On December 15, the House and Senate conference committee released a conference report that reconciled the differences in each chamber’s tax reform bills. Both the House and Senate are expected to vote on the reconciled bill this week. Both have indicated that they have the necessary votes to pass the bill and the President has indicated that he will sign the bill into law.
Summaries of the key provisions are below:
Individuals: The top individual rate would be reduced from 39.6% to 37% for individuals earning at least $500,000 and joint filers earning at least $600,000. There would be 7 tax brackets in total (10%, 12%, 22%, 24%, 32%, 35%, and 37%). The standard deduction would nearly double to $12,000 for individuals and $24,000 for a couple filing jointly. The rates and standard deduction expansion expire in 2026.
Corporate Rate: The top corporate rate would be reduced to 21% starting January 1, 2018.
Pass-through Taxation: Pass-through entity owners that meet certain conditions would be eligible for a 20% deduction on their business income. Pass-through owners who file jointly with taxable income of at least $315,000 are subject to a phased-in limitation on the deduction. The restriction is based on how much the pass-through pays in wages or invests in equipment and machinery. Owners of pass-through service businesses, such as law, medical, and accounting firms, are eligible for the deduction if the owners are under the taxable income threshold, and the deduction is phased out completely if the taxable income of an owner who filed jointly is at least $415,000. The deduction would expire in 2026.
Estate, Gift, and Generation-Skipping Transfer Tax: The lifetime estate, gift, and generation-skipping transfer tax exemptions would be doubled to $11 million for individuals and $22 million for married couples, indexed annually for inflation. The exemption amounts would revert to current levels after 2025.
State and Local Tax Deduction: Individual taxpayers could deduct up to an aggregate of $10,000 of state and local property, income, and sales taxes.
Interest Deductibility: Interest deductions would be limited to 30% of a company’s earnings before interest, tax, depreciation, and amortization (EBITDA) for 4 years. After that, the bill would limit the deduction to 30% of earnings before interest and taxes (EBIT). However, this limitation does not apply to businesses with average annual gross receipts not exceeding $25 million.
Business Expensing: Full expensing of new and used capital investments would be permitted for 5 years. Section 179 expensing will also be made permanent.
Tax Credits: The bill does not materially modify the Low Income Housing or New Markets Tax Credit programs. For buildings owned or leased after January 1, 2018, Historic Tax Credits must be claimed over a 5 year period (currently, the full amount of the credit may be claimed in the year the credit is earned). The 5-year modification will generally not apply to buildings that were owned or leased prior to January 1, 2018.
Private Activity Bonds: Interest on private activity bonds remains tax-exempt.
International Tax: The international taxation regime would move toward a territorial system, and would include a base erosion and anti-abuse tax, which requires U.S. multinationals that make excessive deductible payments to their foreign affiliates to pay a 10% tax on their income without such deductions, after a one-year 5% transition rate. A new tax on global intangible low-taxed income would be imposed. Overseas profits would be taxed automatically at a 15.5% rate for cash assets and 8% rate for illiquid assets.
Alternative Minimum Tax: The individual AMT would be increased to apply to individuals earning more than $500,000 or joint filers earning $1 million. The corporate AMT would be repealed.
Mortgage Interest Deduction: The bill would preserve the deduction for existing mortgages and add a cap of $750,000 for newly purchased homes starting January 1, 2018. However, the deduction for interest on home equity loans would be suspended.
Child Tax Credit: The child tax credit would be increased to $2,000 per child with up to $1,400 of it being refundable and a higher income phased out would apply.
College Endowments: A 1.4% excise tax is imposed on the net investment income of private university and college endowments. The tax applies to schools with assets of more than $500,000 per student.
We will provide a more detailed analysis of the key provisions after (and if) the bill is signed into law.