By: Matthew Issent
Republicans in Congress passed tax reform into law just before the Christmas holiday. President Trump signed the ‘Tax Cuts and Jobs Act’ into law on December 22nd before leaving for vacation in Mar-a-Lago. The tax legislation makes major changes to individual and corporate tax rates, as well as changes to deductions and credits. It includes a number of other provisions not directly related to taxation. Here’s a survey over what’s included in the final plan:
Individual Tax Cuts
Tax cuts for individuals expire after 2025. Standard deduction for individuals will be doubled from $6,350 to $12,000 and for married couples from $12,700 to $24,000.
SALT (State and Local Tax) Deductions are now capped at $10,000. The SALT deduction was one of 6 deductions in place since the original income tax code became law in 1917. The capping of SALT deductions will impact states like California, New York, and New Jersey especially hard.
Although 88 percent of SALT benefits go to those with incomes in excess of $100K, the end of the deduction may negatively impact small business GOP Tax Bill Becomes Law owners and folks who live in high-cost cities like Los Angeles or New York City.
The Childcare tax deduction has been doubled to $2,000 per child, with a refundable limit that hits $1,400. The refundable portion will allow some families to reduce their tax obligation to zero and even receive money back when taxes are filed.
Corporate Tax Cuts
Corporate tax cuts are permanent, dropping from 35 percent to 21 percent. Business income that is filed by individuals (called passthrough businesses) will be able to deduct 20 percent of their qualified business income.
Shareholders are expected to benefit from the tax legislation in the form of shareholder payouts. Savings under the tax plan, according to a survey of 300 US Corporations, will be used to pay down debt, repurchase stocks, and invest in mergers.
The Alternative Minimum Tax (AMT) for corporations is permanently repealed in the tax plan. The Corporate AMT is set up to ensure that Corporations pay at least some income tax.
Also included is a one-time repatriation tax of “8 percent on illiquid assets and 15.5 percent on cash and cash equivalents for about $2.6 trillion in U.S. business profits now held overseas.” The provisions of the tax bill are expected to make incentives to store profits overseas obsolete.
The carried interest loophole is kept in place, allowing for a lower capital gains tax rate for investors that hold on to investments for more than three years. The prior limit was one year, but the change will still allow many investors to avoid the full brunt of the capital gains tax.
The Individual Mandate for Health insurance is repealed beginning in 2019. The repeal of the individual mandate is expected to increase healthcare premiums by 10 percent and 13 million Americans are expected to lose Healthcare by 2025.
Environmental provisions in the tax plan include the Arctic National Wildlife Refuge (ANWR) being opened for oil drilling. Renewable energy tax credits for wind, solar, and electric cars were preserved in the tax plan, despite moves in both House and Senate legislation to roll them back.
“This reform preserves a key form of finance for wind and solar projects, but creates uncertainty going forward by forcing annual calculations to see if the 80 percent threshold is hit by multinational tax equity financiers,” wrote Charles Hernick, from the Atlantic Council.
The estate tax will now exempt estates worth $10 million or less, up from $5 million. A number of Republicans hoped for outright repeal of the estate tax, but this was not included in any version of the tax bill passed through the Congress this year.
Like the Affordable Care Act (ACA) before it, this legislation was passed on part lines and by using the reconciliation process. Republicans have worked for years to repeal provisions of the ACA, it’s to be expected that Democrats will work in the future to make changes to the Tax Cuts and Jobs Act.