In somewhat of a surprising development, Congress passed and President Trump has signed the first significant overhaul of the tax code since 1986. Prior to that, there was a lot of tinkering around the edges, including some fairly substantial tax cuts under the most recent President Bush. However, major reform has proved elusive, until now. How big is the reform? It’s substantial, but it did not really change the structure of the tax code that much, with limited exceptions. For instance, there was no move to a flat tax or a value added tax like some have championed. Still, it is too big to completely summarize in a short article, so here are some highlights.
- The corporate tax is lowered to a flat 21%, and the corporate alternative minimum tax is eliminated. This would apply to C corporations, so it will be more beneficial to the economy as a whole rather than small business owners.
- Individuals can now deduct 20% of the Qualified Business Income (“QBI”) from certain pass-through entities. The details of this deduction are still unclear. The income from certain personal services businesses (such as health, law, accounting, consulting, and financial services) does not count as QBI. In addition, the deduction is limited to no more than 50% of the W-2 wages of the business.
- The one big structural change is the move to a territorial system for foreign earnings. That means businesses will no longer pay US income tax on earnings in foreign countries. This is how most of the rest of the world applies their taxes as well.
- The standard deduction is increased to $24,000 for married filing jointly and $12,000 for individuals.
- The child tax credit is increased to $2,000 per child.
- Individuals can now only deduct up to $10,000 of state and local income or property taxes.
- The home equity loan deduction is eliminated until 2025.
- Finally, the Obamacare penalty for not having health insurance is reduced to zero, after 2018.
Obviously, this is just the tip of the iceberg. There is quite a bit more in the bill, so please feel free to consult a Berry Moorman attorney regarding your personal situation.