In December 2017, the House of Representatives completed the legislative process and sent the Tax Cuts and Jobs Act (“Tax Reform”) to President Trump. The President signed the bill into law on December 22, 2017. With the legislation now in effect, we wanted to provide a brief summary of what Tax Reform will mean in 2018 and beyond.
For Individual and Married Filers
Income Tax Brackets for 2018
|Rate||Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||$38,701 to $82,500||$77401 to $165,000|
|24%||$82501 to $157,500||$165,001to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||Over $500,000||Over $600,000|
Other Individual Provisions
- Repeals the personal exemption and increases the standard deduction to $24,000 (indexed to chained CPI-U) for married filers and $12,000 for individuals.
- AMT exemption amount increased to $109,400 for married filers and $70,300 for individuals.
- Child tax credit increased to $2,000 per qualifying child. AGI phaseout begins at $400,000 for married or $200,000 for all other filers.
- State and Local Tax (SALT) deductions: Repealed except for allowing a deduction up to $10,000 for the aggregate of (1). State and local property taxes and (2). State and local income or sales taxes.
- Estate Tax: Doubles the estate and gift exemption to $10 million, indexed to inflation. ($11.2 million per person in 2018).
- Mortgage deduction limited to $750,000 for homes acquired from 1/1/2018 to 12/31/2025. Homes acquired before 12/15/17 retain the $1 million deduction. Repeals deduction for interest on home equity indebtedness for tax years 1/1/2018 to 12/31/2025.
- Cost Basis of Specified Securities: No change. Avoids implementation of Senate’s proposed FIFO basis rule.
- 529 account can now be used for primary and secondary education expenses up to $10,000 a year per student.
- Charitable contribution deduction: Taxpayers can deduct up to 60% of their income (formerly 50%). Donations made to a college or university in exchange for the right to purchase athletic tickets are no longer deductible.
- Medical expense deduction floor reduced from 10% of adjusted gross income (AGI) to 7.5% of AGI. In other words, medical expenses over 7.5% of AGI are deductible in 2018.
- Deductions that were eliminated: Casualty and theft losses, unreimbursed employee expenses, tax preparation expenses, other miscellaneous deduction subject to 2% AGI cap, moving expenses and employer-subsidized parking and transportation reimbursement.
Summary for Individual and Married Filers
According to early analysis, the vast majority (95%) of all taxpayers will see a tax cut because of the legislation. The loss of the SALT deduction is the primary factor for the roughly 5% of taxpayers that will either see no change or a tax increase as those taxpayers are higher income earners from high tax states/cities. According to the Tax Policy Center, the average household will get a $1,610 tax cut in 2018. The average tax savings for households making $100K-$200K will be $2,260. The average tax savings for households making $200K-$500K will be $6,560.
Planning Items to Consider
- 529 accounts for children and/or grandchildren. 2018 contribution amount will increase to $15,000 per person ($30,000 for married). $10,000 can now be used for public, private or religious elementary and secondary school;
- Itemizing will not be worthwhile for the vast majority of taxpayers with the SALT deduction limitation and the increased standard deduction. In fact, the Joint Committee on Taxation estimates that around 94% of households will claim the standard deduction in 2018, which is up from around 70% in 2017.
- Affordable Care Act penalties were eliminated, but that change does not go into effect until 2019.
- Review existing mortgage debt and home equity loans to ensure continue deductibility.
After some back and forth between the Senate and the House versions related to both the corporate tax rate and the implementation date, the final version of the legislation contains the following highlights for businesses:
- 21% Corporate tax rate starting in 2018;
- Pass-through income will receive a 20% deduction. The result is the equivalent of a 29.6% tax rate for pass-through income. Limitation threshold for wages and service business in $315,000 for married filers (phased out over $50,000). For S-Corps or partnerships, application is at the partner/shareholder level;
- Corporate AMT is repealed;
- Corporate net interest deduction is 30% of EBITDA for tax years 2018 through 2021 and 30% of EBIT after 2021;
- 100% business expensing for capital equipment purchases for tax years 2018 through 2022;
- Section 179 expensing: 5 years for immediate expensing to $1 million with phase-out increase to $2.5 million.
- Mandatory repatriation: 5% tax rate on cash and 8% on plant and equipment;
- REIT dividends included as qualified income for purposes of 20% pass-through deduction;
- Preserves Private Activity Bonds;
- Like-kind exchanges: disallows a deferral of gain or loss on like-kind exchanges of personal property. No change for real property;
- Transitions to a 100% territorial tax system;
Summary for Businesses
According to early analysis, the total effective corporate tax rate will decrease between 5% and 6% under the new tax legislation. That equates to an effective corporate tax rate slightly lower than 20%. There are not many losers among American companies under this legislation, just varying degrees of winner. Many commentators are projecting at least a $10 boost to S&P 500 companies’ earnings per share (EPS). They anticipate a similar uptick for small and midsized, closely held businesses.
For the Economy & Markets
The tax reform legislation includes $205 billion of taxes cuts, which equates to just over 1% of GDP for 2018. The current CBO forecast for 2018 is 2.2% growth. Following the implementation of tax reform, economists project that GDP growth will be closer to 3.25% for 2018, with a potential upside boost from supply side impact to get closer to 3.75% growth.
Winners & Losers in Tax Reform
Small Caps, Mid Caps
High Tax Large Caps
Cap Good Order Industrials
Cash Overseas % of Market Cap
US Companies with High Foreign Sales
Alaska Oil Production
REITs & MLPs
Intangible Income Overseas
High Yield Bonds
High Tax States
Low Tax Companies