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US Achieves Landmark Comprehensive Tax Reform

by Mike Godfrey, Tax-News.com, Washington

26 December 2017


US President Donald Trump has signed the Tax Cuts and Jobs Act into law. The bill will bring about sweeping changes to the US tax code for the first time in 30 years and slash the high corporate income tax rate to a competitive 21 percent.

The TCJA was passed a second and final time by the House of Representatives on December 21 in a 224-201 vote after both chambers had earlier approved a compromise version. It was then signed into law on December 22.

The bill brings about sweeping tax cuts for corporations from 2018, with corporate tax, which currently tops 35 percent, to be reduced to a flat rate of 21 percent, and a form of territorial corporate taxation to be introduced through the provision of a 100 percent dividend tax exemption on the foreign income of domestic corporations, provided the domestic corporations own at least 10 percent of the foreign subsidiary.

In addition, there will be a deemed repatriation tax on foreign deferred income of US corporations of 15.5 percent for cash and eight percent for illiquid assets.

Small business owners will be able to take advantage of a 20 percent tax deduction on pass-through business income under the reforms, up from 17.9 percent in the original Senate proposals, and in preference to the 25 percent tax cap initially favored by the House.

For individual taxpayers, the bill retains a seven-tier income tax regime but with lower rates. These are set at 10, 12, 22, 24, 32, 35, and 37 percent. Under existing law, these rate are 10, 15, 25, 28, 33, 35, and 39.6 percent.

In addition, the standard deduction for individuals will be increased to USD12,000 for single filers, USD18,000 for heads of household, and USD24,000 for joint filers.

The individual tax rate changes and the higher standard deductions are set to expire in 2025.

The bill retains and expands the deduction for charitable donations but curtails and repeals many others. The mortgage interest deduction is retained for new purchases, subject to a cap of USD750,000 in mortgage debt. Taxpayers will also be able to continue claiming a deduction for a combination of state and local taxes, but only up to a maximum of USD10,000. Such deductions are unlimited under existing law.

The bill retains the individual alternative minimum tax (AMT), although the exemption limit will be raised. The corporate AMT will be eliminated.

The bill 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, requires US taxpayers to pay a tax penalty if they fail to maintain a minimum level of health insurance.

TAGS: individuals | tax | business | interest | law | insurance | corporation tax | transfer pricing | United States | individual income tax | Tax | BEPS

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