Tax Cuts and Jobs Act:
Summary of Income, Estate, and Business Tax Law Changes
On December 22, 2017, President Trump signed a wide-reaching tax bill known as the Tax Cuts and Jobs Act (“TCJA”), which Congress had passed two days earlier. TCJA provides for revised income tax rates, limitations on certain deductions, and raises the federal estate and gift tax exemption to $11.2 million per person, indexed for inflation. The main income, estate, and business tax provisions of TCJA are summarized below.
Please note that, as highlighted below, many of TJCA’s provisions are scheduled to expire on December 31, 2025.
Personal Income Taxes: All of these provisions expire on December 31, 2025.
Lowered rates, wider brackets: TCJA keeps the current seven tax brackets, but reduces the rates. The top bracket will now be 37%, reduced from 39.6%. In addition, the brackets are wider, so that the top bracket will now apply to individuals at over $500,000 (from $418,400) and to married couples at over $600,000. For most taxpayers, therefore, more income will be taxed at lower rates. A similar restructuring also applies to the estate and trust income tax rates – with the brackets widened and the top rate reduced from 39.6% to 37%.
Capital gains: The capital gains rate has not changed, and still includes the 3.8% net investment income tax.
Standard deduction: The standard deduction has been increased from $6,500 for individuals and $13,000 for a married couple to $12,000 for individuals and $24,000 for a married couple. Given the limitations on deductions (below), it may make more sense for some people to take the standard deduction in 2018 instead of itemizing.
Personal exemption eliminated: The personal exemption has been eliminated, and the child tax credit has been increased from $1,000 to $2,000 per child, with a phase-out at a family income of $400,000; there is a new $500 credit for a non-child dependent.
Charitable contributions: The limitation on charitable contributions to public charities has been increased from 50% to 60% of adjusted gross income (AGI). The deduction for purchase of preferred seating at college athletic events has been eliminated.
Mortgage interest deduction: For all new mortgages (beginning December 15, 2017), the mortgage interest deduction will only be allowed for the first $750,000 of the mortgage. This provision will not apply to existing loans. The home equity interest deduction has been eliminated for all existing and new loans.
State and local tax deduction: The deduction for state and local income and property taxes will be limited to $10,000 total in 2018. The limit applies for individuals and for married taxpayers. Please note that the TCJA also contains a provision prohibiting taxpayers from claiming a 2017 deduction for the prepayment of 2018 state income taxes.
Medical deduction: The medical deduction threshold is reduced to 7.5% of income for 2017 and 2018; in 2019-2025, it will return to the previous threshold of 10%.
Miscellaneous itemized deductions: All miscellaneous itemized deductions (tax preparation fees, unreimbursed employee expenses, hobby expenses, gambling losses, investment advisory fees, etc.) have been eliminated.
AMT exemption: The AMT exemption has been increased to $70,300 for individuals and $109,400 for married taxpayers (from $54,300/$84,500, respectively) and the phase-out threshold is now $500,000 for individuals or $1 million for married taxpayers.
Alimony: For divorces finalized after December 31, 2018, alimony will neither be deductible for the payor or includible in income by the payee. Ex-spouses who modify their pre-2019 divorce decrees or separation agreements can elect to opt in to the new tax treatment of alimony.
Kiddie tax: the TCJA simplifies the “kiddie tax” by disconnecting it from the parents' tax situation and the unearned income of any siblings. The 2018 rates for a child's unearned income will be based on the tax brackets applicable to trusts and estates (the highest bracket begins at $12,500).
529 plan: 529 plans may now be used (up to $10,000 per year) for elementary and secondary school education (K-12), but not for homeschooling expenses.
Individual mandate (ACA): The TCJA eliminates the individual mandate under the ACA (current penalty of $695) beginning in 2019.
Pass-through entities: Many, but not all, owners of interests in pass-through entities, such as partnerships, LLCs, and sole proprietorships, will now be allowed a deduction equal to 20% of the entity’s income. The remaining 80% will be taxed at individual rates. Please note that this new pass-through provision will not apply to pass-through entities that perform “personal services”, such as doctors, accountants, financial services, and attorneys, unless the income from the entity is below $157,500 for individuals or $315,000 for a married couple. If taxpayers are eligible for the deduction, it begins to phase out at the above levels.
Carried interest: TCJA includes a new three-year holding period for qualification of carried interest as long-term gain. Carried interest will only qualify as long-term capital gain if the fund has held the relevant investment for more than three years at the time of the disposition. Otherwise, the gain will be treated as short-term capital gain. The three-year holding period requirement will also apply to gain derived from the sale or other disposition of a partnership interest attributable to carried interest (called an “applicable partnership interest”).
Estate, Gift and Generation-Skipping Taxes: These provisions expire on December 31, 2025.
The TCJA retains the federal estate, gift and generation-skipping taxes, but doubles the current exemptions. Each taxpayer will now be able to pass on an estate up to $11.2 million, or $22.4 million for a married couple, without paying any federal estate tax. The gift tax and generation-skipping transfer tax thresholds are also increased to $11.2 million. All of these amounts are indexed for inflation in future years.
Corporate Taxes: These provisions are all permanent.
Rates: For tax years beginning after December 31, 2017, the corporate income tax will be charged at a 21% flat rate. Currently, corporations are subject to graduated tax rates ranging from 15% (for taxable income of $0-$50,000) up to a maximum of 35% (for taxable income over $10,000,000).
AMT: Corporate AMT has been eliminated.
Interest deduction: The business interest deduction will be limited to 30% of taxable income.
Net operating losses: The deduction for net operating losses will be limited to 80% of taxable income.
Depreciation: Businesses will be allowed a 100% first-year bonus depreciation deduction for adjusted basis for “qualified property” purchased and placed in service after September 27, 2017 and before January 1, 2023.
Section 179: TCJA increases the section 179 (deduction of the full purchase price of qualifying equipment and/or software) expensing limit to $1 million.
R&D: R&D expenses must now be written off gradually
International Tax: The US will now be subject to a modified territorial tax system, generally not subjecting US companies’ foreign earnings to US taxes. These provisions include an anti-abuse tax. US companies’ current offshore earnings will be taxed at 15.5% for liquid assets and 8% for illiquid assets.