House Republican tax writers have advanced a "Tax Reform 2.0" legislative package. The measure is expected to reach the House floor for a full chamber vote by the end of September.

The House Ways and Means Committee debated the GOP Tax Reform 2.0 three-bill package in a September 13 markup that ran almost seven hours. The package focuses on making permanent individual and small business tax cuts, and creating incentives for retirement savings and business innovation. The following three bills were approved along party lines:

• Protecting Family and Small Business Tax Cuts Act of 2018 ( HR 6760);
• Family Savings Act of 2018 ( HR 6757); and
• American Innovation Act of 2018 ( HR 6756).

Individual, Small Business Tax Cuts

HR 6757 would make permanent the individual and small business tax cuts that were enacted temporarily through 2025 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). These provisions were made temporary to comply with certain Senate budget rules applicable to the reconciliation process Republicans used to pass tax reform with only a simple GOP majority. Notable TCJA provisions that would be made permanent under HR 6750 include, among others:

• lowered individual income tax rates;
• 20-percent deduction of income for qualifying passthrough entities;
• $12,000 (individual) and $24,000 (married filing jointly) standard deduction; and
• $10,000 annual cap on the state and local tax (SALT) deduction.

Family Savings and Business Innovation

HR 6757 aims to simplify certain rules for employer retirement plans, and eliminates the age limit on IRA contributions, among other things. Additionally, it would create a Universal Savings Account (USA), while also allowing tax-advantaged 529 Plans to be used for expenses related to trade schools, home schooling, and up to $10,000 in total distributions for repayment of student loans.

HR 6756 would improve the tax treatment of certain start-up businesses. The bill would allow new businesses to write off up to $20,000 of start-up and organization expenditures. Additionally, HR 6756 would allow for a change in start-up ownership without triggering limits on certain tax benefits.

JCT

The Joint Committee on Taxation (JCT), a nonpartisan congressional scorekeeper, has estimated that all three bills will cost the federal government revenue. As noted in JCX-71-18, the JCT estimates that making permanent the individual and small business tax cuts under the TCJA, as proposed by HR 6750, would cost the federal government $631 billion in lost revenue over the next 10 years. Additionally, the JCT has estimated that HR 6756 and HR 6757, collectively, would cost approximately $26 billion in lost federal revenue over the next 10 years ( JCX-75-18, JCX-78-18).

Tax Reform 2.0’s Fate Uncertain

Tax Reform 2.0’s fate remains largely uncertain as it makes its way through the legislative process. While the measure is expected to garner enough Republican support in the House, despite certain GOP criticisms of the SALT deduction cap, it is not expected as a whole to fare well in the Senate. There is talk on Capitol Hill that Democrats could potentially support the retirement savings and business innovation bills in some form. However, it is considered unlikely that Democrats will support making permanent certain provisions of a law (the TCJA) for which not a single Democrat voted.

Charles P. "Chuck" Rettig was confirmed as the new IRS Commissioner on September 12. The Senate confirmed the nomination by a 64-to-33 vote. Rettig received both Democratic and Republican support.

Charles P. "Chuck" Rettig was confirmed as the new IRS Commissioner on September 12. The Senate confirmed the nomination by a 64-to-33 vote. Rettig received both Democratic and Republican support.

Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah, praised Rettig, saying that he is both "qualified and ready" to lead the IRS. Although SFC ranking member Ron Wyden, D-Ore., previously said that Rettig is a "qualified nominee," he urged colleagues to oppose Rettig’s nomination. Wyden previously said he would only support Rettig’s nomination if he promised to reverse recent IRS guidance which limits Schedule B donor reporting for certain tax-exempt organizations ( Rev. Proc. 2018-38).

Rettig will oversee implementation of tax reform enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). His term as IRS Commissioner will expire on November 12, 2022.

New IRS guidance aiming to curb certain state and local tax (SALT) deduction cap "workarounds" is the latest "hot topic" tax debate on Capitol Hill. The IRS released proposed amendments to regulations, REG-112176-18, on August 23. The proposed rules would prevent taxpayers, effective August 27, 2018, from using certain charitable contributions to work around the new cap on SALT deductions.

New IRS guidance aiming to curb certain state and local tax (SALT) deduction cap "workarounds" is the latest "hot topic" tax debate on Capitol Hill. The IRS released proposed amendments to regulations, REG-112176-18, on August 23. The proposed rules would prevent taxpayers, effective August 27, 2018, from using certain charitable contributions to work around the new cap on SALT deductions.

SALT Deduction

The SALT deduction limit is one of the most controversial temporarily enacted provisions of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) signed into law last December. Under the TCJA, beginning in 2018 and running through 2025, taxpayers may not claim more than $10,000 ($5,000 if married filing separately) for all state and local sales, income and property taxes.

