Congress Finalizes Tax Reform

Noteworthy Developments for Year-End Tax Planning

• Itemized Deduction for State and Local Income Taxes. The Tax Act provides that, in the case of an amount paid in a taxable year beginning before January 1, 2018, with respect to a state or local income tax imposed for a taxable year beginning after December 31, 2017, the payment will be treated as paid on the last day of the taxable year for which the tax is imposed. As a result, under the provision, an individual will not be able to claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation on the deduction of such taxes applicable for taxable years beginning after 2017.
• Securities Sold on a First-in-First-out Basis. The Tax Act rejects the first-in-first-out approach to the sale of stock or securities that was adopted by the Senate. As such, taxpayers selling only part of their holdings of a particular stock or security will continue to be able to identify which shares or securities are being sold.
• Home Sale Gain Exclusion. Rejecting proposals included in both the House and Senate bills, the Tax Act preserves current law allowing taxpayers to exclude up to $500,000 for joint filers ($250,000 for other filers) of gain from a sale of a primary residence provided certain conditions are met.

The following summarizes the major changes of the legislation that will apply to all taxpayers regardless of industry:

• Corporate Taxation
  • Rates. Reduces the corporate tax rate to a flat 21 percent rate. Under current law, corporations are subject to a maximum tax rate of 35 percent.
    • Observation. The reduced flat corporate rate may prompt a review of the choice of legal entity.
  • Capital Investment. Allows taxpayers to fully and immediately expense 100 percent of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. Under current law, a 50 percent write-off (subject to phase-out) is generally available for new property placed in service before January 1, 2020. The Tax Act adopts the House proposal by expanding the 100 percent write-off to certain used property acquired by the taxpayer, and generally follows the Senate’s schedule for phasing out the percentage of the cost that may be expensed for property placed in service after January 1, 2023. Special rules apply to property acquired before September 28, 2017 and placed in service after September 27, 2017. Taxpayers may elect to expense only 50 percent in the first taxable year after September 27, 2017.
    • Observation. Expanding the write-off to used property could increase the incentive for buyers in M&A transactions to structure taxable acquisitions as actual or deemed asset purchases.
  • Dividend Received Deduction. Under current law, corporations are entitled to a 70 percent dividend received deduction (DRD) on dividends received from corporate subsidiaries. If the corporation receiving the dividend owns more than 20 percent, but less than 80 percent of the corporation paying the dividend, the DRD is 80 percent of the dividend received. The Tax Act reduces the 80 percent DRD to 65 percent, and the 70 percent DRD to 50 percent.
    • Observation. This downward adjustment is generally intended to preserve the current law effective tax rates on dividends entitled to the DRD.
  • Interest Deductions. Generally adopts the Senate’s approach but with modifications. With certain exceptions, limits the deduction in any taxable year for business interest to the sum of (i) business interest income for that year; plus (ii) 30 percent of the adjusted taxable income for the year. For this purpose, “business interest” is interest paid or accrued on indebtedness properly allocable to a trade or business. “Business interest income” is interest income properly allocable to a trade or business. “Adjusted taxable income” is a taxpayer’s taxable income, computed without regard to, among other items, (a) any items of income, gain, deduction or loss that are not properly allocable to a trade or business; (b) any business interest or business interest income; (c) the amount of any net operating loss deduction; (d) the 20 percent deduction for certain pass-through income (described more fully below); and (e) in the case of taxable years beginning before January 1, 2022, any deduction allowable for depreciation, amortization or depletion. Any interest disallowed is carried forward indefinitely and, in the case of corporate taxpayers, preserved as a tax attribute in certain asset acquisitions. This limitation does not apply to taxpayers with gross receipts that do not exceed $25 million.
    • Observation. Taxpayers with substantial cost recovery deductions should plan ahead of 2023, when such costs are scheduled to begin reducing the 30 percent adjusted taxable income cap on interest deductions.
  • Alternative Minimum Tax. Adopts the House approach and repeals the corporate alternative minimum tax (AMT). Also, allows a corporation with AMT credit carryforwards to claim a refund of 50 percent of the remaining credits (to the extent the credits exceed regular tax for the year) in tax years beginning in 2018, 2019 and 2020, and allows a refund of all remaining credits in the tax year beginning in 2021.
  • Net Operating Losses. For net operating losses (NOLs) arising in taxable years ending after December 31, 2017, no carryback is permitted but losses can be carried forward indefinitely. NOLs arising in taxable years beginning after December 31, 2017 are permitted, however, to offset only 80 percent of taxable income for the year (computed without regard to the carryover).
