Main Menu
PDF

2017 Federal Tax Reform Creates Urgent Need for Taxpayers to Review Their Tax Strategy

December 22, 2017
Tax Advisory

After last minute political and procedural hurdles were cleared, the Tax Cuts & Jobs Act (the "Tax Act") was passed on December 20 and signed into law by President Trump on Dec. 22, 2017. The new law makes the most dramatic changes to the tax code since 1986. Importantly, in addition to this comprehensive federal tax overhaul, there are significant state tax implications.

The table below provides highlights of specified provisions included in the Tax Act, and compares the new tax provisions with the law in place prior to the passage of 2017 tax reform. There are many nuanced changes, which should be reviewed carefully based on each taxpayer's specific facts and circumstances. In addition, there are no IRS regulations or guidance at this point, and there have been no comprehensive state tax analyses done to compute what the state corporate and individual income tax implications will be. We recommend that taxpayers consult with experienced tax counsel regarding both federal and state tax planning considerations as certain actions may need to be taken quickly to maximize the benefits available from this historic reform. Please contact any member of our Varnum Tax Team for guidance.

*With certain exceptions, the individual tax provisions generally expire for tax years after December 31, 2025. One permanent change affecting tax liabilities of individuals is a change in the manner in which indexing for inflation is done. The new indexing uses what is called "chained CPI-U" rather than the standard "CPI-U" measure that had been used previously. Economic measures indicate the likely result of this change will be that indexed increases in tax brackets and phase-out thresholds will be slowed, which will result in increased tax liabilities for individuals as time passes. The corporate tax provisions included in the new law generally are permanent.

Topic Current Law Tax Cuts & Jobs Act Provision*
Individual Tax and Rates
Top marginal rate 39.6% 37%
Number of tax brackets 7 7
Alternative minimum tax

Complex alternative tax with exemption amounts:

  • Joint returns - $84,500
  • Single - $54,300
  • Married filing separately - $42,250
  • Phased out single $120,700; joint $160,900

Retains AMT with increased exemption amounts:

  • Joint returns - $109,400
  • Single - $70,300
  • Married filing separately - $54,700
  • Exemption amounts reduced by 25% of alternative taxable income exceeds $1m for joint returns and $500,000 for single taxpayers
Tax Rate Schedule: Single
  • $0 to $9,325:
    10% of taxable income
  • Over $9,325 but not over $37,950:
    $932.50 plus 15% of the excess over $9,325
  • Over $37,950 but not over $91,900:
    $5,226.25 plus 25% of the excess over $37,950
  • Over $91,900 but not over $191,650:
    $18,713.75 plus 28% of the excess over $91,900
  • Over $191,650 but not over $416,700:
    $46,643.75 plus 33% of the excess over $191,650
  • Over $416,700 but not over $418,400:
    $120,910.25 plus 35% of the excess over $416,700
  • Over $418,400:
    $121,505.25 plus 39.6% of the excess over $418,400
  • $0 to $9,525:
    10% of the taxable income
  • Over $9,525 but not over $38,700:
    $952.50 plus 12% of the excess over $38,700
  • Over $38,700 but not over $82,500:
    $4,453.50 plus 22% of the excess over $38,700
  • Over $82,500 but not over $157,500:
    $14,089.50 plus 24% of the excess over $82,500
  • Over $157,500 but not over $200,000:
    $32,089.50 plus 32% of the excess over $157,500
  • Over $200,000 but not over $500,000:
    $45,689.50 plus 35% of the excess over $200,000
  • Over $500,000:
    $150,689.50 plus 37% of the excess over $500,000
Tax Rate Schedule: Married Filing Jointly
  • $0 to $18,650:
    10% of taxable income
  • Over $18,650 but not over $75,900:
    $1,865 plus 15% of the excess over $18,650
  • Over $75,900 but not over $153,100:
    $10,452.50 plus 25% of the excess over $75,900
  • Over $153,100 but not over $233,350:
    $29,752.50 plus 28% of the excess over $153,100
  • Over $233,350 but not over $416,700:
    $52,222.50 plus 33% of the excess over $233,350
  • Over $416,700 but not over $470,700:
    $112,728 plus 35% of the excess over $416,700
  • Over $470,000:
    $131,628 plus 39.6% of the excess over $470,700
  • Not over $19,050:
    10% of the taxable income
  • Over $19,050 but not over $77,400:
    $1,905 plus 12% of the excess over $19,050
  • Over $77,400 but not over $165,000:
    $8,907 plus 22% of the excess over $77,400
  • Over $165,000 but not over $315,000:
    $28,179 plus 24% of the excess over $165,000
  • Over $315,000 but not over $400,000:
    $64,179 plus 32% of the excess over $315,000
  • Over $400,000 but not over $600,000:
    $91,379 plus 35% of the excess over $400,000
  • Over $600,000:
    $161,379 plus 37% of the excess over $600,000
Individual Deductions and Credits
State and local tax deduction Income or sales tax, plus property tax deductible Limits deduction for total of state income and property tax to $10,000
Mortgage interest deduction Deduction for interest on loans up to $1m for principal residence plus one additional residence Deduction for interest on loans up to $750,000; eliminates deduction for home equity debt
Moving expenses, and miscellaneous itemized deductions Deductible subject to limits Eliminated
Personal and dependency exemptions $4,150 per individual and dependents Eliminated
Standard deduction
  • $6,500 single
  • $13,000 married filing jointly
  • $12,200 single
  • $24,400 married filing jointly
Itemized deduction phase out

