Congress Passes Sweeping New Tax Legislation
Update: President Trump signed H.R.1 into law on December 22, 2017.
After some procedural drama, Congress passed sweeping new tax legislation on December 20, 2017. On December 19, 2017, the House passed H.R.1 by a vote of 227-203. In the early morning hours of December 20, 2017, the Senate passed H.R.1 by a vote of 51-48, but only after making several technical amendments to provisions the Senate parliamentarian adjudged violative of the Byrd Rule. One change eliminated the provision allowing Section 529 plans to be used by homeschool families. Another removed the formal short title, "Tax Cuts and Jobs Act." The House voted again December 20, 2017, by a vote of 224-201, to approve the amended legislation. As such, H.R.1, now left only with the catchy title, ‘‘An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018," (Act) will become law when signed by the President. It is unclear at this time when that will happen. The signature could be delayed pending budget negotiations.
Below is a summary of major provisions in the Act.
Modifying the Individual Tax Brackets
From 2018 through 2025, the Act would lower individual tax rates across the board. Beginning January 1, 2026, individual rates would return to current levels. During the eight-year period of lowered rates, the Act would retain seven tax brackets for individuals, but lower the rates to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate, lowered from 39.6% to 37%, would be reached with income above $600,000 for married filing jointly (MFJ) and income above $500,000 for single taxpayers.
The income schedule for MFJ would be as follows:
The income schedule for single taxpayers would be as follows:
These rates diverge from both the House and Senate bills. The Senate bill proposed a top rate of 38.5% and the House bill included a top rate of 39.6%. Under these bills, the top rates would not have been triggered until income climbed above $1,000,000 for MFJ. Under the current law 2018 tax rate structure, the top rate of 39.6% would apply to income above $480,050 for MFJ and $426,700 for single taxpayers.
Under the Act, the maximum rates on net capital gains and qualified dividends would remain as they are under current law.
Adding another Enhanced Due Diligence Requirement for Tax Return Preparers
Beginning in 2018, the Act would impose an enhanced due diligence requirement upon tax return preparers when determining eligibility to file as head of household. This would be in addition to the enhanced due diligence requirement imposed by IRC § 6695(g) for determining the American opportunity tax credit, the earned income tax credit, and the child tax credit. A $500 penalty would apply to each failure.
Increasing the Standard Deduction
Of the roughly 143 million tax filers in the U.S., about 48 million currently itemize deductions. The Act would significantly decrease that number. For 2018 through 2025, the Act would increase the standard deduction to $24,000 for married filing jointly, $12,000 for single taxpayers, and $18,000 for head of household. The additional standard deduction for the aged or blind would continue at $1,300 ($1,600 for unmarried) in 2018.
Note: Under current law, the 2018 standard deduction would be $13,000 for married taxpayers, $6,500 for singles, and $9,550 for head of household.
Eliminating the Personal Exemption
The Act would eliminate the deduction for personal exemptions from 2018 through 2025. The personal exemption is $4,050 for each taxpayer and dependent in 2017.
The Act directs the Secretary of the Treasury to create new withholding rules for employers. Withholding is currently based upon the number of exemptions of the taxpayer, plus the amount of the standard deduction. The Act states that the Secretary may choose to continue current withholding rules through 2018.
Note: Depending upon how the Secretary implements the new law (if it passes), employees could begin to see different withholding amounts in early 2018. The IRS has posted a notice stating that it will issue withholding guidance in January, which would allow employees to see changes as early as February.
Eliminating or Changing Many Deductions
For tax years 2018 through 2025, the Act would eliminate a number of deductions.
State and Local Tax Deduction
Currently, individual taxpayers who itemize deductions may deduct the amounts they pay for state and local property taxes and income taxes from their federal income. The Act would generally eliminate this deduction for tax years 2018 through 2025. The Act would, however, include an exception. Individual taxpayers could continue to claim as an itemized deduction in an amount up to $10,000 ($5,000 for married filing separately) per year an aggregate of state and local income taxes and/or property taxes paid during tax years 2018 through 2025. Notably, property taxes incurred in a trade or business would continue to be fully deductible on a Schedule C, Schedule E, or Schedule F.