After the tax code overhaul, New York, New Jersey, and Connecticut (considered high-tax states) passed legislation that essentially allows taxpayers to circumvent the SALT deduction cap by making charitable contributions to state-run charitable organizations. Indeed, similar workarounds for private-school tuition already exists in other states.

"Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families,"Treasury Secretary Steven Mnuchin said in a statement. "The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions."

Congressional Republicans and Democrats, as with the TCJA, are mostly divided on the topic. House Ways and Means Committee Chair Kevin Brady, R-Tex., praised the IRS proposal for aiming to prevent tax evasion. "These Treasury regulations rightly close the door on improper tax evasion schemes conjured up by state and local politicians who insist on brutally taxing local families and businesses," Brady said in a statement.

Meanwhile, Democratic lawmakers are criticizing the regulations. "The Trump administration doubled down on its attack on the middle class," Ways and Means ranking member Richard Neal, D-Mass., said in a statement. "The administration’s new regulations block affected states’ attempts to cope with this significant change and protect residents."

Tax Policy Experts Weigh-In

Several tax policy experts have criticized states’ efforts to circumvent the SALT deduction cap. Carl Davis, research director at the Democratic-leaning Institute on Taxation and Economic Policy, has called the workarounds an "abuse" of the charitable giving deduction. "Anyone who wants a fair and transparent tax system should be cautiously optimistic that these rules will put an end…to the workaround provisions enacted by states more recently," Davis wrote in a recent op-ed about the proposed IRS guidance.

Jared Walczak, senior policy analyst at the conservative-leaning Tax Foundation, has said that states’ strategies to re-characterize SALT payments were pursued to primarily help high-income taxpayers. Additionally, the top one percent of the wealthiest households would reap more than half of the benefit if the SALT cap were eliminated, according to an estimate from the Democratic-leaning Tax Policy Center.

Last year’s Tax Reform created a new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, the provision was enacted only temporarily through 2025. The controversial deduction has remained a buzzing topic of debate among lawmakers, tax policy experts, and stakeholders. In addition to its impermanence, the new passthrough deduction’s ambiguous statutory language has created many questions for taxpayers and practitioners.

Last year’s Tax Reform created a new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, the provision was enacted only temporarily through 2025. The controversial deduction has remained a buzzing topic of debate among lawmakers, tax policy experts, and stakeholders. In addition to its impermanence, the new passthrough deduction’s ambiguous statutory language has created many questions for taxpayers and practitioners.

The IRS released the much-anticipated proposed regulations on the new passthrough deduction, REG-107892-18, on August 8. The guidance has generated a mixed reaction on Capitol Hill, and while significant questions may have been answered, it appears that many remain. Indeed, an IRS spokesperson told Wolters Kluwer Tax & Accounting before the regulations were released that the IRS’s goal was to issue complete regulations but that the guidance "would not cover every question that taxpayers have."

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new passthrough deduction and proposed regulations. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

I. Qualified Business Income and Activities

Wolters Kluwer: What is the effect of the proposed regulations requiring that qualified business activities meet the Code Sec. 162 trade or business standard? And for what industries might this be problematic?

Joshua Wu: The positive aspect of incorporating the Section 162 trade or business standard is that there is an established body of case law and administrative guidance with respect to what activities qualify as a trade or business. However, the test under Section 162 is factually-specific and requires an analysis of each situation. Sometimes courts reach different results with respect to activities constituting a trade or business. For example, gamblers have been denied trade or business status in numerous cases. In Groetzinger, 87-1 ustc ¶9191, 480 U.S. 23 (1987), the Court held that whether professional gambling is a trade or business depends on whether the taxpayer can show he pursued gambling full-time, in good faith, regularly and continuously, and possessed a sincere profit motive. Some courts have held that the gambling activity must be full-time, from 60 to 80 hours per week, while others have questioned whether the full-time inquiry is a mandatory prerequisite or permissive factor to determine whether the taxpayer’s gambling activity is a trade or business. See e.g., Tschetschot , 93 TCM 914, Dec. 56,840(M)(2007). Although Section 162 provides a built-in body of law, plenty of questions remain.

