Highlights of H.R. 1 (The “Tax Bill”), Formerly Known as the “Tax Cuts and Jobs Act,” Passed by Congress and Signed by the President
December 25, 2017
By: Mark Wisniewski
On December 22, 2017, the President signed into law the tax bill, an extremely broad and all-encompassing piece of tax reform legislation. the following is a brief synopsis in tabular format of select key provisions contained in the tax bill which generally go into effect on January 1, 2018:
Tax Reform for Individuals
| TOPIC | THE TAX BILL |
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Individual Income Tax Rates
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7 tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. These tax brackets apply through 2025
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Long Term Capital Gains Tax Rates
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3 tax brackets: 0%, 15% and 20%. In addition, 3.8% net investment income tax is retained
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Basic Standard Deduction
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Increased to $24,000 for married couple filing a joint return and to $12,000 for single filers. These amounts apply through 2025. Additional standard deduction for elderly or blind is retained
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Personal Exemption
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Reduced to zero through 2025
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Alternative Minimum Tax (AMT)
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Retained with higher exemption amounts (i.e., $109,400 for married filing joint and $70,300 for single filers), and increased income limitations on the phase-out of these exemptions, through 2025
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Limitation on Itemized Deductions
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Suspension of limitation on itemized deductions through 2025
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Personal Casualty and Theft Losses
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Suspension of deduction for personal casualty and theft losses (excluding personal casualty losses incurred in a Federally-declared disaster) through 2025
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Mortgage Interest Deduction
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Limited to $750,000 for home acquisition debt incurred after 12/15/17; after 2026, limitation reverts back to $1 million regardless of when the debt was incurred; no deduction for home equity debt through 2025
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Deduction for State and Local Income Taxes, Sales Taxes and Property Taxes
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Capped at $10,000 for all such income, sales and property taxes through 2025; no limitation for any such taxes paid in connection with a trade or business; cannot prepay any 2018 or later state and local income taxes in 2017 to avoid this limitation
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Charitable Deduction
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Increases the adjusted gross income limitation on cash contributions to public charities and certain private foundations from 50% to 60% through 2025 and other changes
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Miscellaneous Itemized Deductions
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Suspension of all miscellaneous itemized deductions subject to the 2% floor through 2025
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Medical Expense Deduction
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Retained but lowers the threshold for the medical expense deduction to 7.5% (from 10%) of adjusted gross income for 2018 and 2019
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Alimony Payments
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No longer deductible by payor and no longer taxable to payee for any divorce or separation agreement entered into after 2018 and certain modifications entered into prior to that date
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Expenses Attributable to Trade or Business of Being an Employee
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Suspension of all miscellaneous itemized deductions subject to the 2% floor (including expenses attributable to the trade or business of being an employee) through 2025
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Estate and Gift Taxes
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Estate and gift tax exemption doubled (with inflation adjustments) through 2025. The Tax Bill does not provide for the repeal of estate tax at any time in the future
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Generation Skipping Transfer (GST) Tax
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GST Tax exemption doubled (with inflation adjustments). The Tax Bill does not provide for the repeal of GST tax at any time in the future
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Deduction for Qualified Business Income from Sole Proprietorships and Pass-Through Entities
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20% deduction for non-corporate taxpayers, including certain trusts and estates, who have “qualified business income” (as that term is defined in the Tax Bill) from sole proprietorship or pass-through entity, subject to certain limitations. This 20% deduction generally cannot exceed the greater of: (i) 50% of the “W-2 wages” (as that term is defined in the Tax Bill) paid with respect to the qualified trade or business; or (ii) the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property” (i.e., tangible, depreciable property held by a qualified trade or business and used in the production of qualified business income). “Qualified business income” does not include income from certain personal service businesses (excluding engineering and architecture) unless the taxpayer’s taxable income is less than certain amounts |
Business Tax Reform
| TOPIC | THE TAX BILL |
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Corporate Tax Rate
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21% flat rate effective for tax years beginning after 2017. No special rate for personal service corporations
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Corporate AMT
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Repealed for tax years beginning after 2017
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Dividends-Received Deduction
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The 80% dividends received deduction is reduced to 65% and the 70% dividends received deduction is reduced to 50%
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Temporary 100% Expensing for Certain Qualifying Business Assets
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100% first-year deduction for the adjusted basis of qualified property acquired and placed in service after 9/27/17 and before 2023, which percentage is reduced to (i) 80% for qualified property placed in service after 2022 and before 2024, (ii) 60% for qualified property placed in service after 2023 and before 2025, (iii) 40% for qualified property placed in service after2024 and before 2026, and (iv) 20% for qualified property placed in service after 2025 and before 2027
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Increased Section 179 Expensing
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Increase in the Section 179 expensing limitation to $1 million and the phase-out threshold to $2.5 million (indexed for inflation)
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Limitation on Business Interest Expense Deduction