  • Like-Kind Exchanges. Allows tax-deferred like-kind exchange treatment only for real property used in a trade or business or for investment, eliminating like-kind exchange treatment for other property such as automobiles and art. The new limitation would generally apply to exchanges completed after December 31, 2017, unless property that is part of a like-kind exchange was either disposed of or received on or before that date.
  • Capital Contributions. Under current law, gross income of a corporation does not include any contributions to its capital, except for contributions in aid of construction from a customer or potential customer. The Tax Act expands the exceptions to also tax contributions from any government or civic group (other than as a shareholder). This provision applies to contributions made after the date of enactment, except for contributions made after the date of enactment by a governmental entity pursuant to a master development plan that has been approved prior to such date by a governmental entity.
    • Observation. These changes are intended to impose a tax on certain state and local incentives and concessions. The uncertainty in the House approach regarding capital contributions by shareholders without shares actually being issued (i.e., the application of the “meaningless gesture” doctrine) is resolved by not changing the current exception, and instead only adding a new category of taxable contributions.
  • Tax Credits and Passive Activity Bonds. Generally adopts the Senate approach. Retains the rehabilitation tax credit, but limits the amount of the tax credit to certified historic buildings and spreads this credit over five years. The Tax Act preserves current law regarding the new markets tax credits, energy tax credits, the deductibility of certain unused business credits, and the exemption for private activity bonds.
  • Accounting Methods. Adopts the Senate proposal and requires an accrual method taxpayer must include items in gross income no later than the taxable year in which that item is taken into account in any applicable financial statement (including any GAAP financial statement, Form 10-K annual statement, audited financial statement or a financial statement filed with any Federal agency for non-tax purposes). This rule applies before accrual rules otherwise applicable to debt instruments (including rules applicable to market discount and original issue discount (OID) of existing debt instruments), although in the case of a debt instrument having OID the new rules apply for taxable years beginning after December 31, 2018. An exception is provided for any gross income attributable to a mortgage servicing contract. In addition, the Tax Act effectively codifies Revenue Procedure 2004-34, which permits taxpayers to defer the inclusion of income from certain advance payments to the following year if the income also is deferred on the taxpayer’s financial statements.

• Partnership Taxation
  • Rates. Under current law, income of pass-through entities (e.g., sole proprietorships, partnerships, limited liability companies and S corporations) is allocated among the owners or shareholders, who pay the corresponding tax on their individual tax returns. As a result, the income (including business income) of pass-through entities is subject to ordinary individual income tax rates with a current maximum marginal rate of 39.6 percent. The Tax Act generally adopted the Senate’s deduction approach, but with certain modifications. For taxable years beginning before January 1, 2026, non-corporate owners and shareholders of pass-through entities may take a deduction for certain pass-through income equal to (i) 20 percent of their domestic qualified business income; plus (ii) 20 percent of any qualified dividends from real estate investment trusts (i.e., those that are not capital gains dividends or otherwise constitute qualified dividend income), a taxpayer’s allocable share of qualified income from a publicly traded partnership, and gain recognized upon the sale of an interest in such partnership that would otherwise be taxed as ordinary income. For this purpose, “qualified business income” is defined as all domestic business income other than investment income (e.g., dividends, income equivalent to a dividend, interest income not allocable to a trade or business, short- and long-term capital gains, etc.). The deduction for qualified business income applies to the first $157,500 of income (if single; $315,000 for joint filers) earned from pass-through entities. Once those income thresholds are met, the deduction is limited to the greater of (i) 50 percent of the W-2 wages paid by the business; and (ii) 25 percent of the W-2 wages paid by the business plus 2.5 percent of the cost of tangible depreciable assets in the business. Income from personal service businesses (e.g., accountants, lawyers, consultants, financial service providers, those in the performing arts, and those investing, trading or dealing in securities, but excluding engineering and architecture services) is not entitled to the deduction unless the owner’s income is less than $207,500 (if single; $415,000 for joint filers). The benefit of the deduction is phased out for these taxpayers over a $50,000-range (if single; $100,000-range for joint filers) for taxable income exceeding the $157,500 income threshold (if single; $315,000 for joint filers).
