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The final tax legislation passed both the Senate and the House and was then signed into law by President Trump in December 2017. The bill was nearly 500 pages long and made the most extensive changes to the Tax Code in 31 years. Below we summarize just some of the key changes to current law that are particularly likely to impact financial professionals or your clients.

Old Law New Law Effective Dates

Ordinary income tax brackets are 10%, 15%, 25%, 28%, 33%, and 39.6%, with the highest rate beginning at $480,050 for married filing jointly (MFJ) taxpayers and $426,700 for other taxpayers.

The highest income taxpayers also have 20% instead of 15% as their long-term capital gains and qualified dividends tax rate.

New tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Each breakpoint is different from current law, with MFJ being two times the amount for single taxpayers in all brackets except for the top bracket, which begins at $600,000 for MFJ taxpayers and $500,000 for all other taxpayers.

The breakpoint for the 20% capital gains and dividends tax rate is unchanged, so it no longer aligns with the breakpoint for the highest ordinary income tax bracket. (FIFO basis for sale of stock was not included in final legislation.)

1/1/18 – 12/31/25

Personal exemption of $4,150 per person in household, but higher-income taxpayers may lose this benefit due to individual alternative minimum tax (AMT) or phase-out of personal exemption.

Child tax credit of $1,000 per child 16 or under, but phased out for incomes over $110,000 for MFJ ($75,000 single).

No personal exemption.

Child tax credit increased to $2,000 per child, and phase-out raised to $400,000 MFJ/$200,000 other taxpayers. $500 credit allowed for other dependents who do not qualify for child tax credit.

1/1/18 – 12/31/25

SALT (state and local taxes) are deductible without limitation, but not deductible under the individual AMT.

AMT exemption $84,500 MFJ/ $54,300 other; phased out above $160,900/$120,700.

SALT only deductible up to $10,000 per taxpayer (unless attributable to conduct of business). Prepayment of 2018 taxes in 2017 not allowed.

AMT exemption amount raised to $109,400 MFJ/$70,300 others, with phase out of exemptions beginning at $1,000,000/$500,000. (This plus limitation of SALT deduction for regular taxes will reduce number of taxpayers impacted by AMT.)

1/1/18 – 12/31/25

Mortgage interest is deductible up to $1,000,000 of acquisition indebtedness, plus $100,000 for home equity indebtedness.

$500,000 MFJ/$250,000 other capital gains excluded from sale of residence.

Mortgage interest deductible to maximum of $750,000 of acquisition indebtedness; no deduction for home equity indebtedness. (Homes under contract by 12/15/17 scheduled to close by 1/1/18 grandfathered under old rule, even if actual close is as late as 4/1/18.)

No change to the capital gains exclusion on sale of primary residence.

1/1/18 – 12/31/25

Tax Reform: Side-By-Side Comparison

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Old Law New Law Effective Dates

Alimony payments are generally deductible for the payor and includable in income for the recipient.

For divorce or separation agreements entered into after 12/31/2018, alimony paid will not be deductible, and alimony received will not be taxable.

1/1/19 – permanent

Persons not enrolled in minimum essential health coverage owe a “shared responsibility” tax, unless no “affordable” coverage is available (“individual mandate”).

The individual shared responsibility tax is set to zero, effectively repealing the individual mandate under the Affordable Care Act.

1/1/19 – permanent

The unified credit against gift, estate, and generation-skipping transfer taxes allows $5.6 million total per person to be exempted from tax. (Figure for 2018; this amount is indexed for inflation every year.) Gifts or bequests in excess of this amount are taxed at 40%.

The unified credit amount is doubled for gifts made and estates of persons dying during the effective period. Inflation adjustments continue, but the adjustments are based on “chained CPI” after 2017, which slows the rate of increase.

At the end of the effective period, the unified credit will be cut to half of the inflated amount at that time. Proposed regulations apply a “use or lose” principle to the temporary higher exclusion. No change to annual exclusion gifts or calculation of basis.

1/1/18 – 12/31/25

Net income of pass-through entities (LLCs, S Corps, partnerships, sole proprietorships) generally taxed as income to the owner at the owner’s personal marginal tax rates.

Income distributed to trust beneficiaries generally is taxed as income to the beneficiary at the beneficiary’s personal marginal tax rates.

Net losses from active conduct of business can be deducted from other income to the extent of the owner’s amount at risk.

Up to 20% of domestic “qualified business income” can be deducted from taxable income, with certain limitations for MFJ taxpayers who would otherwise have taxable income over $315,000 ($157,500 for all other taxpayers), with phase-in of limitations over the next $100,000/$50,000 of income. The deduction is not added back for calculating AMT. Qualified business income to trusts and estates also qualifies for deduction.

For “specified service businesses,” which include financial services, the deduction phases out entirely above the threshold. Acting as an insurance agent or broker does not constitute provision of “financial services” for this purpose.

For other pass-throughs above the threshold, the deduction is capped at an amount equal to 50% of the owner’s allocable portion of all the W-2 wages paid by that business (retirement and deferred compensation amounts included), or 25% of W-2 wages plus 2.5% of depreciable tangible property of the business. (This was a last minute change particularly benefiting real estate businesses).

Real Estate Investment Trust (REIT) and publicly traded partnership income gets the 20% deduction without regard to any income threshold.

Net negative qualified business income can only offset positive qualified business income from other businesses of the same taxpayer, and any excess loss must be carried forward to the next year, and then it will reduce the deductible amount for the next year. Aside from the qualified business income rules on losses, any pass-through business losses in excess of $500,000 MFJ/$250,000 other must be carried forward.

1/1/18 – 12/31/25

The corporate income tax rate is generally 35%.

The corporate income tax rate is lowered to 21%. 1/1/18 – permanent

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Old Law New Law Effective Dates

The corporate AMT rate is 20% of a corporation’s taxable income with certain items added, including corporate-owned life insurance death benefits and inside buildup.

The corporate AMT is repealed. Corporations owning life insurance no longer have to worry whether these policies may or may not trigger additional liability under the corporate AMT.

1/1/18 – permanent

Insurance companies currently have special rules for Net Operating Losses (NOL), allowing a three year carryback and 15 year carryover. They also get a special deduction for reserve requirements, and have a number of other special taxation rules.

Insurance companies will use the same NOL rules as other types of companies (two year carryback and 20 year carryover).

There are several changes to insurance carrier taxation rules that will have the effect of raising tax rates on insurance carriers by a total of $27 billion over 10 years.

1/1/18 – permanent

Compensation in excess of $1 million cannot be deducted for CEOs of publicly traded companies, but certain performance bonuses, stock options and employee benefits do not count toward the limit.

CFOs are covered in addition to CEOs, certain foreign companies traded under American Depository Receipts (ADRs) are covered, and the exception for performance bonuses and stock options is eliminated, with transitional provisions for existing written arrangements.

A similar limitation is imposed on tax-exempt organizations by means of a 21% excise tax.

1/1/18 – permanent

For further information on tax reform and its impact on your business, please contact your Crump representative who can connect you to the appropriate resources.