Aside from the gambling industry, the real estate industry will continue to face some uncertainty over what constitutes a trade or business under Code Secs. 162 and 199A. The proposed regulations provide a helpful rule, where the rental or licensing of tangible or intangible property to a related trade or business is treated as a trade or business if the rental or licensing and the other trade or business are commonly controlled. But, that rule does not help taxpayers in the rental industry with no ties to another trade or business. The question remains whether a taxpayer renting out a single-family home or a small group of apartments is engaged in a trade or business for purposes of Code Secs. 162 and 199A. Some case law indicates that just receiving rent with nothing more may not constitute a trade or business. On the other hand, numerous cases have found that managing property and collecting rent can constitute a trade or business. Given the potential tax savings at issue, I suspect there will be additional cases in the real estate industry regarding the level of activity required for the leasing of property to be considered a trade or business.

Qualified Business Income

Wolters Kluwer: How does the IRS define qualified business income (QBI)?

Joshua Wu: QBI is the net amount of effectively connected qualified items of income, gain, deduction, and loss from any qualified trade or business. Certain items are excluded from QBI, such as capital gains/losses, certain dividends, and interest income. Proposed Reg. §1.199A-3(b) provides further clarity on QBI. Most importantly, they provide that a passthrough with multiple trades or businesses must allocate items of QBI to such trades or businesses based on a reasonable and consistent method that clearly reflects income and expenses. The passthrough may use a different reasonable method for different items of income, gain, deduction, and loss, but the overall combination of methods must also be reasonable based on all facts and circumstances. Further, the books and records must be consistent with allocations under the method chosen. The proposed regulations provide no specific guidance or examples of what a reasonable allocation looks like. Thus, taxpayers are left to determine what constitutes a reasonable allocation.

Unadjusted Basis Immediately after Acquisition

Wolters Kluwer: What effect does the unadjusted basis immediately after acquisition (UBIA) of qualified property attributable to a trade or business have on determining QBI?

Joshua Wu: For taxpayers above the taxable income threshold amounts, $157,500 (single or married filing separate) or $315,000 (married filing jointly), the Code limits the taxpayer’s 199A deduction based on (i) the amount of W-2 wages paid with respect to the trade or business, and/or (ii) the unadjusted basis immediately after acquisition (UBIA) of qualified property held for use in the trade or business.

Where a business pays little or no wages, and the taxpayer is above the income thresholds, the best way to maximize the deduction is to look to the UBIA of qualified property. Rather than the 50 percent of W-2 wages limitation, Section 199A provides an alternative limit based on 25 percent of W-2 wages and 2.5 percent of UBIA qualified property. The Code and proposed regulations define UBIA qualified property as tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year. The proposed regulations helpfully clarify that UBIA is not reduced for taxpayers who take advantage of the expanded bonus depreciation allowance or any Section 179expensing.

De Minimis Exception

Wolters Kluwer: How is the specified service trade or business (SSTB) limitation clarified under the proposed regulations? And how does the de minimis exception apply?

Joshua Wu: The proposed regulations provide helpful guidance on the definition of a SSTB and avoid what some practitioners feared would be an expansive and amorphous area of section 199A. Under the statute, if a trade or business is an SSTB, its items are not taken into account for the 199A computation. Thus, the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services, investment management, trading, dealing in securities, and any trade or business where the principal asset of such is the reputation or skill of one or more of its employees or owners, do not result in a 199A deduction.

There is a de minimis exception to the general rule for taxpayers with taxable income of less than $157,500 (single or married filing separate) or $315,000 (married filing jointly). Once those thresholds are hit, the 199A deduction phases-out until it is fully eliminated at $207,500 (single) or $415,000 (joint).

The proposed regulations provide guidance for each of the SSTB fields. Importantly, they also limit the "reputation or skill" category. The proposed regulations state that the "reputation or skill" clause was intended to describe a "narrow set of trades or businesses, not otherwise covered by the enumerated specified services." Thus, the proposed regulations limit this definition to cases where the business receives income from endorsing products or services, licensing or receiving income for use of an individual’s image, likeness, name, signature, voice, trademark, etc., or receiving appearance fees. This narrow definition is unlikely to impact most taxpayers.

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new Code Sec. 199A passthrough deduction and its recently-released proposed regulations, REG-107892-18. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new Code Sec. 199A passthrough deduction and its recently-released proposed regulations, REG-107892-18. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

II. Aggregation, Winners & Losers

Wolters Kluwer: How do the proposed regulations provide both limitations and flexibility regarding the available election to aggregate trades or businesses?

Joshua Wu: Treasury agreed with various comments that some level of aggregation should be permitted to account for the legal, economic and other non-tax reasons that taxpayers operate a single business across multiple entities. Permissive aggregation allows taxpayers the benefit of combining trades or businesses for applying the W-2 wage limitation, potentially resulting in a higher limit. Under Proposed Reg. §1.199A-4, aggregation is allowed but not required. To use this method, the business must (1) qualify as a trade or business, (2) have common ownership, (3) not be a SSTB, and (4) demonstrate that the businesses are part of a larger, integrated trade or business (for individuals and trusts). The proposed regulations give businesses the benefits of electing aggregation without having to restructure the businesses from a legal standpoint. Businesses failing to qualify under the above test will have to consider whether a legal restructuring would be possible.

