As we await President Trump’s signature on the final tax legislation, we outlined the key changes to the United States tax laws (“Reform”) that will impact individuals and businesses based on the final Republican bill that was approved by the House of Representative and the United States Senate. We divided our overview between individuals and businesses below.
INDIVIDUALS
Federal Income Tax Changes
Individual income tax rate reductions will begin on January 1, 2018 and expire on December 31, 2025. The standard deduction, which is currently $6,350 for single filers and $12,700 for married couples filing jointly, will be increased to $12,000 and $24,000, respectively. Numerous deductions will be eliminated, including the personal exemption, which was $4,050 for individuals, spouses, and each dependent in 2017. The elimination of the personal exemption may adversely affect individuals and families with a large number of dependents.
The Reform also eliminates the deduction on interest on home equity loans and the individual healthcare mandate that imposes a fine on many Americans who do not own health insurance.
State and local tax deductions for individuals under the Reform will be capped at $10,000, which may include a combination of property taxes and either sales or income taxes. This change will likely detrimentally impact residents of states with high state income tax rates, such as New York and New Jersey. It may be advantageous to prepay any outstanding state and local real estate taxes before the standard deduction increases. However, taxpayers cannot claim a deduction from prepaying state and local income taxes.
Deductible mortgage interest is currently capped at loans of $1 million. Deductible mortgage interest for new purchases of first or second homes will be capped on loans of up to $750,000 starting on January 1, 2018. In 2026, the cap will also be $1,000,000, regardless of the date in which the debt was incurred. The medical expense deduction will move the floor from 10% of adjusted gross income to 7.5% and is retroactive to this year but the deduction is only applicable if you itemize deductions.
The child tax credit, which is currently $1,000 per child, will double to $2,000 per child and will be refundable up to $1,400, subject to certain phase-outs. In 2018, the phase-out amount will be increased to $400,000 and the refundable portion will be capped at $1,400.
Although an earlier proposal eliminated the individual alternative minimum tax, the current proposal increases exemptions and phase-outs. The exemption will increase from $54,300 to $70,300 for individuals and $84,500 to $109,400 for joint filers. The phase-out threshold will also be increased to $500,000 for individuals and $1 million for joint filers. These higher limits are scheduled to expire on January 1, 2026.
Single Filers
| Tax Bracket | Tax Rate (2017) | Proposed Bracket | Proposed Tax Rate |
| $0 to $9,325 | 10% | $0 to $9,525 | 10% |
| $9,325 to $37,950 | 15% | $9,525 to $38,700 | 12% |
| $37,950 to $91,900 | 25% | $38,700 to $82,500 | 22% |
| $91,900 to $191,650 | 28% | $82,500 to $157,500 | 24% |
| $191,650 to $416,700 | 33% | $157,500 to $200,000 | 32% |
| $416,700 to $418,400 | 35% | $200,000 to $500,000 | 35% |
| $418,400 and above | 39.6 | $500,000 and above | 37% |
Married Filing Jointly
| Tax Bracket | Tax Rate (2017) | Proposed Bracket | Proposed Tax Rate |
| $0 to $18,650 | 10% | $0 to $19,050 | 10% |
| $18,650 to $75,900 | 15% | $19,050 to $77,400 | 12% |
| $75,900 to $153,100 | 25% | $77,400 to $165,000 | 22% |
| $153,100 to $233,350 | 28% | $165,000 to $315,000 | 24% |
| $233,350 to $416,700 | 33% | $315,000 to $400,000 | 32% |
| $416,700 to $470,700 | 35% | $400,000 to $600,000 | 35% |
| $470,700 and above | 39.6 | $600,000 and above | 37% |
Many United States taxpayers may wish to take advantage of charitable deductions before year-end. For example, Jerry and Sherry, who file a joint return, have $20,000 in itemized deductions. Jerry and Sherry have $12,000.00 of appreciated stock that they are donating to charity. Their standard deduction in 2017 is $12,700 and they enjoy a benefit of $7,300 over their standard deduction. Under the new tax law, their standard deduction will be $24,000 in 2018. As such, Jerry and Sherry will derive no tax benefit from their itemized deductions in 2018, which includes a $24,000 standard deduction. In this example, Jerry and Sherry will enjoy an added tax benefit in 2017 without losing any tax benefits in 2018.