Planning Note: The Act specifically provides that taxpayers may not take a deduction in 2017 for prepaid state and local income taxes incurred after December 31, 2017.
Home Mortgage Interest Deduction
The Act would restrict the home mortgage interest deduction to apply to new acquisition indebtedness in an amount up to $750,000 (MFJ) or $375,000 for married filing separately. This would apply to new acquisitions occurring December 15, 2017, or later. For acquisition indebtedness occurring before December 15, 2017, the limitation for the deduction would remain at $1 million for MFJ and $500,000 for married filing separately. The Act would also suspend the deduction for home equity indebtedness for all taxpayers for tax years 2018 through 2025. In 2026, this deduction would return. Likewise, in 2026 the total indebtedness limitation would reset to $1.1 million of home mortgage indebtedness for MFJ and $550,000 for married filing separately, regardless of when the debt was incurred. This includes $1 million for original indebtedness and $100,000 for home equity indebtedness (MFJ) and half of those amounts for married filing separately.
Personal Casualty and Theft Losses
For tax years 2018 through 2025, the Act eliminates the itemized deduction for personal casualty and theft losses, except where the loss was attributable to a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
The Act would generally leave in place current law regarding the deductibility of charitable contributions. With the increase in the standard deduction and the loss of many other itemized deductions, however, many charitable contributions would no longer result in a tax deduction. The Act would eliminate the charitable deduction for taxpayers donating money in exchange for receiving college athletic event seating rights. It would also expand the income-based limit of cash donations made to public charities and other charitable organizations from 50 to 60 percent. The Act would not change the ability of those over 70 1/2 to make qualified charitable distributions from an IRA, without including those distributions in income.
Miscellaneous Itemized Deductions Subject to the 2 Percent Floor
For tax years 2018 through 2025, the Act would suspend the itemized deduction for all miscellaneous itemized deductions subject to the two percent floor. These deductions include, among many others, those for:
- Unreimbursed employee expenses (including, among many others, home office expenses, uniform expenses, travel expenses, meals and entertainment expenses, license fees, tools used for work, and job search expenses)
- Tax preparation expenses
- Safe deposit box rental
- Hobby expenses
- Investment fees and expenses
- Legal expenses
Medical Expenses Deduction
The Act retains the current itemized deduction for medical expenses exceeding 10 percent of the taxpayer’s adjusted gross income. For tax years 2017 and 2018, the Act would decrease this AGI threshold for everyone (not just those 65 and older) to 7.5 percent.
Beginning with divorce decrees signed after December 31, 2018, alimony payments would no longer be deductible. They would, however, be excluded from the income of the recipient. Divorce decrees issued before 2019, but modified after December 31, 2018, could choose to adopt this tax treatment in the modification. Present law would apply to other divorce decrees. Changes to this deduction would be permanent under the Act.
The Act suspends the deduction for moving expenses, with the exception of moving and storage expenses incurred by members of the Armed Forces. This suspension applies for tax years 2018 through 2025.
The Act retains the current $250 above-the-line deduction for eligible educators.
Increasing the Child Tax Credit and Creating a New Dependent Credit
To offset the considerable impact of the loss of many deductions and the $4,050 personal exemption per person upon families, the Act raises the child tax credit from $1,000 to $2,000 per qualifying child for tax years 2018 through 2025. Although the Senate bill would have expanded the credit to apply to qualifying children under the age of 18, instead of 17, the Act leaves the current age limit of “under 17” in place. Thus, the $2,000 credit applies only to children who are 16 years old and younger. The Act would allow $1,400 of the child tax credit to be refundable. The child tax credit (refundable or nonrefundable) would not be available for any qualifying child who does not have a social security number issued before the due date of the return.
The Act also provides a nonrefundable $500 credit for dependents who do not qualify for the child tax credit. This would include dependent children over the age of 16 and dependents ineligible for the child tax credit because they did not have a social security number. The current definition of dependent would continue.
