The United States initiated its biggest overhaul of the federal income tax system–the first major reform in 30 years–when it passed Tax Cuts and Jobs Act (“TCJA”) on December 15, 2017.1 The TCJA included substantial changes to the taxation of both individuals and businesses across all industries in the United States.2 The bill, much like most major reforms, will probably be amended in form and structure by future amendments, but, for now, I have outlined some of the major changes under the TCJA below.
Individual Tax Rates
Under the TCJA and the accompanying conference committee agreement, the top individual tax rate will temporarily drop from 39.6% to 37%.3 The taxable income brackets for the applicable rates have also changed, with the top individual tax rate applying to every dollar earned past $500,000 for single taxpayers and $600,000 for married taxpayers, which is up from $426,701 and $480,051, respectively, prior to the TCJA.4 However, the benefits of the tax deduction may not be shared evenly across all individuals in the United States. The TCJA has also put in a limit of $10,000 for all state and local tax deductions.5 Depending on one’s income, this may mean that the lower federal income tax rate may not offset higher income taxpayers in high-tax states like California and New York, whose deductions for local taxes will not be capped.6
Many small businesses are organized as pass-through entities.7 This means that instead of the entity paying taxes on its own income, the owner of the entity pays the taxes and reports the income as personal income.8 While such pass-through income was taxed at the same rate as any other personal income prior to the reform, the TCJA now offers a tax deduction of up to 20% for selected pass-through income.9 The rule around limitations and guidance on the new pass-through tax deduction is complex with limitations around type of services provided by the entity and the total amount of income being deducted by the taxpayer.10 The IRS will issue guidance on the new pass-through rules by the summer of 2018 at the earliest, which will hopefully clarify some of the uncertainties surrounding the pass-through income and its taxability.11
Corporate Tax Rate
The TCJA has lowered the top corporate tax rate from 35% to 21%. It also effectively overhauled the corporate alternative minimum tax, which effectively compelled businesses to pay taxes at an established minimum rate.12 Prior to the reform, all businesses had to calculate taxes on both the regular corporate tax rate and the alternative minimum tax, after which they would pay the higher amount between the two.13 With this change, businesses or their accountants may have a much easier time at bookkeeping as they will no longer be required to calculate the tax on two parallel scales.
The TCJA is not without its critics. The bill has been accused of benefitting the rich at the expense of the working class and has also raised eyebrows for reducing the federal tax revenue by $2.6 trillion dollars over the next decade.14 But as with any major reforms, many amendments to the TCJA are surely to follow, and it remains to be seen what the federal tax system will look like once all the amendments have been made.
David Floyd, Trump’s Tax Reform Plan, Investopedia (Jan. 15, 2018), https://www.investopedia.com/news/trumps-tax-reform-what-can-be-done/. ↩
Brian McCuller, US Tax Reform – Summary of the Tax Cuts and Jobs Act, LBMC (Dec. 20, 2017), https://www.lbmc.com/blog/us-tax-reform-summary-of-the-tax-cuts-and-jobs-act. ↩
Matthew Frankel, Your Complete Guide to the 2018 Tax Changes, The Motley Fool (Dec. 29, 2017), https://www.fool.com/taxes/2017/12/29/your-complete-guide-to-the-2018-tax-changes.aspx. ↩
McCuller, supra note 2. ↩
Dan Caplinger, What is Pass-Through Income and Why is it so Important?, The Motley Fool, (Dec. 9, 2017), https://www.fool.com/taxes/2017/12/09/what-is-pass-through-income-and-why-is-it-so-impor.aspx. ↩
Ken Berry, 2018 Tax Reform: Pass-Through Income Deduction More Complex Than Thought, CPA Practice Advisor, (Jan. 8, 2018), http://www.cpapracticeadvisor.com/news/12389903/2018-tax-reform-pass-through-income-deduction-more-complex-than-thought. ↩
Joshua Rosenberg, Pass-Through Guidance Out by Summer at the Earliest, Law 360, (Mar. 26, 2018), https://www.law360.com/articles/1026128/pass-through-guidance-out-by-summer-at-earliest-irs-says. ↩
Heather Long, The Final GOP Tax Bill is complete, Here’s what is in it, Washington Post (Dec.15, 2017), https://www.washingtonpost.com/news/wonk/wp/2017/12/15/the-final-gop-tax-bill-is-complete-heres-what-is-in-it/?noredirect=on&utm_term=.869630cd38ee. ↩
Gregory S. Dowell, Understanding the Corporate AMT (Alternative Minimum Tax), Dowell Group, http://dowellcpa.com/understanding-the-corporate-amt-alternative-minimum-tax/ (last visited Apr. 15, 2018). ↩
David Morgan, Rich would benefit most from Trump tax cut plan: policy group, Reuters (Sept. 29, 2017), https://www.reuters.com/article/us-usa-tax-fiscal/rich-would-benefit-most-from-trump-tax-cut-plan-policy-group-idUSKCN1C42C8. ↩