As the U.S. is in the midst of the holiday season and preparing for year-end, Congress has just passed a tax reform bill that is to take effect in 2018 (just 10 days away). Overall, about one-third of the proposed changes made by the House and Senate did not make it through the final Committee Agreement, and most changes are set to sunset after 2025.
When looking at what passed and what didn't, the most notable changes will be to corporations. Below is a full summary of the final outcome, excluding proposed provisions that were not adopted in the final bill, and provisions affecting life insurance companies, property and casualty insurance companies, and international corporations:
Individual tax rates have been adjusted in each of the higher tax brackets and the highest tax bracket rate has been reduced by 2.6%. Some taxpayers may find themselves in a slight higher tax bracket then before, while others may find themselves in a lower bracket. The lower tax brackets remain mostly unchanged though.
AMT for individuals is still in effect, but the income threshold required to pay AMT has been increased to $500,000 ($1,000,000 for joint filers).
The individual standard deductions will be increased to $12,000 for single filers, $18,000 for head of household, and $24,000 for couples filing jointly (additional deductions for the elderly and blind stay as they were).
Personal exemptions are suspended and payroll withholding taxes will be adjusted (more to come on exactly how this will be carried out).
The Child Tax Credit will be increased to $2,000 per qualifying child under age 17 with a max refundable amount of $1,400. An additional $500 nonrefundable "family" credit will be given for depends who are not qualifying children under age 17. Both credits will begin to phase out when taxpayers reach AGI of $400,000 for joint filers ($200,000 for all other filers). SSN's will be required to receive these credits.
The Individual Health Insurance Mandate penalty has been set to zero beginning in 2019. The penalty is still in effect for 2017 and 2018.
Individuals itemizing deductions will no longer have to reduce their deductions because they reach certain income thresholds.
State and local taxes can be deducted up to $10,000, inclusive of income and property taxes.
Mortgage interest deductions will be limited to interest paid on debts up to $750,000 for the purchase of a home after December 15, 2017 with no deductions allowed for interest on home equity loans. Current tax rules remain in effect for homes purchased prior to December 15, 2017.
Charitable contributions will be limited to 60% of AGI (previously 50%).
Medical expenses can be deducted if they exceed 7.5% of AGI (as was previously in effect before changing to 10% in recent years).
Personal casualty losses will be limited to only losses incurred in Presidentially declared disaster areas. No more deductions for losses incurred from theft or other losses of property that were not part of disaster areas.
Estates less than $10,000,000 in value will be exempt from Estate Tax and individuals receiving estate property would get a step-up in basis.
Retirement Accounts and Executive Compensation:
Recharacterization would no longer be allowed in the case of a conversion to a Roth IRA. Contribution recharacterizations are not impacted, and conversions from Traditional to Roth IRA's are still allowed.
The time limit allowed to repay a loan against a retirement account when employment ends is extended to the due date of the individuals return, including extensions.
2016 Distributions from retirement accounts (up to $100,000) for individuals who live or work in Presidentially declared disaster areas will be exempt from the additional 10% penalty and the mandatory 20% withholding.
Limits on government and tax-exempt employer length of service awards has been doubled to $6,000.
Compensation limits of $1,000,000 will apply to any employee who was the CEO or CFO at any time during the year, and to the three highest compensated officers in the year other than the CEO and CFO; however, some agreements are grandfathered.
A 21% excise tax will be applied to compensation above $1,000,000 (inclusive of fully-vested deferred compensation) paid by tax-exempt employers to the five highest paid employees, with the exception of licensed medical professionals who provide medical or veterinary services.
Employees who are granted stock options or RSUs as compensation for the performance of services may elect to defer the recognition of income for up to five years if the stock is not publicly traded.
Employer deductions for entertainment, amusement, or recreation are disallowed, even if they are directly related to a trade or business activity. This also includes employer-provided recreational and social activities for employees unless the amounts are included in employee's wages. Further information is needed on potential exceptions.
Employer deductions for meals, food or beverages will be disallowed if they are related to entertainment, amusement or recreation activities, unless the amounts are in employee wages. Additionally, a 50% limitation would apply to the amount of food and beverages that can be excluded from an employee's income as a de minimus fringe benefit, including expenses for an employee cafeteria, coffee, donuts, and soft-drinks. As of 2026, all deductions are eliminated for food and beverages, regardless of whether they are included in employee wages.