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The deduction for net interest expenses incurred by a business is generally limited to 30% of the business’ “adjusted taxable income” (as that term is defined in the Tax Bill), subject to certain exceptions; for example, businesses with average annual gross receipts of $25 million or less would generally be exempt from this limitation
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Limitation on Net Operating Loss (NOL) Deduction
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For losses arising in tax years beginning after 2017, the NOL deduction is limited to 80% of taxable income. In addition, the Tax Bill generally eliminates all NOL carrybacks (except for farming NOLs and NOLs of property and casualty insurance companies) and allows unused NOLs to be carried forward indefinitely
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Like-Kind Exchanges of Real Property (§1031)
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The Tax Bill limits the deferral of gain on exchange of like-kind property to real property that is not held primarily for sale, subject to certain transition rules
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Entertainment Expenses
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Disallowance of deduction for entertainment expenses; deduction for 50% of food and beverage expenses associated with operating a trade or business would generally be retained
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Self-Created Property Not Treated as Capital Asset
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Gain or loss from disposition of self-created patent, invention, model, design, secret formula or process would be ordinary not capital
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Carried Interest
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The Tax Bill imposes a 3-year holding period requirement in order for the taxable gain attributable to certain partnership interests received in connection with performance of services to be taxed as long-term capital gain rather than ordinary income |
Tax Reform for Foreign Income and Foreign Persons
| TOPIC | THE TAX BILL |
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100% Deduction for Foreign-Source Portion of Dividends & Repatriation
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The Tax Bill provides a 100% deduction for foreign-source portion of dividends received from “specified 10-percent owned foreign corporations” by U.S. corporate shareholders, subject to a one-year holding periodThe Tax Bill also imposes a mandatory tax on post-1986 accumulated foreign earnings held in cash or cash equivalents of 15.5% and on post-1986 accumulated foreign earnings held in illiquid assets of 8.0%; taxpayers may elect to pay any resulting liability over an eight-year period
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Foreign Tax Credit
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The indirect foreign tax credit under IRC §902 is repealed and the determination of foreign tax credit under IRC §960 will be on a current-year basisA separate foreign tax credit limitation basket is added for foreign branch income
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Subpart F
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The definition of U.S. shareholder is expandedThe current taxation of previously excluded qualified investments under IRC §955 is repealedThe Tax Bill also repeals foreign base company oil related income as Subpart F income under IRC §954Stock attribution rules for determining “controlled foreign corporation” status are modified to treat a U.S. corporation as constructively owning stock held by its foreign shareholder
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Passive Foreign Investment Company (“PFIC”)
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PFIC insurance exception would be restricted to foreign corporations that would be taxed as an insurance company if they were U.S. corporations and if loss and loss adjustment expenses, unearned premiums, and certain reserves exceed 25% (or 10% in certain circumstances) of the foreign corporation’s total assets
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Interest Expense Apportionment
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Interest expense allocated among members of a U.S. affiliated group would be based on adjusted tax basis of assets, as opposed to fair market value under current law
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| Stock Compensation of Insiders in Expatriated Corporations | Excise tax on stock compensation in a corporate inversion would be increased to 20% from 15% |
Tax Reform for Compensation And Benefits
| TOPIC | THE TAX BILL |
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Recharacterization of Certain IRA and Roth IRA Contributions
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For tax years beginning after 2017, the rule allowing a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth IRA conversion
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Deduction for Excessive Employee Remuneration
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For tax years beginning after 2017, the exceptions to the $1 million limitation for commissions and performance-based compensation are repealed and the definition of “covered employee” is revised to include the principal executive officer, the principal financial officer and the three other highest compensated officers
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Qualified Equity Grants
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Creates a new election to defer recognition of gain for up to five years for employees of nonpublic companies who are granted stock options or restricted stock units in connection with their performance of services; certain employees are not permitted to make this election
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| Affordable Care Act Individual Mandate | For months beginning after 2018, the amount of the individual shared responsibility payment under the Affordable Care Act is reduced to zero |
Tax Reform for Tax-Exempt Organizations
| TOPIC | THE TAX BILL |
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Unrelated Business Taxable Income
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Increases unrelated business taxable income by the amount of certain fringe benefit expenses for which a deduction is disallowed. In addition, organizations that carry on more than one unrelated trade or business must separately calculate unrelated business taxable income for each trade or business, effectively prohibiting using deductions relating to one trade or business to offset income from a separate trade or business
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Excise Tax on Tax Exempt Organization Executive Compensation
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Imposes a 21% excise tax on compensation in excess of $1 million paid to an applicable tax-exempt organization’s five highest-paid employees for the tax year (or any person who was such an employee in any prior tax year beginning after 2016). Compensation would be treated as paid when rights to remuneration are no longer subject to substantial risk of forfeiture |
Please note that the above summary is not intended to be a comprehensive summary and analysis of all of the tax reform provisions contained in the Tax Bill but rather is intended to highlight some of the relevant tax reform provisions. Not all of the provisions contained in the Tax Bill are summarized herein. You are encouraged to consult with your own tax advisor regarding these tax reform provisions and the application of these provisions to your own situation.
For more information, please contact authors, Mark Wisniewski, Nick Jovanovich, Mitchell W. Goldberg or William Shaheen on our Business, Finance and Tax Team.