Wolters Kluwer: How does Notice 2018-64 Methods for Calculating W-2 Wages for Purposes of Section 199A, which accompanied the release of the proposed regulations, coordinate with aggregation?

Joshua Wu: Notice 2018-64 contains a proposed revenue procedure with guidance on three methods for calculating W-2 wages for purposes of section 199A. The Unmodified Box method uses the lesser of totals in Box 1 of Forms W-2 or Box 5 (Medicare wages). The Modified Box 1 method takes the total amounts in Box 1 of Forms W-2 minus amounts not wages for income withholding purposes, and adding total amounts in Box 12 (deferrals). The Tracking wages method is the most complex and tracks total wages subject to income tax withholding. The calculation method is dependent on the group of Forms W-2 included in the computation and, thus, will vary depending upon whether businesses are aggregated under §1.199A-4 or not. Taxpayers with businesses generating little or no Medicare wages may consider aggregating with businesses that report significant wages in Box 1 that are still subject to income tax withholding. Under the Modified Box 1 method, that may result in a higher wage limitation.

Crack & Pack

Wolters Kluwer: What noteworthy anti-abuse safeguards did the proposed regulations seek to establish? How do the rules address "cracking" or "crack and pack" strategies?

Joshua Wu: Treasury included some anti-abuse provisions in the proposed regulations. One area that Treasury noted was the use of multiple non-grantor trusts to avoid the income threshold limitations on the 199A deduction. Taxpayers could theoretically use multiple non-grantor trusts to increase the 199A deduction by taking advantage of each trust’s separate threshold amount. The proposed regulations, under the authority of 643(f), provide that two or more trusts will be aggregated and treated as a single trust if such trusts have substantially the same grantor(s) and substantially the same primary beneficiary or beneficiaries, and if a principal purpose is to avoid tax. The proposed regulations have a presumption of a principal purpose of avoiding tax if the structure results in a significant tax benefit, unless there is a significant non-tax purpose that could not have been achieved without the creation of the trusts.

Another anti-abuse issue relates to the "crack and pack" strategies. These strategies involve a business that is limited in its 199A deduction because it is an SSTB spinning off some of its business or assets to an entity that is not an SSTB and could claim the 199A deduction. For example, a law firm that owns its building could transfer the building to a separate entity and lease it back. The law firm is an SSTB and, thus, is subject to the 199A limitations. However, the real estate entity is not an SSTB and can generate a 199A deduction (based on the rental income) for the law partners. The proposed regulations provide that a SSTB includes any business with 50 percent common ownership (direct or indirect) that provides 80 percent or more of its property or services to an excluded trade or business. Also, if a trade or business shares 50 percent or more common ownership with an SSTB, to the extent that trade or business provides property or services to the commonly-owned SSTB, the portion of the property or services provided to the SSTB will be treated as an SSTB. The proposed regulations provide an example of a dentist who owns a dental practice and also owns an office building. The dentist rents half the building to the dental practice and half to unrelated persons. Under [Proposed Reg.] §1.199A-5(c)(2), the renting of half of the building to the dental practice will be treated as an SSTB.

Winners & Losers

Wolters Kluwer: Generally, what industries can be seen as "winners" and "losers" in light of the proposed regulations?

Joshua Wu: The most obvious "losers" in the proposed regulations are the specified services businesses (e.g., lawyers, accountants, doctors, etc.) who are further limited by the anti-abuse provisions in arranging their affairs to try and benefit from 199A. On the other hand, certain specific service providers benefit from the proposed regulations. For example, health clubs or spas are exempt from the SSTB limitation. Additionally, broadcasters of performing arts, real estate agents, real estate brokers, loan officers, ticket brokers, and art brokers are all exempt from the SSTB limitation.

Wolters Kluwer: What areas of the Code Sec. 199A provision stand out as most complex when calculating the deduction, and how does this complexity vary among taxpayers?

Joshua Wu: With respect to calculating the deduction, one complex area is planning to maximize the W-2 wages limitation. Because compensation as W-2 wages can reduce QBI, and potentially the 199A deduction, determining the efficient equilibrium point between having enough W-2 wages to limit the impact of the wage limitation, while preserving QBI, will be a fact-driven complex planning issue that must be determined by each taxpayer. Another area of complexity will be how taxpayers track losses which may reduce future QBI and, thus, the 199A deduction. The proposed regulations provide that losses disallowed for taxable years beginning before January 1, 2018, are not taken into account for purposes of computing QBI in a later taxable year. Taxpayers will be left to track pre-2018 and post-2018 losses and determine if a loss in a particular tax year reduces QBI or not.

