After the House of Representatives and Senate passed different versions of the “Tax Cuts and Jobs Act,” a conference committee was appointed to reconcile the two tax bills. On December 13, 2017, the conference committee reached a consensus on a revised “Tax Cuts and Jobs Act.” Both chambers must pass the “Tax Cuts and Jobs Act” by a majority vote before President Trump can sign it into law. On December 20, 2017, the Senate passed the bill by a vote of 51-49. The House is expected to pass the tax bill later this week. “Tax Reform Now” will highlight the relevant changes for individuals, corporations, pass-through businesses, and estates.
The “Tax Cuts and Jobs Act” retains seven income tax brackets, but it will change the income tax rates. The seven income tax brackets will be 10%, 12%, 22%, 24%, 32%, 35%, and 37%. To comply with the budget reconciliation rules, the lower income tax rates will begin in 2018 and sunset after 2025. Due to the changes made by Congress, many taxpayers will no longer itemize their deductions. The alimony payment deduction will be repealed. As a result, an ex-spouse will not include alimony payments in gross income. This law will apply to any divorce or separation instrument executed after December 31, 2018. Under the tax bill, a taxpayer will be able to take a maximum $750,000 deduction for home mortgage interest on a newly purchased home. This maximum deduction is lower than the currently allowable $1 million deduction for home mortgage interest. A taxpayer will be allowed to deduct up to $10,000 for state and local property taxes and either state income or sales taxes. This tax bill will also repeal the Obamacare penalty tax for taxpayers who fail to buy health insurance beginning in 2019.
Corporations receive favorable treatment under the tax bill. The corporate income tax rate will be cut from 35% to 21% for tax years beginning in 2018. The corporate income tax rate change will be permanent. The corporate alternative minimum tax will be repealed.
The “Tax Cuts and Jobs Act” will not create a new maximum tax rate for pass-through business owners. However, most pass-through business owners will be able to deduct 20% of their non-wage portion of business income. After this deduction is taken, the pass-through owner will pay income taxes at the new individual income tax rates. Trusts or estates with ownership interests in pass-through businesses will be entitled to take this deduction. However, this deduction is generally not available for pass-through business income from a “specified service trade or business.” A “specified service trade or business” includes a trade or business “involving the performance of services in the fields of health, law, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.” For pass-through business owners in a “specified service trade or business,” this deduction is available only if the pass-through business owner’s taxable income is not more than $157,500 for single filers and $315,000 for married joint filers. A reduced deduction will be available if a single filer’s taxable income is between $157,500 and $207,500 and when a married joint filer’s taxable income is between $315,000 and $415,000.
Although the estate tax will not be eliminated, almost all estates will no longer pay the federal estate tax. Beginning in 2018, an unmarried individual’s estate, gift, and generation-skipping transfer tax exclusions will be doubled to almost $11 million. The exclusions for married couples will approach $22 million. The doubling of the exclusions will sunset after 2025.
We hope this update has been helpful. As always, please let us know if you have any questions.