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Tax Reform Bill Moves Closer to Enactment

December 20, 2017

Following the passage of separate tax reform bills by the House of Representatives and the Senate in November and early December, respectively, a conference committee met to draft a reconciliation bill. On Friday, December 15, 2017, the conference committee announced that an agreement had been reached on tax reform. Both the House and the Senate have now passed the compromise bill, which will now go to President Trump for his signature. The enactment of this bill represents the most comprehensive tax reform package since the Tax Reform Act of 1986.

Below is a brief summary of certain key provisions of the compromise tax reform bill. Note that, due to budgetary constraints, many of these revisions that affect non-corporate taxpayers are effective only for taxable years beginning after 2017 and before 2026.

  • Individual Tax Rates*
    • There are now seven individual income tax brackets, with the highest marginal rate reduced from 39.6% to 37%. The new tax rates and the taxable income level for a married couple filing jointly or surviving spouse and for heads of households are as follows:
Tax Rate Taxable Income (Married, Filing Jointly/Surviving Spouse) Taxable Income (Heads of Households)
10% Not over $19,050 Not over $13,600
12% Over $19,050, but not over $77,400 Over $13,600, but not over $51,800
22% Over $77,400, but not over $165,000 Over $51,800, but not over $82,500
24% Over $165,000, but not over $315,000 Over $82,500, but not over $157,500
32% Over $315,000, but not over $400,000 Over $157,500, but not over $200,000
35% Over $400,000, but not over $600,000 Over $200,000, but not over $500,000
37% Over $600,000 Over $500,000
  • The new tax rates and the taxable income levels for unmarried individuals (other than surviving spouses or heads of households) and married couples filing separately are as follows:
Tax Rate Taxable Income (Married, Filing Jointly/Surviving Spouse) Taxable Income (Heads of Households)
10% Not over $9,525 Not over $9,525
12% Over $9,525, but not over $38,700 Over $9,525, but not over $38,700
22% Over $38,700, but not over $82,500 Over $38,700, but not over $82,500
24% Over $82,500, but not over $157,500 Over $82,500, but not over $157,500
32% Over $157,500, but not over $200,000 Over $157,500, but not over $200,000
35% Over $200,000, but not over $500,000 Over $200,000, but not over $300,000
37%

Over $500,000

Over $300,000
  • Increased Standard Deduction*
    • The standard deduction for individuals has been increased as follows:
Married, Filing Jointly/Surviving Spouse Heads of Households

Unmarried (other than surviving spouse or head of household)

Married, Filing Separately
$24,000 $18,000 $12,000 $12,000
  • Suspension and Limitations on Itemized Deductions*
    • In connection with the increase in the standard deduction, miscellaneous itemized deductions (such as tax return preparation fees, investment expenses, etc.) have been suspended through 2025.
    • Other itemized deductions, including the state and local tax (“SALT”) deduction and the home mortgage interest deduction, have been scaled back through 2025.
      • Individuals are now limited to a SALT deduction of $10,000 (applicable to property taxes, and either income or sales taxes).
      • Home mortgage interest expense deductions on debt incurred after December 15, 2017, will be limited to mortgage debt not in excess of $750,000 for a married couple filing jointly ($375,000 for a married individual filing separately).
      • Interest on home equity loans will not be deductible.
  • Suspension of Personal Exemptions*
  • Business-Related Interest Expense Deductions
    • Deductions for interest expense incurred in connection with a business will be limited based on a formula tied to “EBITDA” (earnings before interest, taxes, depreciation and amortization) through 2021, and thereafter will be limited based a formula tied to “EBIT” (earnings before interest and taxes, which is a lower base).
    • This limitation on the deduction of interest does not apply to taxpayers with average gross receipts of $25 million or less.
  • Pass-through Taxation
    • Non-corporate owners of pass-through businesses (including sole proprietorships) are entitled to a new 20% deduction determined by reference to either their taxable income or certain qualified business income.
    • The availability and calculation of the deduction are subject to a complex set of rules that take into account, without limitation, the amount of wages paid in connection with a qualifying trade or business, the amount of taxable income earned by the owners of the pass-through business, and the type of trade or business carried on.
  • Estate and Gift Taxes
    • The estate and gift tax unified credits are increased to $11 million (after an inflation adjustment) in the case of estates of decedents dying and gifts made through 2025.
  • Reduction in the Corporate Tax Rate, Corporate AMT and NOLs
    • The maximum corporate tax rate has been reduced from 35% to 21%, effective for tax years beginning after 2017.
    • The corporate alternative minimum tax is repealed.
    • Net operating losses (“NOLs”) no longer can be carried back (except in very limited circumstances) and NOL carryforwards can be carried forward indefinitely, but can only offset 80% of taxable income in a taxable year.
  • International Taxation
    • U.S. taxpayers will no longer be taxed on their worldwide income, but instead will be taxed under a modified territorial regime.
      • The modifications include a “base erosion and anti-abuse tax,” which applies a 10% tax (5% in 2018, 12.5% after 2025) on the income of multinational U.S. taxpayers that make “excessive” deductible payments to their foreign affiliates.
      • There will also be a minimum tax applied to “global intangible low-taxed income.”
      • Taxpayers with offshore profits that have not been taxed in the U.S. are subject to immediate taxation at a 15.5% rate (for cash and liquid assets) and an 8% rate on illiquid assets.

In addition to these changes, there are numerous other changes in the conference bill that affect a wide variety of taxpayers and industries.

Please contact James H. Combs, Honigman’s Tax Practice Group Leader, or one of the other tax attorneys in Honigman’s Tax Practice Group for advice on how tax reform may impact you, your family, or your company and for factors to consider before the end of the year.

*In effect for taxable years beginning after December 31, 2017, and before January 1, 2026.