III. Looking Ahead

Questions Remain

Wolters Kluwer: An IRS spokesperson told Wolters Kluwer that the IRS did not expect the proposed regulations to answer all questions surrounding the deduction. Indeed, Acting IRS Commissioner David Kautter has said that stakeholder feedback would help finalize the regulations. What significant questions remain unanswered for taxpayers and tax practitioners, and has additional uncertainty been created with the release of the IRS guidance?

Joshua Wu: On the whole, the proposed regulations did a good job addressing the most important areas of Section 199A. However, there are many areas where additional guidance would be helpful. Such guidance may be in the form of additional regulations or other administrative pathways. For example, the proposed regulations did not address the differing treatment between a taxpayer operating as a sole proprietor versus an S corporation. Wages paid to an S corporation shareholder boosts the W-2 limitation but are not considered QBI. Thus, with the same underlying facts, the 199Adeduction may vary between taxpayers operating as a sole proprietor versus those operating as an S corporation.

Possible Changes to Proposed Regulations

Wolters Kluwer: In what ways do you see the passthrough deduction rules changing when the final regulations are released?

Joshua Wu: I suspect that the core components of the proposed regulations will not change significantly. However, I would not be surprised if Treasury were to include more specific examples with respect to real estate and whether certain types of activity constitute a trade or business. Additionally, the proposed regulations will likely generate comments and questions from various industry groups related to the SSTB definitions and specific types of services (e.g., do trustees and executors fall under the legal services definition). Treasury may change the definitions of SSTBs in response to comments and clarify definitions for industry groups.

Tax Reform 2.0

Wolters Kluwer: The White House and congressional Republicans are currently moving forward on legislative efforts known as "Tax Reform 2.0." The legislative package proposes making permanent the passthrough deduction. How does the impermanence of this deduction currently impact taxpayers? (Note: On September 13, the House Ways and Means Committee marked up a three-bill Tax Reform 2.0 package. The measure is expected to reach the House floor for a full chamber vote by the end of September.)

Joshua Wu: The 199A deduction has a significant impact on the choice of entity question for businesses. With the 21 percent corporate rate, we have seen many taxpayers considering restructuring away from passthrough entities to a C corporation structure. The 199A deduction is a large consideration in whether to restructure or not, but its limited effective time does raise questions about the cost effectiveness of planning to obtain the 199A deduction where the benefit will sunset in eight years.

Key Takeways

Wolters Kluwer: Aside from advice on specific taxpayer situations, what key takeaways should tax practitioners generally alert clients to ahead of the 2019 tax filing season?

Wolters Kluwer: Aside from advice on specific taxpayer situations, what key takeaways should tax practitioners generally alert clients to ahead of the 2019 tax filing season?

Joshua Wu: Practitioners should remind clients who may benefit from the 199A deduction to keep detailed records of any losses for each line of business, as this may impact the calculation of QBI in the future. Practitioners should also help clients examine the whole of their activity to define their "trades or businesses." This will be essential to calculating the 199A deduction and planning to maximize any such deduction. Finally, practitioners should remember that some of the information that may be necessary to determine a 199A deduction may not be in their client’s possession. Practitioners need to plan in advance with their clients regarding how information about each trade or business will be obtained (e.g., how will a limited partner in a partnership obtain information regarding the partnership’s W-2 wages and/or UBIA of qualified property).

Wolters Kluwer: Any closing thoughts or comments?

Joshua Wu: Practitioners and taxpayers should remember that the regulations are only proposed and may change before they become final. Any planning undertaken this year should carefully weigh the economic costs and be rooted in the statutory language of 199A. It will be some time before case law helps clarify the nuances of Section 199A, and claiming the deduction allows the IRS to more easily impose the substantial understatement penalty if a taxpayer gets it wrong.

Wolters Kluwer has projected annual inflation-adjusted amounts for tax year 2019. The projected amounts include 2019 tax brackets, the standard deduction, and alternative minimum tax amounts, among others. The projected amounts are based on Consumer Price Index figures released by the U.S. Department of Labor on September 12, 2018.

Wolters Kluwer has projected annual inflation-adjusted amounts for tax year 2019. The projected amounts include 2019 tax brackets, the standard deduction, and alternative minimum tax amounts, among others. The projected amounts are based on Consumer Price Index figures released by the U.S. Department of Labor on September 12, 2018.