    • Observation. The 20 percent deduction for qualified business income in the Tax Act is lower than the 23 percent deduction included in the Senate bill but, because of the drop in the maximum marginal tax rate for ordinary individual income, results in a slightly better effective tax rate of 29.6 percent on pass-through business income, unless the deduction is otherwise limited as described above. Notably, the addition of the second prong to the W-2 wage limitation added by the conference committee expands the 20 percent deduction to businesses that do not have many employees (e.g., partnerships in which all service providers are partners) or that are capital-intensive (e.g., real estate firms). Fund managers organized as pass-through entities are not likely to, and investment funds organized as pass-through entities will not, benefit from this deduction.
  • Carried Interest. Under current law, a taxpayer who owns an interest in a partnership that recognizes long-term capital gain will include in income the taxpayer’s allocable share of such long-term capital gain. Under the Tax Act, if a non-corporate taxpayer owns a partnership interest received in connection with the performance of services (and not for the contribution of capital) in an applicable trade or business, any capital gain allocable to such taxpayer in respect of assets held by the partnership for more than one year that would have otherwise been treated as long-term capital gain will be converted into short-term capital gain unless the assets are held by the partnership for more than three years. An applicable trade or business means the business of raising or returning capital or investing in or developing specified assets. Specified assets consist of securities, commodities, real estate held for rental or investment, derivatives relating to the foregoing, and partnership interests to the extent of such partnership’s interest in the foregoing assets.
    • Observation. Although the legislative language is not entirely clear, the committee report accompanying the House bill indicates that the holding period is determined at the partnership level. Accordingly, a taxpayer holding a partnership interest may get the benefit of long-term capital gain treatment even if the taxpayer has held the partnership interest for three years or less.
  • Interest Deductions. With certain exceptions, limits the deduction in any taxable year for business interest to the sum of (i) business interest income for that year; plus (ii) 30 percent of the adjusted taxable income for the year. See “Corporate Taxation—Interest Deductions” above. In the case of partnerships, this limitation applies at the entity level. Any interest disallowed is carried forward indefinitely, subject to certain restrictions.
  • Mandatory Basis Adjustments. Under current law, a partnership is required to adjust the basis in its assets upon the sale of a partnership interest if the partnership has an overall net built-in loss of more than $250,000 in all of its assets. The Tax Act adopts the Senate provision requiring a partnership to make the same downward basis adjustments if the partner buying a partnership interest would be allocated a net loss of more than $250,000, notwithstanding the overall built-in gain in the partnership’s assets, such as when losses are specifically allocated to only some of the partners.
  • Technical Terminations. Adopts the House provision repealing the technical termination rule, thereby treating a partnership as continuing even if more than 50 percent of the total capital and profits interests of the partnership are sold or exchanged during any 12-month period. New elections are not required or permitted.

• Taxation of U.S. Multinational Entities
  • Modified Territorial System. Implements dramatic changes to the taxation of foreign income earned by U.S. businesses by adopting a modified territorial system of taxation, the most important features of which are summarized below. U.S. multinationals will need to examine their foreign holdings to determine the extent to which reorganization of them will maximize their benefits from these new rules.
    • Participation Exemption System. Adopts a participation exemption system in which 100 percent of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder that owns 10 percent or more of the foreign corporation are exempt from U.S. taxation by means of a 100 percent DRD. No foreign tax credit or deduction is allowed for any foreign taxes (including withholding taxes) paid or accrued with respect to any exempt dividend, and no deductions for expenses properly allocable to an exempt dividend (or stock that gives rise to exempt dividends) are taken into account for purposes of determining the U.S. corporate shareholder’s foreign-source income. A minimum holding period of 365 days is required in order for the exemption to apply. In addition to actual dividends, the participation exemption also applies to the deemed-dividend portion of a corporation’s gain from the sale of stock of a 10 percent-owned foreign corporation. The participation exemption does not apply to amounts for which the paying foreign corporation receives a benefit against foreign country taxes.
    • Repatriation of Prior Deferred Income. Ensures that the adoption of the participation exemption system does not allow the previously untaxed deferred earnings (estimated to be approximately $2 trillion) of a controlled foreign corporation (CFC) or other foreign corporation with a 10 percent U.S. corporate shareholder to escape U.S. tax entirely by requiring a U.S. shareholder (as defined in the subpart F rules) to include as subpart F income, in its last taxable year beginning before January 1, 2018, its share of the foreign corporation’s earnings that have not been previously subject to U.S. tax. The earnings are classified either as cash or cash equivalents (including net accounts receivable) taxed at a rate of 15.5 percent or as earnings reinvested in the corporation’s business (e.g., in property, plant and equipment) taxed at a rate of eight percent. A U.S. shareholder may elect to pay the tax liability over a period of up to eight years without an interest charge. The eight-year installment period for payment of the tax is back-loaded by requiring only eight percent of the tax to be paid in each of the first five years, 15 percent in the sixth year, 20 percent in the seventh year, and 25 percent in the eighth year. Each shareholder of an S corporation that is a U.S. shareholder may elect to defer payment of its tax liability without an interest charge until a triggering event occurs, such as a disposition of shares of the S corporation.
