Congress has passed a major overhaul of the US tax system. The measure passed 224 to 201 in the House and 51-48 in the Senate, largely along party lines. The tax bill is now on its way to the President, and the President is expected to sign the new tax bill into law by the end of the year.
The most notable change in the new tax law is the change in the corporate tax rates – from a system of graduated tax rates up to 35% down to a flat tax on corporate profits of 21%. The alternative minimum tax has been eliminated for corporations, and there will be no different or special tax rate now for “personal service corporations”.
Individual income tax rates have also changed under the new tax law, with 7 new tax rate brackets being established, from 10% up to a maximum rate of 37%. The standard deduction has been increased ($24,000 for joint filers), but many personal income tax deductions have been cut back such as the state and local tax deduction and the deduction for home mortgage interest. Personal exemptions have been eliminated. The individual alternative minimum tax still remains; however, exemptions from this tax have been increased.
For small businesses, those not taxed as corporations, the new law gives these businesses a special 20% deduction against its profits, and then the balance of the profits are taxed to the owners as regular income – subject to regular income tax rates and also employment taxes. Certain phase out rules apply for this new small business deduction.
The new tax law also allows “full expensing” of certain business assets, and allows businesses to write-off 100% of the cost of these assets now. Prior law only allowed the cost of these assets to be written over a period of years through “depreciation” and “amortization” deductions.
The new tax law did not end the estate tax, but it did increase the gift and estate tax exemption amounts to $10 million per person ($20 million per couple), and as adjusted for inflation.
The new tax law has dozens and dozens of other changes affecting both corporations and individuals, including many new “special interest” provisions, enacted as part of the back-and-forth of the legislative process, such as provisions benefitting citrus plant growers and craft breweries, to name a few. Finally, many of the provisions of the new tax legislation “sunset” and end after a number of years, and presumably return to the old tax regime.
As with any change to the tax laws, there will be many open and uncertain issues, and careful planning must be considered to navigate the new law.