Estate Tax
The Reform doubles the estate tax exemption to $10 million per person, which is indexed for inflation. As such, the estate tax will likely apply to even fewer estates but the estate tax rate of 40 percent will remain unchanged. The increased estate tax exemptions will be effective through December 31, 2025. The estate tax exemption will be indexed for inflation starting again on December 1, 2019. It is important to take advantage of the new unified credit amounts prior to the scheduled sunset on December 31, 2025, at which time the unified credit will revert to 2017 levels, provided that there are no extensions or patches to the Reform after enactment.
BUSINESSES
One of the primary goals of the Reform is to make the United States more competitive in the global marketplace. Corporations will likely benefit greatly from the Reform, which reduces the federal income tax rate from 35% to 21% and repeals the corporate alternative minimum tax as of January 1, 2018. Unlike the proposed laws pertaining to individual taxpayers, there are no sunset or expiration dates on the corporate tax rates.
Pass-through businesses, which include certain partnerships, limited liability companies, S corporations, real estate investment trusts and sole proprietorships, may apply a 20 percent deduction to their business income if the taxpayer’s W-2 income is at least $315,000 for married couples ($157,500 for single taxpayers). The deduction decreases the maximum marginal tax rate on certain pass-through businesses to 29.6 percent. Like many other sections of the Reform, there are exceptions. The 20 percent deduction cannot exceed 50 percent of a taxpayer’s share of the W-2 wages paid by the business and certain “personal services businesses,” such as doctors, accountants and lawyers, are not entitled to the deduction.
In addition, new foreign-sourced income rules are intended to transition the United States to a territorial tax system, which is in stark contrast to the previous system that imposed a tax on worldwide income. The territorial approach exempts certain foreign active business income by providing a 100 percent deduction to U.S. corporations (but not U.S. individuals) on dividends received from foreign subsidiaries if the U.S. corporation owns at least a 10 percent interest of the foreign subsidiary. The territorial proposal allows future offshore earnings to be repatriated to the U.S. without additional tax, which allows U.S.-based corporations immediate access to their foreign cash.
Presently, the U.S. taxes multinational companies on their global earnings at the corporate rate of 35 percent but taxes on foreign earnings may be deferred until the company repatriates (meaning to “bring back”) the funds to the United States.
The transition to a territorial system includes a one-time tax on all foreign earnings, in which all funds are treated as if they were all repatriated. The Reform proposes a tax on foreign earnings that are held in cash or cash equivalents at a rate of 15.5 percent and reinvested earnings held in illiquid assets will be taxed at 8 percent. The one-time tax liability on repatriated funds may be repaid over an eight-year period in uneven installment payments.
The Reform also allows businesses to immediately deduct the cost of certain depreciable assets, not including buildings, purchased after September 27, 2017 but before January 1, 2023. After January 1, 2023, the percentage of depreciable assets that may be immediately deducted will gradually be phased down. Before the Reform, businesses depreciated the cost of depreciable assets over several years.
Michael Salad is a partner in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on estate planning, business transactions, mergers and acquisitions, tax matters and cyber risk management. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in New Jersey, Florida and the District of Columbia. Michael may be reached at 609.572.7616 or via e-mail at msalad@cooperlevenson.com.
Jarad Stiles is a member of Cooper Levenson’s Business and Tax and Estate Practice Groups. He focuses on estate and corporate tax planning, business succession planning, administration, tax litigation, elder law, and related matters. Jarad holds an LL.M. in Taxation. Jarad is licensed to practice in New Jersey, New York, and the United States Tax Court. Jarad may be reached at 856.857.5994 or via e-mail at jstiles@cooperlevenson.com.
Every tax payer’s situation is different. Depending on a myriad of factors certain tax payers may be subject to phase outs and the alternative minimum tax. Please see your tax professional for your specific situation.