The Tax Cuts and Jobs Act of 2017 (TCJA) ( P.L. 115-97) mandated a change from the Consumer Price Index for All Urban Consumers (CPI-U) to the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). Official amounts for 2019 should be released by the IRS later in 2018.

Individual Tax Brackets

The projected bracket ranges for individuals in 2019 are as follows.

For married taxpayers filing jointly:

The 10 percent bracket applies to taxable incomes up to $19,400
The 12 percent bracket applies to taxable incomes over $19,400 and up to $78,900
The 22 percent bracket applies to taxable incomes over $78,900 and up to $168,400
The 24 percent bracket applies to taxable incomes over $168,400 and up to $321,450
The 32 percent bracket applies to taxable incomes over $321,450 and up to $408,200
The 35 percent bracket applies to taxable incomes over $408,200 and up to $612,350
The 37 percent bracket applies to taxable incomes over $612,350

For heads of households:

The 10 percent bracket applies to taxable incomes up to $13,850
The 12 percent bracket applies to taxable incomes over $13,850 and up to $52,850
The 22 percent bracket applies to taxable incomes over $52,850 and up to $84,200
The 24 percent bracket applies to taxable incomes over $84,200 and up to $160,700
The 32 percent bracket applies to taxable incomes over $160,700 and up to $204,100
The 35 percent bracket applies to taxable incomes over $204,100 and up to $510,300
The 37 percent bracket applies to taxable incomes over $510,300

For unmarried taxpayers:

The 10 percent bracket applies to taxable incomes up to $9,700
The 12 percent bracket applies to taxable incomes over $9,700 and up to $39,450
The 22 percent bracket applies to taxable incomes over $39,450 and up to $84,200
The 24 percent bracket applies to taxable incomes over $84,200 and up to $160,700
The 32 percent bracket applies to taxable incomes over $160,700 and up to $204,100
The 35 percent bracket applies to taxable incomes over $204,100 and up to $510,300
The 37 percent bracket applies to taxable incomes over $510,300

For married taxpayers filing separately:

The 10 percent bracket applies to taxable incomes up to $9,700
The 12 percent bracket applies to taxable incomes over $9,700 and up to $39,450
The 22 percent bracket applies to taxable incomes over $39,450 and up to $84,200
The 24 percent bracket applies to taxable incomes over $84,200 and up to $160,725
The 32 percent bracket applies to taxable incomes over $160,725 and up to $204,100
The 35 percent bracket applies to taxable incomes over $204,100 and up to $306,175
The 37 percent bracket applies to taxable incomes over $306,175

For estates and trusts:

The 10 percent bracket applies to taxable incomes up to $2,600
The 24 percent bracket applies to taxable incomes over $2,600 and up to $9,300
The 35 percent bracket applies to taxable incomes over $9,300 and up to $12,750
The 37 percent bracket applies to taxable incomes over $12,750

Standard Deduction

TCJA also roughly doubled the amount of the standard deduction. For 2019, the following standard deduction amounts are projected:

For married taxpayers filing jointly, $24,400
For heads of households, $18,350
For unmarried taxpayers and well as married taxpayers filing separately, $12,200

AMT Exemptions

TCJA eliminated the AMT for corporations, and increased the exemption amounts, and the exemption phaseouts, for individuals. For 2019, the AMT exemption amounts are projected to be:

For married taxpayers filing jointly, $111,700
For unmarried individuals and heads of households, $71,700
For married taxpayers filing separately, $55,850

Estate and Gift Tax

The following amounts related to transfer taxes (estate, generation-skipping, and gift taxes) are projected for 2019:

The gift tax annual exemption is projected to be $15,000 in 2019

The estate and gift tax applicable exclusion (increased under TCJA) is projected to be $11,400,000 for decedents dying in 2019

The exclusion for gifts made in 2019 to a spouse who is not a U.S. citizen is projected to be $155,000 for 2019

Other Amounts

The following other amounts are also projected for 2019:

The adoption credit for 2019 is projected to be $14,080 for 2019.

For 2019, the allowed Roth IRA contribution amount is projected to phase out for married taxpayers filing jointly with income between $193,000 and $203,000 For heads of household and unmarried filers, the projected phaseout range is between $122,000 to $137,000.

The maximum amount of deductible contributions that can be made to an IRA is projected to be $6,000 for 2019. The increased contribution amount for taxpayers age 50 and over will, therefore, be $7,000.

The deduction for traditional IRA contributions is projected to begin to phase out for married joint filers whose income is greater than $103,000 if both spouses are covered by a retirement plan at work. If only one spouse is covered by a retirement plan at work, the phaseout is projected to begin when modified adjusted gross income reaches $193,000. For heads of household and unmarried filers who are covered by a retirement plan at work, the 2019 income phaseout range for deductible IRA contributions is projected to begin at $64,000.

