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United States Tax Reform Highlights

By Editorial
January 25, 2018

On December 21, 2017, United States President Donald Trump signed into the law the most far-reaching changes to the US tax code in more than 30 years. The key provisions of the legislation, known as the Tax Cuts and Jobs Act (TCJA), affecting corporations, individual business income, and individual taxpayers, are summarized in this special feature.

Corporate Tax Rate

The TCJA brings about sweeping changes for corporations, with corporate tax cut from a maximum of 35 percent (previously the highest rate in the OECD), to a flat rate of 21 percent, as from January 1, 2018.

International Taxation

As part of a move towards a more territorial form of corporate taxation, a goal long-held by Republicans, the legislation provides for an exemption for certain foreign income. This takes the form of a 100 percent deduction for the foreign-source portion of dividends received from specified 10 percent-owned foreign corporations by domestic corporations that are US shareholders of those foreign corporations.The measure is effective for distributions made after 2017.

Under the TJCA, any US shareholder of a specified foreign corporation must include in income its pro rata share of the undistributed, non-previously taxed post-1986 foreign earnings of the corporation. This income is subject to a one-off, two-tier deemed repatriated tax, of 15.5 percent for liquid assets, and 8 percent for illiquid assets.

Pass-Through Income

The TCJA allows small business owners to take advantage of a 20 percent tax deduction on pass-through business income under the reforms. Shareholders or partners of pass-through entities, such as S corporations and partnerships, are taxed under the personal income tax regime.

When combined with the lower top rate of individual income tax (see below), this is designed to provide an effective tax rate on pass-through income of 29.6 percent. The 20 percent deduction will apply to the first USD315,000 of joint business income earned by S corporations, partnerships, LLCs, and sole proprietorships.

Business Expensing

The additional first-year depreciation deduction is increased by the TCJA, froma 50 percent allowance to 100 percent for property (excluding structures) acquired and placed in service after September 27, 2017, and before January 1, 2023. The proportion that can be expensed is decreased by 20 percent per year thereafter. Used property, as well as new property, qualifies for bonus depreciation.

Additionally, the final bill increases small business expensing under Section 179 of the tax code to USD1m. The provision begins to phase out at a threshold of USD2.5m. Under existing law, Section 179 expensing is capped at USD200,000, with phase-out beginning at USD2m.

Business Interest Deductions

The TCJA restricts interest deductions to 30 percent of unadjusted taxable income. Unused deductions may be carried forward indefinitely. Taxpayers with average gross receipts of less than USD25m for the three previous tax years are exempt from this restriction.

Business Losses

New net operating loss deduction rules generally limit the deduction to 80 percent of taxable income, applicable to losses arising in taxable years beginning after 2017. Losses may be carried forward indefinitely, but may not be carried back.

Other Business Deductions and Credits

Certain corporate tax credits and deductions have been repealed by the TCJA, including the Section 199 deduction for domestic manufacturing activities, and the low-income housing credit. However, the Work Opportunity Tax Credit, and the New Markets Tax Credit remain in place. The research and development tax credit was also retained.

Personal Taxation

Individual Tax Rates

For individual taxpayers, the TCJA retains a seven-tier income tax regime, but with lower rates. Notably, this has the effect of reducing the top rate of income tax from 39.6 percent to 37 percent.

For single individuals, the new rates are placed at the following income thresholds:

  • Up to USD9,525 – 10 percent of the taxable income
  • Over USD9,525 but not over USD38,700 – 12 percent
  • Over USD38,700 but not over USD82,500 – 22 percent
  • Over USD82,500 but not over USD157,500 – 24 percent
  • Over USD157,500 but not over USD200,000 – 32 percent
  • Over USD200,000 but not over USD500,000 – 35 percent
  • Over USD500,000 – 37 percent

For joint filers, the rates and thresholds are:

  • Up to USD19,050 – 10 percent of the taxable income
  • Over USD19,050 but not over USD77,400 – 12 percent
  • Over USD77,400 but not over USD165,000 – 22 percent
  • Over USD165,000 but not over USD315,000 – 24 percent
  • Over USD315,000 but not over USD400,000 – 32 percent
  • Over USD400,000 but not over USD600,000 – 35 percent
  • Over USD600,000 – 37 percent

Under previous law, these rates were 10, 15, 25, 28, 33, 35, and 39.6 percent.

In addition, the standard deduction for individuals was increased from USD6,500 to USD12,000 for single filers, and from USD13,000 to USD24,000 for joint filers.

Individual Deductions

The TCJA retains and expands the deduction for charitable donations, but curtails and repeals many other itemized deductions. Taxpayers can continue to deduct mortgage interest, but subject to a new cap of USD750,000 in mortgage debt. Taxpayers can also continue claiming a deduction for state and local property and sales or income taxes (but not both), but only up to a maximum of USD10,000. Such deductions were unlimited under previous law.

The medical expense deduction, currently 10 percent, is lowered to 7.5 percent for 2018, and will revert to its former level from 2019.

Other itemized deductions are eliminated.

Child Tax Credit (CTC)

The CTC increases from USD1,000 to USD2,000, of which USD1,400 is refundable. The credit phase-out threshold increases to USD400,000 for joint filers, up from USD110,000 under existing law. Those ineligible for the CTC may qualify for a USD500-per-child family tax credit, which phases out for joint filers beginning with income of USD400,000.

Alternative Minimum Tax (AMT)

The bill retains the individual AMT, although the exemption limit will be raised to USD109,400, with the phase-out threshold increased to USD1m for joint filers. Under current law, the exemption amount is USD86,200, and the phase-out threshold is set at USD164,100 for joint filers.

Obamacare Individual Mandate

The TCJA also reduces the Obamacare individual mandate to zero from 2019, which effectively amounts to a repeal of the provision. The individual mandate, a key pillar of the Affordable Care Act, had required US taxpayers to pay a tax penalty if they failed to maintain a minimum level of health insurance.


Tags: tax | Tax | law | business | individuals | legislation | interest | Other | small business | individual income tax | United States | dividends | insurance | tax credits | research and development | Personal Tax | Tax Rates | Work | proprietors | manufacturing



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