On Friday, December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 (TCJA), which had passed the House and the Senate two days earlier by votes of 227 to 203 and 51 to 48, respectively. This article provides an in-depth explanation of the sweeping tax overhaul that will affect virtually every individual and business taxpayer in the United States.
Introduction
With respect to individuals, some of the more notable items included in TCJA are:
- the provision of seven tax brackets, with a top rate of 37 percent (the top rate under present law is 39.6 percent);
- a repeal of the personal exemption deductions and an increase in the standard deduction amounts to $24,000 for joint filers and surviving spouses, $18,000 for heads of household, and $12,000 for unmarried taxpayers and married taxpayers filing separately (additional amounts for the elderly and blind are retained);
- a $10,000 limit on the deduction for state and local taxes, which can be used for both property taxes and income taxes (or sales taxes in lieu of income taxes);
- a $750,000 limit on the loan amount for which a mortgage interest deduction can be claimed by individuals, with existing loans grandfathered, and the repeal of interest deductions on home equity indebtedness;
- a repeal of miscellaneous itemized deductions subject to the 2 percent of adjusted gross income floor;
- a repeal of the personal deduction for casualty and theft losses, except for losses incurred in presidentially declared disaster areas;
- an increase in the child tax credit to $2,000 ($1,400 is refundable) and an increase in the phaseout threshold amounts to $400,000 for joint filers and $200,000 for all others (the credit is $1,000 under present law and is fully refundable);
- an increase in the alternative minimum tax (AMT) exemption amounts and the adjusted gross income thresholds at which the exemption amount begins to phase out;
- a repeal of the deduction for alimony paid and corresponding inclusion in income by the recipient, effective for tax years beginning in 2019 (alimony paid under a separation agreement entered into prior to the effective date is generally grandfathered);
- permanent repeal of the individual shared responsibility payment (individual healthcare mandate) enacted as part of the Affordable Care Act (ACA); and
- the expiration of most of the TCJA's individual tax provision changes after December 31, 2025.TCJA also provides a 20 percent deduction against qualified business income from passthrough business entities. The provision includes relatively relaxed rules for calculating qualified business income for individuals with taxable income below certain thresholds ($315,000 for joint filers, $157,500 for all others), and stricter ones that are phased in for individuals with taxable income above the thresholds.
TCJA reduces the corporate tax rate to 21 percent and fully repeals the corporate alternative minimum tax. Both changes are effective for tax years beginning after December 31, 2017.
Other important business-related changes include (1) 100% bonus depreciation for qualified property placed in service before January 1, 2023; (2) a permanent increase in the Section 179 expensing limit to $1,000,000 (up from $500,000 under present law) and a permanent increase in the phase-out threshold amount to $2,500,000 (up from $2,000,000 under present law); (3) a change in the law that will allow more businesses to qualify for the cash method of accounting; and (4) an exemption from the requirement to use inventories for certain taxpayers.
TCJA also makes changes to certain partnership rules, including (1) the repeal of the technical termination rule in Code Sec. 708(b); (2) the recharacterization of certain gains in the case of partnership profits interests held in connection with the performance of investment services; (3) the modification of the definition of substantial built-in loss in the case of the transfer of a partnership interest; and (4) a modification of the basis limitation on partner losses to account for a partner's distributive share of partnership charitable contributions and foreign taxes.
I. Changes Affecting Individuals
II. Estate and Gift Tax Changes
III. Deduction for Qualified Business Income of an Individual (Passthrough Break)
VI. Retirement Plan-Related Changes
