The much anticipated Republican tax bill is finalized, with President Trump expected to sign the legislation into law before Christmas. The final bill codifies significant changes to personal 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.
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Current Law |
Republican 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 Republican 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.
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|
Current Law |
Republican Bill |
|
Standard |
$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.
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Current Law |
Republican 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.
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|
Current Law |
Republican 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.
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|
Current Law |
Republican 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% |
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.
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|
Current Law |
Republican 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 |
|
|
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.
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|
Current Law |
Republican 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) |