Itemized deductions phased out for income of:

  • Single $261,000
  • Married/Joint $318,800
Eliminated
Alimony deduction/ income Alimony generally is deductible to payor and taxable to recipient  For divorce or separation agreement entered (or modified if the new law is expressly incorporated) after December 31, 2018, alimony is not deductible to the payor and is not taxable to the recipient
Individual Tax Credits
Child Tax Credit $1,000

$2,000: up to $1,400 refundable

  • Credit phased out for married filing joint taxpayers at $400,000 of income, and single taxpayers at $200,000 of income
Basis/Carried Interest Provisions
Basis determination for sales of stock Specific identification available for basis determinations for stock sales No change in law – proposal to require first in first out (FIFO) basis determinations eliminated in final bill
Carried interest holding period One year holding period New three year holding period required to qualify for long term capital gain
Estate Tax
Estate tax base/ threshold Top rate 40% on estates valued at more than $5.6m/$11.2m

Rates unchanged

  • Increased threshold to tax only estates valued at more than $11.2m /$22.4m
Business Provisions
Highest pass-through rate 39.6%

Tax determined with a 20% deduction of pass-through income

  • Maximum rate of 29.6%
  • At income threshold of $157,500 single; $315,000 married, deduction limited to greater of 50% of wages paid, or 25% of wages plus 2.5% of cost of depreciable tangible property
Highest corporate rate 35% 21%
Corporate alternative minimum tax ("AMT") Complex alternative tax for corporations Eliminated
Business interest deduction Deductible in full (generally)

Limits deduction to 30% of net income before interest, taxes, depreciation, and amortization (EBITDA) and depletion

Section 179 expensing Small business can expense up to $500,000 of property in first year

Limit increased to $1m of property

Phase out threshold increased to $2.5m
Bonus Depreciation Prior bonus depreciation rules applied

100% immediate expensing of the cost of (new and used) qualified property placed in service after September 27, 2017 and before January 1, 2023

Phased down to:

  • 80% for property placed in service after December 31, 2022
  • 60% for property placed in service after December 31, 2023
  • 40% for property placed in service after December 31, 2024
  • 20% for property placed in service after December 31, 2025
Like Kind Exchange Deferral of gain on exchange of like-kind property (tangible and real) Like-kind exchange limited to real property
Dividends received deduction 80%/70% deduction for intercorporate dividends

80% deduction reduced to 65%

70% deduction reduced to 50%
Tax on multinational companies Tax using worldwide system with credits and deferrals Modified territorial system
One-time repatriation of assets tax N/A

8% tax on non-cash assets
(15.5% for cash)

You May Also Be Interested In

Join our email list to receive legal advisories, informative newsletters and event invites based on topics relevant to you.
Subscribe to Updates
Back to Page
{ footer Image }