Ed Mills, Washington Policy Analyst, breaks down the major components of the new tax legislation.
January 11, 2018
The tax bill lowering the corporate tax rate and making a number of adjustments to the individual tax code was signed into law on December 22, 2017. The final tax bill sets a corporate tax rate of 21% starting January 1, 2018, and makes a number of changes to individual tax rates (including lowering the top individual to 37%). Key changes on the individual side include doubling the standard deduction ($12,000 for individuals and $24,000 for joint filers) but the bill reduces and/or removes many existing deductions. On the corporate side of the bill, businesses will have the benefit of 100% depreciation of qualified capital expenditures for the next five years, repeal of the corporate AMT, and a shift towards a territorial tax system (from a worldwide tax system). The bill also repeals the individual mandate of the Affordable Care Act (ACA). In this report, we review the changes to the corporate and individual tax code and cover next steps on tax legislation in 2018.
Seven tax brackets are retained, but the bill provides tax relief by changing the income thresholds and tax rate for most taxpayers. The bill also lowers the top rate to 37% (starting at $600,000 for joint filers). The standard deduction is doubled to $12,000 for individuals and $24,000 for joint filers. Personal exemptions are eliminated, and SALT deductions are capped at $10,000. Mortgage interest deductions are capped interest on loans below $750,000, but grandfathers existing loans at $1 million. The individual AMT is retained, but narrowed with a raised phase-out threshold at $1 million.
Lowering the corporate tax rate to 21% and moving to territorial taxation are the key parts of the corporate tax changes. The corporate alternative minimum tax (AMT) is eliminated. Repatriated earnings will be subject to a 15.5% tax on liquid assets and 8% on other earnings and profits with an eight-year repayment window. Net interest deduction is limited to 30% of adjusted taxable income, and net operating loss deductions are capped at 80% of taxable income. Capital expenditures see full depreciation and are 100% deductible for five years. For small businesses, the capital investment deduction limit under Section 179 is increased from $500,000 to $1 million.
Guidance and interpretations are expected from the IRS over the course of the year. House Ways and Means Committee Chairman Kevin Brady (R-TX) anticipates work will continue on tax legislation with corrections to streamline and clarify provisions in the final bill expected this year. Congressional Republicans may attempt to work with Democrats on fixes that require 60 votes to pass the Senate, but have also signaled that the budget reconciliation measure used to pass tax reform with a 51 majority vote may be used again on issues where bipartisan compromise cannot be reached. This will usher in a new round of debates about which provisions could see further revision (including a potential SALT fix).
See below the changes to the corporate and individual tax code in the final tax bill.
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