GENERAL EXPLANATION OF PUBLIC LAW JOINT COMMITTEE ON TAXATION

Transcription

1 1 [JOINT COMMITTEE PRINT] GENERAL EXPLANATION OF PUBLIC LAW PREPARED BY THE STAFF OF THE JOINT COMMITTEE ON TAXATION DECEMBER 2018 U.S. GOVERNMENT PUBLISHING OFFICE WASHINGTON : 2018 JCS 1 18 VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 4012 Sfmt 4012 E:\HR\OC\A137.XXX A137 E:\Seals\Congress.#13

2 JOINT COMMITTEE ON TAXATION 115TH CONGRESS, 2D SESSION SENATE ORRIN G. HATCH, Utah, Chairman CHUCK GRASSLEY, Iowa MIKE CRAPO, Idaho RON WYDEN, Oregon DEBBIE STABENOW, Michigan HOUSE KEVIN BRADY, Texas, Vice Chairman SAM JOHNSON, Texas DEVIN NUNES, California RICHARD NEAL, Massachusetts JOHN LEWIS, Georgia THOMAS A. BARTHOLD, Chief of Staff ROBERT HARVEY, Deputy Chief of Staff DAVID LENTER, Deputy Chief of Staff (II) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 6646 E:\HR\OC\A137.XXX A137

3 C O N T E N T S Page INTRODUCTION... 1 TITLE I... 3 SUBTITLE A INDIVIDUAL TAX REFORM... 3 PART I TAX RATE REFORM... 3 A. Modification of Rates (sec of the Act and sec. 1 of the Code)... 3 B. Inflation Adjustments Based On Chained CPI (sec of the Act and sec. 1(f) of the Code)... 9 PART II DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS THRU ENTITIES A. Deduction for Qualified Business Income (sec of the Act and sec. 199A of the Code) B. Limitation on Losses for Taxpayers Other Than Corporations (sec of the Act and sec. 461(l) of the Code) PART III TAX BENEFITS FOR FAMILIES AND INDI- VIDUALS A. Increase in Standard Deduction (sec of the Act and sec. 63 of the Code) B. Increase in and Modification of Child Tax Credit (sec of the Act and sec. 24 of the Code) C. Modifications to the Deduction for Charitable Contributions (secs , 13704, and of the Act and sec. 170 of the Code) D. Increased Contributions to ABLE Accounts (sec of the Act and secs. 25B and 529A of the Code) E. Rollovers to ABLE Programs from 529 Programs (sec of the Act and secs. 529 and 529A of the Code) F. Treatment of Certain Individuals Performing Services in the Sinai Peninsula of Egypt (sec of the Act and secs. 2, 112, 692, 2201, 3401, 4253, 6013, and 7508 of the Code) (III) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

4 IV Page G. Temporary Reduction in Medical Expense Deduction Floor (sec of the Act and sec. 213 of the Code) H. Relief for 2016 Disaster Areas (sec of the Act and secs. 72(t), 165, , 408, 457, and 3405 of the Code) PART IV EDUCATION A. Treatment of Student Loans Discharged on Account of Death or Disability (sec of the Act and sec. 108 of the Code) B. 529 Account Funding for Elementary and Secondary Education (sec of the Act and sec. 529 of the Code) PART V DEDUCTIONS AND EXCLUSIONS A. Suspension of Deduction for Personal Exemptions (sec of the Act and sec. 151 of the Code) B. Limitation on Deduction for State and Local, etc. Taxes (sec of the Act and sec. 164 of the Code) C. Limitation on Deduction for Qualified Residence Interest (sec of the Act and sec. 163(h) of the Code) D. Modification of Deduction for Personal Casualty Losses (sec of the Act and sec. 165 of the Code) E. Suspension of Miscellaneous Itemized Deductions (sec of the Act and secs. 62, 67 and 212 of the Code) F. Suspension of Overall Limitation on Itemized Deductions (sec of the Act and sec. 68 of the Code) G. Suspension of Exclusion for Qualified Bicycle Commuting Reimbursement (sec of the Act and sec. 132(f) of the Code) H. Suspension of Exclusion for Qualified Moving Expense Reimbursement (sec of the Act and sec. 132(g) of the Code) I. Suspension of Deduction for Moving Expenses (sec of the Act, and sec. 217 of the Code) J. Limitation on Wagering Losses (sec of the Act and sec. 165(d) of the Code) K. Repeal of Deduction for Alimony Payments (sec of the Act and secs. 61, 71, 215, and 682 of the Code) PART VI INCREASE IN ESTATE AND GIFT TAX EX- EMPTION VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

