The Tax Cuts and Jobs Act: What You Need to Know
November 3, 2017
After months of discussion, the Republicans in the House of Representatives released the Tax Cuts and Jobs Act on November 2, representing a first attempt at legislating some of the previously proposed reforms. While the Act will likely go through several changes before it becomes law, this marks a significant step forward in attempting to enact tax reform prior to the end of 2017.
The Tax Cuts and Jobs Act
The Act, authored by House Ways and Means Chairman Kevin Brady, adopts many of the principles outlined in the nine-page framework released in September which earlier proposed overhauls to the U.S tax code.
Key Changes for Corporate Tax Planning Purposes
Corporations are the focus of most of the tax cuts outlined in the Act. Some of the main changes include:
Corporate Tax Rates
The Act proposes to reduce the federal corporate income tax rate from 35% to 20%, effective immediately and not phased in over time.
Pass-Through Business Tax Rates
Individuals doing business via pass-through entities such as partnerships or limited liability companies treated as partnerships would be eligible for a newly introduced 25% federal income tax rate.
Net Operating Loss Deductions
The Act limits the deduction of net operating losses to 90% of a taxpayer’s taxable income. Net operating losses could be carried forward indefinitely, instead of being limited to being carried over for 20 years only.
Repatriation Tax Rate
The Act seeks to implement a repatriation rate, a mandatory one-time tax on overseas assets of U.S companies. Any illiquid assets would be taxed at a 5% rate, spread over a longer period than liquid assets (such as cash) which would be taxed at a 12% rate.
Key Changes for Personal Tax Planning Purposes
The House Ways and Means Committee announced that:
The Tax Cuts and Jobs Act will deliver real tax relief to Americans across the country – especially low- and middle-income Americans who have been struggling for far too long to earn a raise and get ahead. With this bill, a typical middle-income family of four, earning $59,000 (the median household income), will receive a $1,182 tax cut.
Changes that will affect individuals include:
New Individual Tax Brackets
The Act would reduce the number of income tax brackets from the current seven down to four, leaving capital gains rates intact and the highest rate untouched.
The highest tax bracket would remain at 39.6%. The new brackets would be as follows:
- 12%: applicable to incomes up to $45,000 for an individual and $90,000 for married couples;
- 25%: applicable to incomes up to $200,000 for an individual, and $260,000 for married couples;
- 35%: applicable to incomes up to $500,000 for an individual, and $1 million for married couples.
Changes to Local and State Deductions
A huge roadblock in previous tax reform discussion were the proposals to end state and local tax deductions, which would have allowed individuals to deduct state taxes from their federal tax bill. Brady recently announced that the Republicans had reached a deal that would allow individuals to deduct state and local property taxes up to $10,000, but not income or sales taxes.
Elimination of the Estate Tax
The Act would double estate, generation-skipping, and gift tax exemptions from $5.6 million for individuals/$11.2 million for married couples, to $11.2 million for individuals/$22.4 million for married couples. The Act seeks to phase out the estate and generation-skipping tax after six years. Canadian residents would be able to benefit from estate tax changes in accordance with the terms of the cross-border tax treaty.
Repeal of the Alternative Minimum Tax
The Act seeks to repeal the alternative minimum tax (AMT).
Bill Expected to Move Through Government Quickly
Brady predicts that the Bill should be passed by the House by Thanksgiving, in line with President Trump’s desire to sign the Bill into law by Christmas. The Senate is expected to use the budget reconciliation process to move the Bill through quickly and avoid a Democratic filibuster. The process allows for expedited passage of certain legislation (including laws on spending, revenue, and the federal debt limit) with a simple majority vote in both the House (218 votes) and the Senate (51 votes).
We will continue to follow developments with respect to the Act, and will provide updates as they become available. In the meantime, if you have questions about personal or corporate tax planning, contact Feigenbaum Law. We offer customized tax and financial planning solutions to clients in the U.S., Canada, and around the globe. Contact us online or at (905) 695-1269 or toll-free at (877) 275-4792.to learn about how we can help with complex, cross-border tax planning.