      • Observation. The mandatory inclusion of untaxed deferred earnings applies to all U.S. shareholders even though only 10 percent corporate shareholders benefit from the participation exemption. As a practical matter, a U.S. shareholder in a foreign corporation that is not a CFC may not be able to know how much untaxed earnings are allocable to it.
    • Expansion of Subpart F Rules. Retains with modifications the subpart F regime for taxation of a CFC. To deal with the outbound shifting of income from intangible property to a CFC, the Tax Act follows the Senate bill and creates a new category of subpart F income deemed to arise from high-value intangibles, known as “global intangible low-taxed income” (GILTI). The effective tax rate on GILTI for a corporate U.S. shareholder is 10.5 percent for taxable years beginning after December 31, 2017, while a non-corporate U.S. shareholder’s share of a CFC’s GILTI is subject to ordinary individual income tax rates. GILTI is measured as the excess of the U.S. shareholder’s share of its CFC’s net income over such shareholder’s share of 10 percent of the adjusted basis of the qualified business investment of such CFC, adjusted downward for interest expense. GILTI does not include income effectively connected with a U.S. trade or business, subpart F income, insurance and financing income subject to a high effective rate of tax, certain related-party payments or foreign oil and gas extraction income. As with other subpart F income, the U.S. shareholder is taxed on GILTI each year, regardless of whether it leaves those earnings offshore or repatriates the earnings to the United States.
    • Definition of U.S. Shareholder for Subpart F Purposes. Under current law, a U.S. person that owns at least 10 percent of the voting stock of a CFC is a “U.S. shareholder” that is required to include its share of the CFC’s subpart F income in income currently (whether distributed or not). The Tax Act adopts the Senate’s approach and expands the definition of a U.S. shareholder to include U.S. persons that own at least 10 percent of the value of a CFC. This expansion would cause some foreign corporations to become CFCs and would require additional persons to become subject to subpart F income inclusions from CFCs.
      • Observation. Under current law, a U.S. person that has owned at least 10 percent of the voting stock of a CFC at any point during the five-year period prior to selling stock in such corporation is required to treat any gain recognized on such sale as ordinary income to the extent of such shareholder’s pro rata share of the corporation’s previously untaxed earnings and profits. The Tax Act does not expand this provision to apply to U.S. shareholders that own 10 percent by value. This may be an oversight that will be addressed in future technical corrections legislation.
    • Downward Attribution for Determining CFC Status. Revises the attribution rules relevant for determination of CFC status so that certain stock of a foreign corporation owned by a foreign person is attributed to a related U.S. person for purposes of determining whether the related U.S. person is a U.S. shareholder of the foreign corporation and, therefore, whether the foreign corporation is a CFC. This provision applies to the last taxable year of a foreign corporation beginning before January 1, 2018 and each subsequent year of such foreign corporation and to taxable years of U.S. shareholders in which or with which such taxable years of a foreign corporation end.
      • Observation. The conference committee report states that the intent of this provision is to render ineffective certain transactions that are used as a means of avoiding the subpart F provisions. The report accompanying the Senate bill states that the provision is not intended to cause a U.S. shareholder to have subpart F inclusions if that U.S. shareholder is unrelated to the other U.S. person to whom stock of the CFC is attributed. However, the legislative language does not contain either of these limitations. Therefore, unless this is clarified in technical corrections or regulations, the provision increases the likelihood of a foreign corporation being a CFC.
    • Additional Subpart F Changes. Among other changes, removes foreign base company oil related income from subpart F income and modifies the deemed paid credit so that it applies on a current year basis only. Both the House and Senate bills repealed or modified Internal Revenue Code § 956 and made permanent the rule under Internal Revenue Code § 954(c)(6) (providing look-through treatment for dividends, interest, rents and royalties that one CFC receives or accrues from a related CFC). The Tax Act, however, adopts neither change.
      • Observation. It is unclear if there is any policy reason for the continued application of Internal Revenue Code § 956 with respect to taxpayers that are entitled to the benefits of the new participation exemption system.
