On December 22nd President Trump signed into law H.R. 1, originally known as The Tax Cuts and Jobs Act (TCJA), marking the largest tax reform since the Tax Reform Act of 1986. This tax reform package reveals radical changes that affect not only individuals and businesses, but will make an impact at the industry level as well.
Tax reform efforts have been a topic of much discussion and controversy since Trump’s election at the beginning of 2017. After various revisions and reconciliations between the Senate and the House, the bill’s goals were accomplished, which primarily were to simplify the current tax system, and provide tax relief for middle-class families and businesses, as well as incentives for companies to bring business back to the US rather than invest overseas.
The final Conference Report signed by President Trump is 1,100 pages in length outlining in detail the current overhaul of the US tax system. These changes are in effect as of January 1, 2018. However, to keep the bill within budgetary parameters, many of these changes are temporary and will expire December 31, 2025 with no guarantee of extension by Congress.
For many US citizens living in Canada, these changes will not have a great deal of impact on their US tax filings because of the Canadian foreign tax credit offsetting any US tax liability and resulting in no tax due. However, as a result of the family incentives in the legislation we do expect to see larger refunds from the child tax credit as the bill revealed an increase in the child tax credit from $1,000 to $2,000 per qualifying child, of which up to $1,400 will be refundable. The committee believes this increased credit will offset the loss of the personal exemptions under the new law. For US citizens in Canada this could mean a larger refund even though no US tax liability is incurred.
If you are a US citizen residing in the US, please contact us for a more detailed analysis of the changes implement by the TCJA, so we can review any planning techniques that may be relevant in the transition.
Below we have highlighted the key points for both individuals and corporations.
For individuals, the TCJA reduced overall tax rates and widened tax brackets. Beginning in 2018 there will be seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
No changes were made to the current tax treatment of qualified dividends and capital gains.
Personal exemptions will be eliminated and standard deductions will increase to almost double their current amount: $12,700 to $24,000 for married filing joint filers, and $6,350 to $12,000 for single filers. The incentive is that there will be more taxpayers electing the standard deduction versus itemizing their deductions.
To further this incentive, many itemized deductions have been eliminated or reduced. State and local income taxes and property taxes are now capped at $10,000 per return. Home mortgage interest deduction is limited to $750,000 for primary and secondary homes purchased after December 15, 2017. Current homeowners are able to keep the current limitation of $1 million. Home equity debt interest is no longer deductible. All miscellaneous itemized deductions subject to the 2% floor were repealed, including tax preparation fees, brokerage fees and unreimbursed employee business expenses. Medical expense deductions were enhanced, with the threshold being reduced to 7.5% of AGI for tax years 2017 and 2018. They also increased the limit on charitable cash contributions from 50% of AGI to 60% of AGI.
Alimony is another area that was repealed. For divorce or separation instruments executed after December 31, 2018, there will no longer be a deduction for alimony payments or inclusion of those payments for the recipient.
Alternative Minimum Tax
Alternative minimum tax has been maintained for individuals (after much debate), but the exemption amount and phase-out range has been expanded.
Both C corporations and pass-through entities will benefit from the diminished tax rate implemented in the TCJA. Beginning in 2018, the corporate tax rate will be reduced to 21% and AMT will be fully eliminated, providing a substantial decrease in taxes for C corporations. Pass-through entities for individuals and trusts will now be taxed at a flat 20% rate on certain pass-through income. There are a number of factors that will determine whether or not the income will be subject to this rate. In addition, the new law outlines certain deductions for business that have been modified, with credits being repealed or altered.
The TCJA will move the US tax system to a territorial tax system. This includes numerous new rules regarding repatriation of foreign earnings and various transition rules and effective dates. US citizens in Canada that own at least 10% of shares in a Canadian corporation will very likely be affected by this transition tax and should consult with their accountant regarding planning options.
Estate and Gift Taxes
Estate and gift taxes were not eliminated as initially discussed, but the exemption was doubled to $11.2M per person and will be indexed for inflation accordingly.
The implications of this bill cannot be ignored. The significance of these changes will affect all taxpayers in some facet of their filings. Therefore, we encourage individuals and corporations to be proactive and take this opportunity to review the legislation, identify planning techniques and take action in order to strive towards a smooth transition in the 2018 tax year.