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December 18, 2017

Tax Cuts and Jobs Act Update: Final Tax Bill

House & Senate Agree on Final Tax Bill

This past Friday, Congress released the conference committee report on the final tax bill to be voted on by the House and Senate this week.  The House will undoubtedly approve the bill and although the Senate is also expected to approve the bill, there is less certainty, as the health and support of several Republican Senators are in question.  All that will remain after that will be the President’s signature.  Most of the legislation will take effect January 1, 2018, impacting 2018 tax returns.  With or without the new tax law there are two weeks left in 2017 and still time to implement important year-end tax planning.  Below are the highlights of the final version of the bill:

Income tax brackets:  The final bill lowers the top tax rate for individuals earning $500,000 (single) and $600,000 (joint) to 37%.  The final tax brackets would include 10%, 12%, 22%, 24%, 32%, 35% and 37%.  The rates would return to the current brackets on January 1, 2026.

Personal exemption and standard deduction:  Personal exemptions would be eliminated and the standard deduction is increased to $12,000 (single) and $24,000 (joint).

State & local tax deduction: After much debate regarding this deduction, the final bill keeps all state taxes (income, sales and property) deductible, but caps the deduction to a maximum of $10,000.  Also, individual taxpayers can choose to deduct state sales, income or property tax.  Property and income taxes may be aggregated in order to reach the $10,000 maximum. 

Mortgage interest deduction:  The mortgage interest deduction does not change for existing mortgages (i.e. for debt up to $1,000,000).  For new mortgages (beginning January 1, 2018) mortgage interest will be deductible for up to $750,000 of debt.  The additional interest deduction on home equity debt is eliminated. 

Child tax credit:  The final bill increases the child tax credit from $1,000 to $2,000.

Alternative Minimum Tax:  The final bill repeals AMT for corporations, but keeps it for individuals (with an increased exemption). 

Corporate tax rate:  The final bill reduces the corporate tax rate to 21%, effective January 1, 2018.  The bill eliminates NOL carrybacks.  NOLs would be carried forward indefinitely, but the deduction in any one year would be limited to 80% of taxable income.

Pass-through deduction:  The final bill creates a deduction of 20% of “qualified business income” for pass-through income from certain S corporations, partnerships and sole proprietorships.  The deduction is taken on the individual’s, trust’s or estate’s tax return.  Generally, if an individual’s income exceeds $157,500 (single), $315,000 (joint) then most service businesses would not qualify (e.g. law firms and accounting firms), however, the final bill does allow engineering and architectural firms to qualify (the original Senate bill excluded those companies from qualifying).  Also, originally the Senate bill did not permit trusts and estates to take this deduction, but the final bill does. 

Business interest deduction:  The final bill generally limits businesses’ interest deduction to 30% of a company’s earnings before interest, tax, depreciation and amortization.  

Capital expenditures:  The final bill generally allows a 100% deduction for qualified capital expenditures placed in service during the period after September 27, 2017 and before January 1, 2023.  Afterwards, the expensing is phased out by 2027.  Importantly, the final bill eliminates the rule that requires that the original use of the qualified property begin with the taxpayer.

Estate tax:  The final bill keeps the estate tax in place, but doubles the exemption.

International:  The final bill creates a mandatory tax on foreign accumulated earnings.  U.S. shareholders of foreign corporations would be subject to a tax foreign earnings, 15.5% on earnings held in cash or cash equivalents and 8% on non-liquid assets.  Also, U.S. shareholders would be eligible for a 100% deduction for foreign sourced dividends received from 10% owned foreign corporations.  

This is a follow-up to our last article, Tax Cuts and Jobs Act Update: Senate Approves Tax Bill. We will continue to monitor this closely and update you with any additional changes. In the meantime, if you have any questions, please contact us at 973.994.9400 or Evan Gernant, CPA at egernant@wiss.com.