5 V Page A. Increase in Estate and Gift Tax Exemption (sec of the Act and secs and 2010 of the Code) PART VII EXTENSION OF TIME LIMIT FOR CON- TESTING IRS LEVY A. Extension of Time Limit for Contesting IRS Levy (sec of the Act and secs and 6532 of the Code) PART VIII INDIVIDUAL MANDATE A. Elimination of Shared Responsibility Payment for Individuals Failing to Maintain Minimum Essential Coverage (sec of the Act and sec. 5000A of the Code) SUBTITLE B ALTERNATIVE MINIMUM TAX A. Repeal of Tax for Corporations; Credit for Prior Year Minimum Tax Liability of Corporations; Increased Exemption for Individuals (secs of the Act and secs. 53 and of the Code) SUBTITLE C BUSINESS RELATED PROVISIONS PART I CORPORATE PROVISIONS A. 21-Percent Corporate Tax Rate (sec of the Act and sec. 11 of the Code) B. Reduction in Dividends-Received Deduction to Reflect Lower Corporate Income Tax Rates (sec of the Act and sec. 243 of the Code) PART II SMALL BUSINESS REFORMS A. Modifications of Rules for Expensing Depreciable Business Assets (sec of the Act and sec. 179 of the Code) B. Small Business Accounting Method Reform and Simplification (sec of the Act and secs. 263A, 448, 460, and 471 of the Code) PART III COST RECOVERY AND ACCOUNTING METHODS SUBPART A COST RECOVERY A. Temporary 100-Percent Expensing for Certain Business Assets (sec of the Act and sec. 168(k) of the Code) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

6 VI Page B. Modifications to Depreciation Limitations on Luxury Automobiles and Personal Use Property (sec of the Act and sec. 280F of the Code) C. Modifications of Treatment of Certain Farm Property (sec of the Act and sec. 168 of the Code) D. Applicable Recovery Period for Real Property (sec of the Act and sec. 168 of the Code) E. Use of Alternative Depreciation System for Electing Farming Businesses (sec of the Act and sec. 168 of the Code) F. Amortization of Research and Experimental Expenditures (sec of the Act and sec. 174 of the Code) G. Expensing of Certain Costs of Replanting Citrus Plants Lost by Reason of Casualty (sec of the Act and sec. 263A of the Code) SUBPART B ACCOUNTING METHODS A. Certain Special Rules for Taxable Year of Inclusion (sec of the Act and sec. 451 of the Code) PART IV BUSINESS RELATED EXCLUSIONS AND DEDUCTIONS A. Limitation on Deduction for Interest (sec of the Act and sec. 163(j) of the Code) B. Modification of Net Operating Loss Deduction (sec of the Act and sec. 172 of the Code) C. Like-Kind Exchanges of Real Property (sec of the Act and sec of the Code) D. Limitation on Deduction by Employers of Expenses for Fringe Benefits (sec of the Act and sec. 274 of the Code) E. Repeal of Deduction for Income Attributable to Domestic Production Activities (sec of the Act and former sec. 199 of the Code) F. Denial of Deduction for Certain Fines, Penalties, and Other Amounts (sec of the Act and sec. 162 of the Code) G. Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection with Sexual Harassment or Sexual Abuse (sec of the Act and sec. 162 of the Code) H. Repeal of Deduction for Local Lobbying Expenses (sec of the Act and sec. 162 of the Code) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