The Act would significantly expand the phase-out threshold for credit eligibility. Beginning in 2018, the credit would begin to phase-out where adjusted gross income exceeds $400,000 for MFJ and $200,000 for other taxpayers. These levels would not be adjusted for inflation. Current phase-outs begin at $110,000 for MFJ and $75,000 for singles.
Note: As with other individual provisions, the expanded child tax credit and dependent credit provisions would expire in 2026.
Other Credits and Exclusions
Exclusion of Gain on a Personal Residence
The Act would continue current provisions allowing taxpayers to exclude gain from the sale of a personal residence. This means if taxpayers have lived in the residence for two out of the last five years and meet the other requirements of IRC § 121, they can continue to exclude gain from that sale from their income. The exclusion is limited to $250,000 of gain for single taxpayers and $500,000 if married filing jointly.
The Act would eliminate the following exclusions from income for tax years 2018 through 2025:
- Exclusion from income for employer reimbursement of qualified moving expenses (except for members of the Armed Forces)
- Exclusion from Income for Qualified Bicycle Commuting Reimbursements
The following exclusions from income would be retained:
- Employer-provided dependent care assistance up to $5,000
- Exclusion from income for employer-provided adoption assistance programs
- Exclusion for tangible personal property employee achievement awards
The Act clarifies that employee achievement awards consisting of cash, gift cards, event tickets, or other non-tangible personal property would not be considered tangible personal property "employee achievement awards." They would, therefore, not be deductible to the employer or excludable from income.
The Act retains current law for the following credits for individuals:
- Credit for the elderly and permanently disabled
- Credit for plug-in vehicles
- American Opportunity Tax Credit
- Earned Income Tax Credit
- Adoption Credit
Tax benefits permitted for retirement plans would be largely unchanged under the Act. It would, however, eliminate the ability of individuals to re-characterize a conversion contribution to a Roth IRA as a contribution to another type of IRA before the due date of the return. Other re-characterizations, however, would continue to be allowed. For example, a taxpayer could re-characterize a standard contribution to a Roth IRA as one being made to a traditional IRA before the due date of the return.
Expanded Section 529 Plans
The Act would expand IRC §529 plans to allow funds to pay expenses for K-12 private schools.
Other Education Provisions
- Allows student loan debt discharged because of death or disability to be excluded from income for years from 2018 through 2025.
- Retains the current deduction for student loan interest
- Retains the current American Opportunity Tax Credit
- Retains current law with respect to excluding qualified tuition reductions for graduate students from income
- Retains the exclusion from income for educational assistance provided by an employer
- Allows qualified amounts from a Section 529 account to be rolled into an ABLE account without penalty, through 2025.
The Act would also:
- Expand from nine months to two years the period of time for bringing a civil action to challenge a wrongful levy and the period for returning monetary proceeds from the sale of property that was wrongfully levied upon
- Temporarily increase some contribution limits for ABLE accounts
Alternative Minimum Tax
The Act would eliminate the corporate alternative minimum tax (AMT) beginning in 2018, but retain the AMT for individuals. The individual AMT, however, would see increased exemption amounts and phase-out thresholds for individuals through 2025.
Individual Shared Responsibility Payment
The Act would set the Individual Responsibility Payment to $0, beginning in 2019, meaning that individuals who do not have health insurance in 2019 and later will not be liable for the penalty. The penalty remains in place for tax years 2017 and 2018.
Note: The shared responsibility payment in 2017, for those without minimal essential coverage or an exemption, is 2.5% of the taxpayer’s annual income in excess over the filing requirement or $695 per person for the year, whichever is higher.
Estate, Gift, and Generation Skipping Tax
The Act would double the basic exclusion amount for estates of decedents dying during tax years 2018 through 2025 and for gifts made during those tax years. The Act would not repeal the estate, gift or generation skipping tax for estates valued greater than the increased basic exclusion. Under the Act, the basic exclusion amount for each person would be $11.2 million in 2018 (double the $5.6 million exclusion provided under current law). Portability would continue to allow a surviving spouse to elect to preserve the deceased spouse’s unused exclusion. Likewise, basis adjustment would continue at death for all estates.In 2026, basic exclusion amounts would return to current levels.
