PREPARE YOUR INDIVIDUAL AND BUSINESS INCOME TAXES AND THE INTERNATIONAL IMPACT
The Tax Cuts and Jobs Act was signed into law on December 22, 2017 by President Donald Trump. Changes to individual income taxes include lowered tax brackets, increased Alternative Minimum Tax thresholds and higher estate, gift and generation skipping tax exemptions. For businesses, changes include a reduced corporate tax rate and the repeal of the Corporate Alternative Minimum Tax.
Here is a summary of provisions and tips for how to start planning ahead for 2018 and beyond.
What the Tax Act Means for Individuals
- Tax Rates: The tax rates are lowered for all taxpayers. The brackets include a 10%, 12%, 22%, 24%, 32%, 35%, and 37% bracket. The 37% bracket for individuals is $500,000 and for married ling jointly will be $600,000.
- Alternative Minimum Tax (AMT): The AMT remains but the thresholds at which it becomes applicable increase to $109,400 for married filers and $70,300 for single filers. Phase out exemption amounts are $1,000,000 for married taxpayers and $500,000 for single taxpayers.
- Federal Estate, Gift and Generation Skipping Tax: The tax exemptions are in- creased to $10 million per person and will be adjusted for inflation. There is no mention of a total repeal of the estate, gift or generation skipping tax.
- Child Tax Credit: The Child Tax Credit will be $2,000 per child under age 17 with $1,400 being a refundable amount. The credit phases out at $400,000, not subject to inflation. There is also a $500 nonrefundable credit for non-qualifying dependents.
- Personal Exemption: The personal exemption is eliminated.
- Standard Deduction: The standard deduction is doubled to $12,000 for single filers and $24,000 for married couples, adjusted for inflation.
- Itemized Deductions: All miscellaneous itemized deductions subject to the 2% floor are eliminated. This includes tax preparation fees, investment interest, employee ex- penses (other than teacher’s expenses up to $500 – $250 per teacher).
- Mortgage Interest: The mortgage interest deduction is limited for interest on loans over $750,000 acquired after December 15, 2017. The $1,000,000 limitation remains for debt acquired before December 15, 2017. The interest on home equity indebtedness is eliminated.
- State, Income and Property Tax Deductions: State, local, and foreign income and property taxes deductions are limited to $10,000.
- Medical Expenses: For tax years 2017 and 2018, the medical expense deduction floor is reduced to 7.5% of adjusted gross income.
- Moving Expenses: Moving expense deductions are suspended.
- Cash Contributions: The AGI limitation on cash contributions increases to 60%.
- Tuition Expenses: Expenses up to $10,000 per year for tuition in connection with enrollment in elementary or secondary schools, whether they be public, private, or religious, can now be taken out of 529 accounts.
- Net Operating Loss: The Net Operating Loss deduction is limited to 80% of the tax- payer’s taxable income for tax years beginning in 2018.
How the Act Impacts Businesses
- Tax Rate: The corporate tax rate is permanently reduced from 35% to 21%.
- Corporate Alternative Minimum Tax (AMT): The AMT is repealed starting in 2018.
- Business Income Deductions: Business taxpayers (other than C Corporations) are allowed a deduction of up to 20% qualified business income. This includes business income from a partnership, S corporation, and sole proprietorships. The provisions for this deduction are complicated and limited for many businesses.
- Accounting Methods: Companies with average gross receipts of up to $25 million may now use the cash method of accounting.
- Real Estate and Improvements: Deprecation recovery periods are accelerated on residential and non-residential real estate and improvements placed into service after December 31, 2017.
- Paid Family Leave: The Act contains benefits for employers that provide paid family leave to its employees. Certain eligible employers can claim a business credit for 12.5% of the benefits paid to qualifying employees, provided the plan meets certain thresholds.
- Entertainment: The deduction for business entertainment expenses has been eliminated.
How the Act Impacts on an In- ternational Level
- Deduction for Foreign Source Dividends: There is a 100% deduction for fo- reign-source dividends received from 10% owned foreign corporations by a US corporate shareholder provided the shares are held at least one year.