7 VII Page I. Recharacterization of Certain Gains in the Case of Partnership Profits Interests Held in Connection with Performance of Investment Services (sec of the Act and sec of the Code) J. Prohibition on Cash, Gift Cards, and Other Nontangible Personal Property as Employee Achievement Awards (sec of the Act and secs. 74(c) and 274(j) of the Code) K. Elimination of Deduction for Living Expenses Incurred by Members of Congress (sec of the Act and sec. 162 of the Code) L. Certain Contributions by Governmental Entities Not Treated as Contributions to Capital (sec of the Act and sec. 118 of the Code) M. Repeal of Rollover of Publicly Traded Securities Gain into Specialized Small Business Investment Companies (sec of the Act and former sec of the Code) N. Certain Self-Created Property Not Treated as a Capital Asset (sec of the Act and sec. 1221(a)(3) of the Code) PART V BUSINESS CREDITS A. Modification of Orphan Drug Credit (sec of the Act and secs. 45C and 280C of the Code) B. Rehabilitation Credit Limited to Certified Historic Structures (sec of the Act and sec. 47 of the Code) C. Employer Credit for Paid Family and Medical Leave (sec of the Act and new sec. 45S of the Code) D. Repeal of Tax Credit Bonds (sec of the Act and former secs. 54A, 54B, 54C, 54D, 54E, 54F and 6431 of the Code) PART VI PROVISIONS RELATED TO SPECIFIC EN- TITIES AND INDUSTRIES SUBPART A PARTNERSHIPS PROVISIONS A. Treatment of Gain or Loss of Foreign Persons from Sale or Exchange of Interests in Partnerships Engaged in Trade or Business Within the United States (sec of the Act and secs. 864(c) and 1446 of the Code) B. Modify Definition of Substantial Built-in Loss in the Case of Transfer of Partnership Interest (sec of the Act and sec. 743(d) of the Code) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

8 VIII Page C. Charitable Contributions and Foreign Taxes Taken into Account in Determining Limitation on Allowance of Partner s Share of Loss (sec of the Act and sec. 704 of the Code) D. Repeal of Technical Termination of Partnerships (sec of the Act and sec. 708(b) of the Code) SUBPART B INSURANCE REFORMS A. Net Operating Losses of Life Insurance Companies (sec of the Act and sec. 805 of the Code) B. Repeal of Small Life Insurance Company Deduction (sec of the Act and former sec. 806 of the Code) C. Adjustment for Change in Computing Reserves (sec of the Act and sec. 807(f) of the Code) D. Repeal of Special Rule for Distributions to Shareholders from Pre-1984 Policyholders Surplus Account (sec of the Act and former sec. 815 of the Code) E. Modification of Proration Rules for Property and Casualty Insurance Companies (sec of the Act and sec. 832(b) of the Code) F. Repeal of Special Estimated Tax Payments (sec of the Act and former sec. 847 of the Code) G. Computation of Life Insurance Tax Reserves (sec of the Act and sec. 807 of the Code) H. Modification of Rules for Life Insurance Proration for Purposes of Determining the Dividends Received Deduction (sec of the Act and sec. 812 of the Code) I. Capitalization of Certain Policy Acquisition Expenses (sec of the Act and sec. 848 of the Code) J. Tax Reporting for Life Settlement Transactions and Clarification of Tax Basis of Life Insurance Transactions, and Exception to Transfer for Valuable Consideration Rules (secs of the Act and secs. 101 and 1016(a) and new sec. 6050Y of the Code). 241 K. Modification of Discounting Rules for Property and Casualty Insurance Companies (sec of the Act and sec. 846(c) of the Code) SUBPART C BANKS AND FINANCIAL INSTRU- MENTS VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

9 IX Page A. Limitation on Deduction for FDIC Premiums (sec of the Act and sec. 162 of the Code) B. Repeal of Advance Refunding Bonds (sec of the Act and sec. 149 of the Code) SUBPART D S CORPORATIONS A. Expansion of Qualifying Beneficiaries of an Electing Small Business Trust (sec of the Act and sec. 1361(c) of the Code) B. Charitable Contribution Deduction for Electing Small Business Trusts (sec of the Act and sec. 641(c) of the Code) C. Modification of Treatment of S Corporation Conversions to C Corporations (sec of the Act and secs. 481 and 1371 of the Code) PART VII EMPLOYMENT SUBPART A COMPENSATION A. Modification of Limitation on Excessive Employee Remuneration (sec of the Act and sec. 162(m) of the Code) B. Excise Tax on Excess Tax-Exempt Organization Executive Compensation (sec of the Act and new sec of the Code) C. Treatment of Qualified Equity Grants (sec of the Act and new sec. 83(i) of the Code) D. Increase in Excise Tax Rate for Stock Compensation of Insiders in Expatriated Corporations (sec of the Act and sec of the Code) SUBPART B RETIREMENT PLANS A. Repeal of Special Rule Permitting Recharacterization of Roth Conversions (sec of the Act and sec. 408A(d) of the Code) B. Modification of Rules Applicable to Length of Service Award Plans (sec of the Act and sec. 457(e) of the Code) C. Extended Rollover Period for Plan Loan Offset Amounts (sec of the Act and sec. 402(c) of the Code) PART VIII EXEMPT ORGANIZATIONS A. Excise Tax Based on Investment Income of Private Colleges and Universities (sec of the Act and new sec of the Code) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