Note: In 2016, there were only 5,219 estate tax returns filed for taxable estates. Only 682 of those taxable estates had any farm property (2% of total taxable assets). This change would significantly lower this number for impacted tax years.
Corporate Tax Rate
The Act would permanently lower the maximum corporate tax rate from 35% to 21%, beginning in 2018. Reducing the corporate tax rate over a 10-year period would cost approximately $1.35 trillion.
Planning Note: The Act would transform the corporate tax structure from a graduated system, to a flat rate for all income. As such, some small corporations, would see an increase in their corporate income tax rate from 15 percent to 21 percent. The current corporate rate structure is as follows:
Lowering Tax Rates for Pass-Through Business Income
From 2018 through 2025, the Act would generally allow many individuals receiving income from a pass through business—including a sole proprietorship, an S corporation or a partnership—to take a new Section 199A deduction.
Qualified Business Income
These individuals could generally deduct 20 percent of “qualified business income,” defined as the net amount of income, gain, deduction, and loss attributable to a domestic trade or business, from their taxable income. Qualified business income is determined separately for each qualified trade or business of a taxpayer. Qualified businesses income does not include investment income, such as that from capital gain or dividends. It also does not include reasonable compensation received by an S corporation shareholder or guaranteed payments received by a partner in a partnership. Income from REIT dividends and qualified cooperative dividends, however, would be eligible for the 20 percent deduction. Qualified cooperative dividends would include patronage dividends and per-unit retain allocations. For more detail on the calculation of the 199A deduction with respect to qualified cooperative dividends, click here.
The 199A deduction would generally be limited to 50 percent of W-2 wages paid (like the current DPAD deduction). However, the wages limitation would only apply to individuals with taxable income greater than $315,000 (MFJ) or $157,500 for singles. Once these income levels are reached, the limitation would be phased in for the next $100,000 of income (MFJ) or $50,000 for singles. Individuals with income above these levels would be fully subject to the wages limitation. The wages limitation does not apply to income from REIT dividends or qualified cooperative dividends.
The Act incorporates an alternative capital component when calculating the wages limitation (for those taxpayers with taxable income above the threshold amount). The wages limitation is the greater of the following:
- 50 percent of the W-2 wages paid with respect to the qualified trade or business, or
- The sum of 25 of percent of the W-2 wages with respect to the qualified trade or business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property.
Service Trade or Businesses
Specified service trade or businesses are generally excluded from taking the Section 199A deduction. Like the W-2 wages limitation, however, this restriction is phased in, based upon taxable income. The services business limitation would begin to apply to taxpayers with taxable income greater than $315,000 (MFJ) or $157,500 for singles. Once these income levels are reached, the limitation would phase in over the next $100,000 of income for MFJ or $50,000 for singles. A specified service trade or business is defined in the Act as follows:
Any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.
Agricultural or Horticultural Cooperatives
Specified agricultural or horticultural cooperatives would also be eligible for the Section 199A deduction. The deduction, also beginning in 2018 and eliminated in 2026, would be subject to the wages limitation detailed above.
Trusts and Estates
The Act provides that trusts and estates would generally be eligible for the 20-percent deduction.
Calculating the Deduction
A taxpayer’s Section 199A deduction may not exceed his or her taxable income, reduced by net capital gain. It is also important to note that the Section 199A deduction would reduce taxable income, not adjusted gross income. As such, limitations based upon AGI (such as payment limitations for farm programs) would not be impacted by the deduction. Taxpayers would not be required to itemize to claim the Section 199A deduction.
First-Year Bonus Depreciation and Expensing
Additional First-Year Depreciation
The Act would significantly expand current cost recovery options for businesses for five years and then reduce those options through 2026. The Act would generally allow 100 percent bonus depreciation for five years for qualifying property acquired and placed into service after September 27, 2017 (taxpayers could elect to use 50 percent bonus for 2017 purchases). After five years of 100 percent bonus, the Act would then allow one year (2023) of 80 percent bonus, one year (2024) of 60 percent bonus, one year (2025) of 40 percent bonus, and one year (2026) of 20 percent bonus. After that time, bonus depreciation would end. Notably, the Act provides that these first-year additional depreciation property provisions would apply to used property, as well as new property. Property acquired before September 28, 2017, but placed in service on or after that date, would be subject to present-law phase-down limits.
