Late Friday, Dec. 15, 2017, the Joint Committee on Taxation released its Conference Agreement on tax reform legislation. The Senate and House passed separate tax bills over the last several months, and those bills have undergone a process of reconciliation of the disparities between the bills. The Conference Agreement of the Joint Committee on Taxation will soon be voted upon by both houses of Congress and, if passed, move to President Trump for signature. We expect those approvals by both the House and Senate to occur in the next week, and the current version of tax reform may soon be signed by the President.
The following are the key components of the Conference Agreement:
- Individual taxpayers will have seven tax brackets, 10%, 12%, 22%, 24%, 32%, 35% and 37%, effective in 2018. These rates would replace the current seven rates and a top current tax rate of 39.6%.
- The top 37% individual tax rate would apply to taxable income of over $600,000 for taxpayers filing joint returns. Under current tax law, the top rate of 39.6% applies to income of greater than $470,700 for married taxpayers filing joint returns
- Effective in 2018, the standard deduction is essentially doubled to $24,000 for married filing joint taxpayers, however the bill repeals personal exemptions.
- Effective in 2018, the itemized deduction for real property tax and state and local income tax is limited to a combined total of $10,000.
- Itemized deductions are allowed for medical expenses greater than 7.5% (rising to 10% in 2020) of adjusted gross income and for charitable contributions.
- The agreement continues a limited mortgage interest deduction, reducing the amount of debt eligible for the deduction to $750,000 from the prior limit of $1 million.
- The deduction for miscellaneous itemized deductions is eliminated.
- Some of the changes to individual rates, deductions and exemptions revert to prior law in 2026.
- The Child Tax Credit is expanded from $1,000 to $2,000 per child, and the refundable portion of that credit is expanded to $1,400 per child.
- The individual alternative minimum tax (AMT) is continued, but the AMT exemption is increased to $109,400 from $86,200 for joint files, and the income level at which the exemption phases out is increased. When this increased exemption is combined with the limit on state income and local property tax, the effect of the AMT will be much less than in past years.
- Effective in 2018, the agreement provides a 21% C-corporation tax rate and repeals the corporate alternative minimum tax.
- Business income taxed to an individual may be subject to a maximum tax rate that is lower than the individual tax bracket rates described above. The reduction in rates is accomplished through a new deduction of 20% of qualified business income, including qualified business income of pass-through entities as well as sole proprietorships. For income eligible for this 20% deduction, the effective maximum rate would be 29.6% (a 20% reduction of the 37% top individual rate).
a. The deduction is generally limited to 50% of wages paid in the business. However, this limit begins to phase in for taxpayers married filing joint with taxable income of $315,000 and is fully phased in at $415,000.
b. For certain personal service businesses, the 20% deduction is phased out as taxable income exceeds $315,000 for married taxpayers filing joint returns and is fully phased out when taxable income reaches $415,000.
- A new limitation is imposed on business interest expense deductions. Interest expense would generally be limited to 30% of income prior to depreciation and interest expense. There are several exceptions, including those for farmers and for businesses with less than $15 million in gross receipts.
- The Conference Agreement allows 100% bonus depreciation of short tax life assets such as machinery and equipment for the next five years, and then phases out the 100% bonus depreciation over the subsequent five years. In addition, the Sec 179 yearly limit is increased to $1 million with a phase-out starting at $2.5 million of additions.
- The lifetime estate tax exclusion (currently $5.49 million for 2017) is increased to $10 million, effective in 2018. This increase to the lifetime exclusion would revert to the prior limit in 2026.
We expect these changes to be enacted, and will continue to offer guidance on the opportunities and challenges presented by this legislation. For questions, please call 888-556-0123.