For 2019, the $2,500 student loan interest deduction is projected to begin to phase out for married joint filers with modified adjusted gross income (MAGI) above $140,000. For single taxpayers, the 2019 deduction is projected to begin to phase out at a MAGI level of over $70,000.

The amount of the 2019 foreign earned income exclusion under Code Sec. 911 is projected to be $105,900.

Special Report

President Signs Sweeping Tax Overhaul Into Law

The Tax Cuts and Jobs Act (H.R. 1) has been approved by Congress and signed by President Trump. After a last-minute procedural glitch that required the Senate to vote first on the final bill, the most sweeping change to the U.S. tax code in decades cleared the Senate, 51 to 48, in the early morning hours of December 20, followed by House approval, 224 to 201, later the same day. President Trump signed the bill into law at the White House on December 22, 2017.

Special Report

President Signs Sweeping Tax Overhaul Into Law

The Tax Cuts and Jobs Act (H.R. 1) has been approved by Congress and signed by President Trump. After a last-minute procedural glitch that required the Senate to vote first on the final bill, the most sweeping change to the U.S. tax code in decades cleared the Senate, 51 to 48, in the early morning hours of December 20, followed by House approval, 224 to 201, later the same day. President Trump signed the bill into law at the White House on December 22, 2017.

H.R. 1, as approved by Congress, impacts virtually every individual and business on a level not seen in over 30 years. As with any tax bill, however, there will be "winners" and "losers." This historic bill calls for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, enhancing the child tax credit, boosting business expensing, and more. The bill also impacts the Affordable Care Act (ACA), effectively repealing the individual shared responsibility requirement. Most provisions are effective starting in 2018.

INDIVIDUALS

Tax Rates

H.R. 1 carries temporary tax rates of 10, 12, 22, 24, 32, 35, and 37 percent after 2017. Under prior law, individual income tax rates have been 10, 15, 25, 28, 33, 35, and 39.6 percent.

Standard Deduction

H.R. 1 nearly doubles the standard deduction. It increases the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation (using chained CPI) for tax years beginning after 2018. All increases are temporary, starting in 2018 but ending after December 31, 2025. Under prior law, the standard deduction for 2018 had been set at $13,000 for joint filers, $9,550 for heads of households, and $6,500 for all other filers. The additional standard deduction for the elderly and the blind ($1,300 for married taxpayers, $1,600 for single taxpayers) is retained.

Deductions and Credits

H.R. 1 makes significant changes to some popular individual credits and deductions, effective starting in 2018. Many of the changes, however, are temporary, generally ending after 2025, in order to keep overall revenue costs for the new law within budgetary constraints.

Mortgage interest deduction. The new law limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), in the case of tax years beginning after December 31, 2017, and beginning before January 1,2026. For acquisition indebtedness incurred before December 15, 2017, the new law allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately).

The new law also allows taxpayers to continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.

State and local taxes. The new law limits annual itemized deductions for all nonbusiness state and local taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayer filing a separate return). Sales taxes may be included as an alternative to claiming state and local income taxes.

Miscellaneous itemized deductions. The new law temporarily repeals all miscellaneous itemized deductions that are subject to the two-percent floor under current law.

Medical expenses. The new law temporarily enhances the medical expense deduction. It lowers the threshold for the deduction to 7.5 percent of adjusted gross income (AGI) for tax years 2017 and 2018.

Family Incentives

The new law temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child. Up to $1,400 of that amount would be refundable. It also raises the adjusted gross income phaseout thresholds, starting at adjusted gross income of $400,000 for joint filers ($200,000 for all others).

The child tax credit is further modified to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children.

Education

The new law retains the student loan interest deduction. It also modifies section 529 plans and ABLE accounts. It does not overhaul the American Opportunity Tax Credit, as proposed in the original House bill. The new law also does not repeal the exclusion for interest on U.S. savings bonds used for higher education, as proposed in the House bill.

Alimony

The new law repeals the deduction for alimony payments and their inclusion in the income of the recipient.

Retirement

The new law generally retains the current rules for 401(k) and other retirement plans. However, it repeals the rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions to unwind a Roth conversion. Rules for hardship distributions are modified, among other changes.

Federal Estate Tax

The new law follows the original Senate bill in not repealing the estate tax, but rather doubling the estate and gift tax exclusion amount for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. The generation-skipping transfer (GST) tax exemption is also doubled.