Employer deductions for providing qualified transportation benefits or reimbursements to employees for commuting to and from work will be eliminated, unless the amount is necessary to ensure the safety of an employee.
Tax-exempt employers will be taxed on the value of providing qualified transportation fringe benefits, including parking facilities, and on-premise gyms by treating the funds used to pay for the benefits as unrelated business taxable income, unless it can be directly connected with an unrelated trade or business that is regularly on by the organization.
Employer reimbursements for qualified bicycle commuting as a fringe benefit will be included in employee wages as taxable income.
Employee achievement awards paid in cash, gift coupons, gift certificates, vacations, meals, lodging, tickets to sporting or theater events, securities, and other similar items would become taxable regardless of the amount or value paid. Employers will also not be limited on the amount of their deduction for these payments.
A tax credit will be given to employers that pay employees while on FMLA.
Employer reimbursements for qualified moving expenses would be considered taxable income, with the exception of members of the Armed Forces on active duty who move as the result of a military order.
Individuals will no longer be allowed to deduct the cost of qualified moving expenses on their personal returns, with the exception of members of the Armed Forces on active duty who move as the result of a military order.
Coverdell ESA's can be used to pay for up to $10,000 of elementary and high school expenses, including expenses in connection with homeschool.
529 savings plans can be rolled over to ABLE accounts of the 529 beneficiaries, or a member of the 529 beneficiary's family.
ABLE contributions will be increased after the initial $15,000 is reached, to the lesser of the beneficiary's compensation for that year, or the Federal Poverty Level for a one-person household. This additional contribution amount is not available to defined contribution plans, 402(b) annuities, or 457(b) plans.
Beneficiaries of an ABLE account may claim the Saver's Credit for contributions made to the ABLE account, with a credit limit of $2,000 ($4,000 for joint filers).
Student loan debt forgiven due to death or total disability will be excluded from taxable income.
An excise tax of 1.4% would be applied on the net investment income of certain private colleges and universities with 500 or more full-time tuition-paying students when more than 50% of those students are located in the U.S., and with assets of at least $500,000 per student.
Partners, S corporation shareholders, and sole proprietors will be allowed to deduct the "combined qualified business income amount" from their total business income, up to the lesser of 23% of their taxable income, or 50% of their share of W-2 wages paid by the business. The remaining business income after the deduction would be subject to individual tax rates as it is currently.
Corporate taxes would no longer follow the current tax brackets and would instead be subject to a single flat tax rate of 21%. Additionally, the special tax rate for personal service corporations, and the maximum corporate tax rate on net capital gain would be repealed.
The AMT imposed on corporations is repealed with additional rules regarding the application of AMT credits accumulated in prior years.
Business losses incurred by businesses other than C corporations, would be treated as Net Operating Losses carried forward to subsequent years. The amount allowed to be deducted in subsequent years against net income is limited to 90% of taxable income, until 2023 when it is limited to 80% of taxable income.
Business interest expense deductions will be limited to 30% of the business's "adjusted taxable income" with the excess carried forward indefinitely. Exceptions apply to real property trades or businesses (if elected, subject to other provisions), and small businesses.
The maximum amount a small business taxpayer may expense (under sec. 179) for the cost of depreciable tangible personal property used in a trade or business, is increased to $1,000,000 with a phase-out threshold amount of $2,500,000.
Bonus depreciation amounts allowed under sec. 168, are increased from 50% to 100% through 2022 with phase-downs to 80% in 2023; 60% in 2024; 40% in 2025; 20% in 2026; and 0% in 2027 and beyond.
A 10-year recovery period will apply to the depreciation of "qualified improvement property".
The deferral of gain on like-kind exchanges will only be allowed for real property, excluding real property held primarily for sale.
Corporate Net Operating Losses (NOLs) will only be allowed to be carried forward, and will be limited to 80% of taxable income.
A three-year holding period will be applied to long-term capital gains on certain "applicable partnership interests" received in connection with the performance of services.
A 20% tax credit will be given for qualified rehabilitation expenses with respect to historic buildings, to be claimed over a 5-year period.
The business tax credit for qualified clinical testing expenses for certain drugs or rare diseases or conditions is reduced to 25% with additional reporting requirements imposed.
Certain research and experimental expenses would no longer be deductible in the year of expense, and would instead be capitalized and amortized over a 5-year period, beginning in 2022.