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NEWSLETTER

Tax and Financial News for December 2017

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The Final Tax Bill

The Final Tax Bill 2017, Republican Tax Bill 2017

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.

 

Current Law
(as would be for 2018)

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.

 

Current Law

Republican Bill

Standard
Deduction

$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.

 

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.

 

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.

 

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%
(inclusive of net investment tax)

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.

 

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

Eliminated for business, reduced for individuals

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.

 

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)

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