Alternative Minimum Tax

The new law retains the alternative minimum tax (AMT) for individuals with modifications. It temporarily increases (through 2025) the exemption amount to $109,400 for joint filers ($70,300 for others, except trusts and estates). The new law also raises the exemption phase-out levels so that the AMT will apply to an income level of $1 million for joint filers ($500,000 for others). These amounts are all subject to annual inflation adjustment.

Affordable Care Act

The new law repeals the Affordable Care Act (ACA) individual shared responsibility requirement, making the payment amount $0. This change is effective for penalties assessed after 2018.

Carried Interest

Under the new law, the holding period for long-term capital gains is increased to three years with respect to certain partnership interests transferred in connection with the performance of services.

BUSINESSES

Corporate Taxes

H.R. 1 calls for a 21-percent corporate tax rate beginning in 2018. The new law makes the new rate permanent. The maximum corporate tax rate currently tops out at 35 percent.

Under the new law, the 80-percent and 70-percent dividends received deductions under current law are reduced to 65-percent and 50-percent, respectively. It also repeals the AMT on corporations.

Bonus Depreciation

H.R. 1 increases the 50-percent "bonus depreciation" allowance to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). A 20-percent phase-down schedule would then kick in. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.

Vehicle Depreciation

The new law raises the cap placed on depreciation write-offs of business-use vehicles. The new caps will be $10,000 for the first year a vehicle is placed in service (up from a current level of $3,160); $16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and $5,760 for each subsequent year (up from $1,875) until costs are fully recovered. The provision is effective for property placed in service after December 31, 2017, in taxable years ending after such date.

Section 179 Expensing

The new law enhances Code Sec. 179 expensing. The Conference bill sets the Code Sec. 179 dollar limitation at $1 million and the investment limitation at $2.5 million.

Deductions and Credits

Numerous business tax preferences are eliminated. These include the Code Sec. 199 domestic production activities deduction, non-real property like-kind exchanges, and more. Additionally, the rules for business meals are revised, as are the rules for the rehabilitation credit.

The new law leaves the research and development credit in place, but requires five-year amortization of research and development expenditures. It also creates a temporary credit for employers paying employees who are on family and medical leave.

Interest Deductions

The new law generally caps the deduction for net interest expenses at 30 percent of adjusted taxable income, among other criteria. Exceptions exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less.

Pass-Through Businesses

Currently, up to the end of 2017, owners of partnerships, S corporations, and sole proprietorships – as "pass-through" entities – pay tax at the individual rates, with the highest rate at 39.6 percent. The original House bill proposed a 25-percent tax rate for certain pass-through income after 2017, with a nine-percent rate for certain small businesses. The original Senate bill generally would have allowed a temporary deduction in an amount equal to 23 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications.

H.R. 1 generally follows the Senate's approach to the tax treatment of pass-through income, but with some changes, including a reduction in the percentage of the deduction allowable under the provision to 20 percent (not 23 percent), a reduction in the threshold amount above which both the limitation on specified service businesses and the wage limit are phased in, and a modification in the wage limit applicable to taxpayers with taxable income above certain threshold amounts.

Net Operating Losses

The new law modifies current rules for net operating losses (NOLs). Generally, NOLs will be limited to 80 percent of taxable income for losses arising in tax years beginning after December 31, 2017. It also denies the carryback for NOLs in most cases while providing for an indefinite carryforward, subject to the percentage limitation.

ENERGY

The original House bill called for repealing many current energy tax incentives, including the credit for plug-in electric vehicles. Other energy tax preferences, such as the residential energy efficient property credit, would have been modified. The new law retains the credit for plug-in electric vehicles and did not adopt any of the other repeals of or modifications to energy credits from the House bill.

EXEMPT ORGANIZATIONS

The new law does not modify or repeal the so-called "Johnson amendment." This provision generally restricts Code Sec. 501(c)(3) organizations from political campaign activity.

IRS ADMINISTRATION

H.R. 1 extends from nine months to two years the period for bringing a civil action for wrongful levy. The new law does not prohibit increases in IRS user fees, as proposed by the original Senate bill.

INTERNATIONAL

The new law moves the United States to a territorial system. It creates a dividend-exemption system for taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when the earnings are distributed. The foreign tax credit rules are modified, as are the Subpart F rules. The look-through rule for related controlled foreign corporations are made permanent, among other changes.

Repatriation

A portion of deferred overseas-held earnings and profits (E&P) of subsidiaries will be taxed at a reduced rate of 15.5 percent for cash assets and 8 percent for illiquid assets. Foreign tax credit carryforwards will be fully available and foreign tax credits triggered by the deemed repatriation would be partially available to offset the U.S. tax.