Last night the Senate signed a slightly modified version of the Tax Cuts and Jobs Act, a key hurdle in passing the tax legislation. While the House needs to vote again today, the bill is expected to be signed into law later this week, creating the biggest overhaul of U.S. tax code since the 1980s.
Highlights of the changes
While the legislation includes hundreds of changes, here are some of the highlights.
Perhaps the biggest change is the reduction of the corporate tax rate form 35 percent to 21 percent. This change to the corporate tax rate is permanent, and brings the U.S. closer to the rates found in other industrialize countries, which average 22.5 percent. For corporations the alternative minimum tax (AMT) would be repealed. Corporations could continue to use their AMT credits to offset their regular tax liability; credits would be partially refundable in tax years 2018 through 2021.
The corporate net interest expense deduction also has changes. This deduction would be limited to 30 percent of a business’s adjusted taxable income. In 2018 through 2021, adjusted taxable income would be based on EBITDA; after 2021 the calculation would be based on EBIT. Interest amounts greater than 30 percent could be carried forward into future tax years.
For individuals, tax rates for most of the seven tax brackets have been lowered, ranging from 10 percent to 37 percent, and the Affordable Care Act individual health insurance mandate has been eliminated. The standard deduction has been nearly doubled. The estate tax exemption has been doubled and fewer taxpayers will be subject to the alternative minimum tax (AMT).
In an effort to balance the impact on the deficit of lower tax rates, some tax credits have been modified or suspended. Those include a cap for the amount of mortgage interest, state taxes and local taxes that can be deducted on your federal tax return. The state and local tax deduction caps may present a time-sensitive tax planning issue for individuals with substantial state taxes owed. Pre-paying those state taxes during calendar 2017 could result in a substantial tax savings down the road.
Most of the changes for individual taxpayers are temporary, and will expire in 2025 unless more legislation is passed to extend the changes.
According to the Congressional Joint Committee on Taxation, the changes would reduce federal revenue by almost $1.5 trillion over the coming decade. This estimate is before accounting for any economic growth that might result.
What happens next?
After the House votes on the exact version the Senate passed last night the bill will go to the president to be signed into law. The work of understanding the implications of the changes will begin in earnest. With myriad changes added to the bill during the last week before the vote, sorting through the hundreds of pages of the bill will take time.
Stay tuned for more detailed analysis from Frazier & Deeter of the implications of the new tax code.