  • Tax on Gain on Sale of Partnership Interest. For sales or exchanges occurring on or after November 27, 2017, adopts the Senate’s proposal and codifies Revenue Ruling 91-32 by treating gain recognized by a foreign person on the sale of an interest in a partnership as effectively connected with a U.S. trade or business if the partnership is engaged in a U.S. trade or business. Also imposes a new 10 percent withholding tax on the sale unless a non-foreign affidavit is provided by the seller. The new withholding tax is effective for sales or exchanges occurring after December 31, 2017.
    • Observation. The change reverses a recent Tax Court decision, which held that gain recognized by a foreign person on the sale of an interest in a partnership could not be subject to U.S. federal income tax solely because the partnership is engaged in a U.S. trade or business. 
    • Observation. In the event the buyer of such partnership interest fails to withhold, the partnership is responsible for the withholding tax. As a result, it is likely that most partnership agreements would treat the partnership’s payment of the withholding tax as a distribution to the buyer.
  • Interest Deductions. Does not include either the House bill or Senate bill provisions that would have limited the deductible net interest expense of a U.S. corporation that is a member of a worldwide affiliated group to the extent the U.S. corporation has disproportionate interest compared to the worldwide group.
  • Anti-Base Erosion. Follows the Senate bill (with modifications) and requires an applicable taxpayer to pay a tax generally equal to its “base erosion minimum tax amount.” For this purpose, a taxpayer’s base erosion minimum tax amount is the excess of 10 percent (five percent for taxable years beginning in 2018) of the corporation’s taxable income (determined without regard to deductions and certain other tax benefits from “base erosion payments” or the “base erosion percentage” of any NOL deduction) over its regular tax liability (computed generally without regard to credits other than research and development credits). For affiliated groups that include certain banks and securities dealers, the income threshold is 11 percent (six percent for taxable years beginning in 2018). For taxable years beginning after December 31, 2025, the income threshold increases to 12.5 percent (13.5 percent for affiliated groups that include certain banks and securities dealers) and all credits are also subtracted from regular tax liability in computing the base erosion minimum tax amount. A base erosion payment generally includes any amount paid or accrued by a taxpayer to a foreign person that is a related party (generally, with a 25 percent affiliation threshold) and that either is deductible or is paid in connection with the acquisition of depreciable or amortizable property. The provision applies to corporations (other than RICs, REITs, and S corporations) with average annual gross receipts of at least $500 million for the preceding three years (computed on a group-wide basis) and a “base erosion percentage” of at least three percent (two percent for affiliated groups that include certain banks and securities dealers). The base erosion percentage is generally the taxpayer’s base erosion tax benefits divided by its deductions (other than the 100 percent participation exemption dividends received deduction, net operating loss deductions, and the deduction that implements the reduced tax on GILTI (described more fully above)). The House bill’s excise tax on certain payments made by domestic corporations to certain related foreign corporations is not included in the Tax Act.
  • Outbound Transfers. The Tax Act adopts certain provisions from the Senate bill in respect of outbound transfers of property.
    • Property Used in Active Trade or Business. Under Internal Revenue Code § 367(a), a U.S. person generally is required to recognize gain with respect to certain transfers to a foreign corporation that would otherwise be tax-free. The Tax Act repeals an exception previously provided for the transfer of certain property to be used by the transferee foreign corporation in the active conduct of a trade or business outside of the United States.
    • Intangible Property. Internal Revenue Code §§ 367(d)(2) and 482 contain special rules, with respect to transfers by a U.S. person of intangible property, in otherwise tax-free exchanges or to a related person, that require the U.S. transferor’s income to be increased in the future to reflect amounts that are commensurate with the income derived from the intangible (the so-called “super royalty” rules). The Tax Act revises the definition of intangible property to include goodwill, going concern value, workforce in place, and any other item of value or potential value that is not attributable to tangible property or the services of any individual. Such revisions direct the Internal Revenue Service to require the valuation of transfers of intangible property on an aggregate basis with other property or services transferred or on the basis of the realistic alternatives to such a transfer if the Internal Revenue Service determines that such basis is the most reliable means of valuation of such transfers.
      • Observation. It appears these provisions are intended to limit shifting income to foreign affiliates through intangible property transfers. The extent to which these provisions would do so is unclear.
    • Inventory Income Sourcing. Allocates and apportions income from the sale of inventory property produced within and sold outside of the U.S. (or vice versa) between sources within and outside of the U.S. solely on the basis of the production activities with respect to the inventory.
      • Observation. This will likely reduce the amount of foreign source income realized by taxpayers exporting goods produced in the U.S. and, therefore, reduce their ability to utilize foreign tax credits.

