Major Tax Overhaul Approved

DECEMBER 21, 2017

President Trump celebrated the House and Senate passage of historic tax reform legislation. When the president signs the measure into law, it will fulfill one of his key campaign promises. Republicans now have to convince a skeptical public that the 560-page, $1.5 trillion measure will grow the U.S. economy and will personally benefit middle-income families. President Trump has not yet said when he will sign the bill into law.

A key element of the legislation is that it permanently lowers the federal corporate tax rate from 35 percent to 21 percent. It also lowers the tax burden on businesses that are “pass through” entities, such as S-Corporations, Limited Liability Companies (LLC), and general and limited partnerships.

Owners of pass-through companies who remit business taxes through their individual returns will see tax relief from a 20 percent of their pass-through business income. There are anti-abuse provisions in the legislation for those owners who collect a salary from the business. 

Under current law, there are seven individual tax brackets at 10, 15, 25, 28, 35 and 39.6 percent. The law maintains the seven separate brackets, but changes the rates and income thresholds in them:

  • 10 percent for individuals with income up to $9,525 and married couples filing jointly $19,050;
  • 12 percent for income in excess of $9,525 to $38,700 for individuals and over $19,050 to $77,400 for married couples filing jointly;
  • 22 percent for income between $38,700 to $82,500 for individuals and over $77,400 to $165,000 for married couples filing jointly;
  • 24 percent for income over $82,500 to $157,500 for individuals and over $165,000 to $315,000 for married couples filing jointly;
  • 32 percent for income between $157,500 to $200,000 for individuals and 315,000 to $400,000 for married couples filing jointly couples; 
  • 35 percent for income over $200,000 to $500,000 for individuals and over $400,000 to $600,000 for married couples filing jointly;
  • 37 percent for income over $500,000 for individuals and over $600,000 for married couples filing jointly.
The measure essentially doubles the “standard deduction” from $6,350 to $12,000 for individuals and from 12,700 to $24,000 for married couples. It is anticipated that the standard deduction increase will result in fewer individuals electing to itemize deductions on their tax returns.

The legislation eliminates or caps several popular deductions, including mortgage interest and state and local taxes. State and local tax deductions will be subject to a $10,000 cap, which is expected to hit taxpayers in states with high property taxes, such as New York and California.

Mortgage interest may only be deducted on debt up to $750,000, which is a $250,000 reduction from the 2017 level of $ 1 million. The final law does maintain deductions for student loan interest and medical expenses. Notably for business owners, employers previously offering a “commuter benefit,” such as a transit pass or a subway card, will now no longer be able to deduct the cost of that benefit.

Importantly for many family-owned ILMA members, while the legislation does not repeal the estate tax, it doubles the exemption from $5.6 million to $11.2 million and will adjust for inflation moving forward.

The measure eliminates the “individual mandate” from the Affordable Car Act that required every person to purchase health insurance or pay a penalty to the Internal Revenue Service. The law reduces the penalty to $0, starting January 1, 2019.

The passage of the bill has set off a scramble for individuals and businesses to understand the changes and to take advantage of any year-end steps to minimize their tax bills.

The legislation also will be a central issue in next year’s midterm congressional elections. Republicans hope the measure will spur economic growth and will win over a public that polls suggest oppose the legislation. Democrats can be expected to characterize the measure as a giveaway to the wealthy.