing separate). Under the Act, the exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the AMTI of the taxpayer exceeds the phase-out amounts of $1 million on joint returns and all others $500,000.
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ABLE Account Changes
ABLE Accounts under Code Sec. 529A provide individuals with disabilities and their families the ability to fund a tax preferred savings account to pay for “qualified” disability related expenses. Under the new act the contribution limitation to ABLE accounts with respect to contributions made by the designated beneficiary is increased.
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Estate and Gift Tax Retained, with Increased Exemption Amount
For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the Act doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018.
2017 Year-End Moves to Prepare for Tax Cuts and Jobs Act
What’s Next with Tax Reform
Keep in mind that nothing is officially signed into law yet (at least as of December 21, 2017), however, these changes are likely to pass. As with any major changes, YHB will continue to provide updates and stand ready to answer your questions. This act is sweeping and will affect nearly all of us, from individuals to businesses across every industry. YHB will be hosting a seminar towards the end of January that will be available in person and via webinar. More information will be distributed in the coming weeks and we encourage you to attend. Should you have any questions now, do not hesitate to reach out to your trusted advisors at YHB.
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