• Individual Taxation
  • Rates. Under current law, ordinary income is subject to a seven-bracket progressive system: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. Generally adopting the Senate’s proposal, under the Tax Act ordinary income is subject to the following seven brackets: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent (down from the Senate’s 38.5 percent). For joint returns, the thresholds generally are as follows: $19,050 for the 12 percent rate; $77,400 for the 22 percent rate; $165,000 for the 24 percent rate; $315,000 for the 32 percent rate, $400,000 for the 35 percent rate; and $600,000 for the 37 percent rate. The rates are effective for taxable years 2018 through 2025.
  • Individual Mandate. Under current law, taxpayers must maintain “minimum essential coverage” for health insurance or pay a penalty (otherwise known as the “individual mandate”). The Tax Act adopts the Senate’s approach and effectively repeals the individual mandate by reducing the amount of the penalty to zero. The permanent change is effective for taxable months after December 31, 2018.
  • Standard Deduction. For taxable years 2018 through 2025, increases the standard deduction for joint filers to $24,000, up from the current deduction of $12,700.
    • Observation. Increasing the standard deduction comes at the expense of personal exemptions and itemized deductions, many of which are eliminated.
  • Itemized Deductions. Under current law, individuals are allowed to take itemized deductions for medical expenses, mortgage interest expense (on up to $1.1 million of acquisition and home equity debt for joint filers), personal casualty losses, real estate taxes, state and local income taxes, charitable contributions, unreimbursed employee expenses, and tax preparation fees. Below is a list of some of the changes included in the Tax Act with respect to itemized deductions of individuals. Unless otherwise noted, these changes are effective for taxable years 2018 through 2025.
    • Repeals the overall limitation on itemized deductions.
    • Repeals the deduction for state and local taxes, other than (A) property taxes paid or accrued in a trade or business or for the production of income and (B) $10,000 of property and income (or sales) tax.
    • Repeals the deduction for foreign real property taxes other than those paid or accrued in a trade or business.
    • For mortgage debt incurred after December 15, 2017, interest on no more than $750,000 of such debt is deductible, down from the current limit of $1 million. The deduction for interest on loans for second homes is retained, but the deduction for interest on home equity lines of credit is no longer available. Acquisition indebtedness incurred on or before December 15, 2017 or pursuant to binding contracts to purchase a home before such date are subject to certain grandfathering rules. After 2025, the current $1 million limitation on mortgage interest applies regardless of when the debt was incurred.
    • Increases the limitation on deduction for charitable contributions to 60 percent of the taxpayer’s contribution base, up from the current overall 50 percent limitation.
    • The deduction for medical expenses would apply to expenses that exceed 7.5 percent of the taxpayer’s adjusted gross income for the 2017 and 2018 taxable years, and expenses that exceed 10 percent of the taxpayer’s adjusted gross income thereafter.
    • Repeals other itemized deductions, such as moving expenses, tax preparation, and all itemized deductions subject to the two-percent floor (e.g, home office deductions, license and regulatory fees, dues to professional societies, etc.).
      • Observation. Eliminating the need for itemized deductions was intended to lead to a more simplified filing process. Because the Tax Act ultimately retains more deductions and exemptions than originally proposed, however, a simplified “postcard” filing process seems unlikely.
    • Alternative Minimum Tax. Preserves the individual AMT, and generally follows the Senate’s proposal by increasing (i) the exemption amount from $78,750 to $109,400; and (ii) the phase-out threshold from $150,000 to $1 million, in each case, for joint filers. These provisions are effective for taxable years 2018 through 2025.
    • Child Tax Credits. For taxable years 2018 through 2025, increases the amount of the child tax credit from $1,000 to $2,000 and increases the phase-out threshold amount to $400,000 for joint filers. Up to $1,400 of the tax credit is refundable, and a new non-refundable $500 credit is available for other dependents. The earned income threshold for the refundable credit is reduced from $3,000 to $2,500.
    • Estate, Gift and Generation-Skipping Transfer Taxes. For taxable years 2018 through 2025, increases the basic exclusion amount for estate, gift and generation-skipping transfer taxes to $10 million, up from the current $5 million limit.

Some of the changes described above, as well as other aspects of the Tax Act, will have particular effect on certain industries. We expect to publish summaries of provisions in the Tax Act affecting the insurance industry, the energy industry, and compensation. These summaries will be posted on our Tax Reform Developments and Insights webpage, which can be accessed by clicking here.