Beginning in 2018, the Act would expand Section 179 to provide an immediate $1 million deduction (up from $510,000 in 2017) with a $2.5 million phase-out threshold (up from $2,030,000 in 2017). These amounts would be indexed for inflation beginning in 2019. These provisions would not expire.
Other Key Ag-Related Provisions
Farm Equipment Depreciation
Beginning in 2018, the Act would allow new farm equipment to be depreciated over a period of five years, instead of seven years. It would also remove the requirement that farm property is depreciated using the 150 percent declining balance method (except for 15 or 20-year property). These provisions apply to property placed in service after December 31, 2017.
Business Interest Limitation
Although the Act restricts business interest deductions generally to 30 percent of adjusted gross income (beginning in 2018), those restrictions would not apply to businesses with revenue below $25 million. The Act also allows a farming business (as defined in IRC § 263A(e)(4)) and agricultural cooperatives to elect not to be subject to the business interest limitation. Such farming businesses, however, would then be required to use the alternative depreciation system to depreciate any property used in the farming business with a recovery period of ten years or more.
Net Operating Losses
Beginning in 2018, the Act eliminates the two-year carryback of net operating losses (five-years for farming businesses), but allows a two-year carryback of net operating losses in the case of certain losses incurred in the trade or business of farming. It also limits the net operating loss deduction to 80 percent of taxable income for losses incurred after December 31, 2017.
The Act retains IRC §1031 like-kind exchange treatment for real property, but eliminates it for personal property, such as farm equipment or breeding heifers. The increase in expensing options should lessen the impact of this change.
Domestic Production Activities Deduction
The Act would eliminate the domestic production activities deduction (DPAD), which is frequently used by agricultural producers and cooperatives, beginning in 2018. The new 20 percent deduction for pass-through businesses is much like an expanded DPAD.
The Act would expand the number of taxpayers who may use cash accounting. Most taxpayers that meet a $25 million gross receipts test would be eligible to use the cash method, including any farming C corporations.
One concern raised by the Act would be its impact on the deficit. The Congressional Budget Office has stated that sequestration would be triggered by an increased deficit of $1.5 trillion. In 2018, $111 billion could be sequestered from mandatory accounts, including those allotted for farm program benefits. This could mean a decrease in farm program payments, absent further action by Congress. We will be watching for further information on this issue. (Update: On December 21, Congress passed a continuing resolution that, in addition to keeping the federal government operating into January, waived PayGo provisions in the near term, meaning that no sequestration will occur in 2018).
New Business Credit
The Act would allow an employer to take a general business credit of 12.5 percent of the amount of wages paid to qualifying employees during periods of FMLA leave if the rate of payment is 50 percent of the wages normally paid to the employee.
This Act will impact all taxpayers in 2018. Most of the changes made by the Act will go into effect January 1, 2018, and will not impact the 2018 filing season (2017 tax year). However, some changes will be near-term, such as payroll procedures (yet to be determined) and bonus depreciation rules. We will be providing updates and education on important provisions in the Act in the weeks ahead.
In the meantime, taxpayers should work with their tax advisors to see if there are steps that should be taken before year end in preparation for the new law. Some actions may include maximizing charitable and other itemized deductions in 2017 when tax rates are higher and many more deductions are allowed, paying assessed property taxes in 2017 (the law preempts pre-payment of state and local income taxes), making equipment purchases or trades in 2017, taking advantage of income deferral opportunities, moving for work before year-end, and prepaying farm expenses. Farmers with net operating losses from previous years should carefully consider best options since NOL carrybacks for agricultural businesses will be restricted from five years to two in 2018. Year-end planning options are all highly individualized decisions that will depend upon taxpayers' unique situations.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.