- Outbound Transactions and Hybrid Entities: The definition of intangibles for outbound transactions now includes good- will, going concern value, workforce in place and other items of value that are not tangible or services. As a result certain transfer by US persons to foreign corporations will result in tax. The Act prohibits a deduction for certain payments made to related entities that are “hybrid entities” (i.e. an entity that is transparent for US tax pur- poses but not for foreign tax purposes).
- Base Erosion Anti-Abuse: The Act im- poses a “Base Erosion Anti-Abuse” (BEAT) tax on certain multinational corporations.
- It will be the excess of 5% of the taxpayers modi ed taxable income over any amount equal to the taxpayer’s regular tax liability reduced by certain credits. For tax years after 2025, the tax will increase to 12.5%.
- GILTI Tax: Imposes a tax on “Global In- tangible Low Tax Income” (GILTI) of US shareholders of Controlled Foreign Corporations (CFCs) with a deduction equal to 37.5% of the foreign- derived intangible in- come plus 50% of the global intangible low- taxed income, and the amount treated as a dividend received by the corporation.
- Deemed Repatriation of Deferred Foreign Earnings: Requires US shareholders of CFCs to include the pro rata share of a “deemed repatriation amount” in income. The amount is the greater of the foreign corporation’s post-1986 deferred foreign income as of (i) November 2, 2017 or (ii) December 31, 2017 and that was not previously subject to U.S. tax (but excluding earnings and profits that were accumulated prior to the foreign corporation becoming a CFC or having a 10% U.S. shareholder).
- Elimination of Active Trade or Business Exception to Recognition: Transfers of appreciated property actively used in a trade or business to a foreign corporation will now result in a taxable gain.
- Subpart F Rules Changes: The definition of shareholder now includes US persons that own 10% or more of the total voting power of the foreign corporation and US persons that own stocks of 10% of the total value of the foreign corporation. Stock attribution rules have been expanded to treat US corporations as constructively owning the shares of its foreign shareholders. The 30 day requirement for a corporation being treated as a CFC has been eliminated. Additional changes were made for shipping and oil companies.
- Foreign Tax Credit Changes: The indirect foreign tax credit is repealed. A foreign tax credit is permitted for subpart F income included in gross income of a domestic corporation that is a shareholder of a CFC. Income from the sale of inventory is now – solely sourced in the place of production. There is a separate basket for foreign branch income.
- PFIC Regime Changes: The exception from PFICs for foreign insurance companies is limited to insurance companies that have loss and loss adjustment expenses, unearned premiums, and certain reserves exceeding 25% of the foreign corporation’s total assets.
Future Planning Opportunities
As more detail and regulations come out consider ongoing planning opportunities:
- Evaluate Company Structures. With the change in income tax rates and the increased estate tax exemptions, closely held business owners should assess whether their company’s current structure and ownership is best from both an income and estate planning perspective.
- Review Business Deductions. For business taxpayers allowed a deduction of up to 20% qualified business income, the provisions for this deduction are complicated and limited for many businesses. Business owners should consult with an accountant or attorney.
- Individuals should evaluate their estate plan. Individuals under the exemption amount may be able to undue unnecessary tax planning. Individuals with estates greater than the exemption may be able to use utilize their additional exemptions to maximize estate tax savings. Such individuals should contact an attorney about their estate plan.
- Assess the Impact on Individual and Corporate Shareholders, US individual and corporate shareholders of foreign corporations should seek the advice of a tax attorney or accountant to assess the impact to their taxes and possible restructuring or repatriation of assets.
We will continue to monitor updates to the Tax Law and will provide a more detailed alert on the new business income tax provisions and future planning strategies for businesses.
For questions, contact:
Gerald Dunworth
gjdunworth@gibney.com
Meredith Mazzola
mmazzola@gibney.com
Gibney, Anthony & Flaherty LLP
665 Fifth Avenue
New York, New York 10022
Tel : +1 212 705 9808 – Fax: +1 212 688 8315