10 X Page B. Unrelated Business Taxable Income Separately Computed for Each Trade or Business Activity (sec of the Act and sec. 512(a) of the Code) C. Unrelated Business Taxable Income Increased by Amount of Certain Fringe Benefit Expenses for which Deduction is Disallowed (sec of the Act and sec. 512 of the Code) PART IX OTHER PROVISIONS SUBPART A CRAFT BEVERAGE MODERNIZATION AND TAX REFORM A. Production Period for Beer, Wine, and Distilled Spirits (sec of the Act and sec. 263A(f) of the Code) B. Reduced Rate of Excise Tax on Beer (sec of the Act and sec. 5051(a) of the Code) 299 C. Transfer of Beer Between Bonded Facilities (sec of the Act and sec of the Code) D. Reduced Rate of Excise Tax on Certain Wine (sec of the Act and sec. 5041(c) of the Code) E. Adjustment of Alcohol Content Level for Application of Excise Tax Rates (sec of the Act and sec. 5041(b) of the Code) F. Definition of Mead and Low Alcohol by Volume Wine (sec of the Act and sec of the Code) G. Reduced Rate of Excise Tax on Certain Distilled Spirits (sec of the Act and sec of the Code) H. Bulk Distilled Spirits (sec of the Act and sec of the Code) SUBPART B MISCELLANEOUS PROVISIONS A. Modification of Tax Treatment of Alaska Native Corporations and Settlement Trusts (sec of the Act and secs. 646 and 6039H and new secs. 139G and 247 of the Code) B. Amounts Paid for Aircraft Management Services (sec of the Act and sec. 4621(e) of the Code) C. Opportunity Zones (sec of the Act and new secs. 1400Z 1 and 1400Z 2 of the Code). 316 SUBTITLE D INTERNATIONAL TAX PROVISIONS PRIOR LAW VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

11 XI Page A. General Overview of International Principles of Taxation Source and residence principles Origin and destination principles Resolving overlapping or conflicting jurisdiction to tax International principles as applied in the U.S. tax system B. Principles Common to Inbound and Outbound Taxation Residence Entity classification Source of income rules Intercompany transfers C. U.S. Tax Rules Applicable to Nonresident Aliens and Foreign Corporations (Inbound) Gross-basis taxation of U.S.-source income Net-basis taxation of U.S.-source income Special rules D. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons (Outbound) In general Anti-deferral regimes Foreign tax credit Special rules PART I OUTBOUND TRANSACTIONS SUBPART A ESTABLISHMENT OF PARTICIPATION EXEMPTION SYSTEM FOR TAXATION OF FOR- EIGN INCOME A. Deduction for Foreign-Source Portion of Dividends Received by Domestic Corporations from Specified 10-Percent Owned Foreign Corporations (sec of the Act and sec. 904(b) and new sec. 245A of the Code) B. Special Rules Relating to Sales or Transfers Involving Specified 10-Percent Owned Foreign Corporations (sec of the Act and secs. 367(a)(3), 961, 964(e), and 1248 and new sec. 91 of the Code) C. Treatment of Deferred Foreign Income Upon Transition to Participation Exemption System of Taxation and Deemed Repatriation at Two- Tier Rate (sec of the Act and secs. 78, 904, 907, and 965 of the Code) SUBPART B RULES RELATED TO PASSIVE AND MOBILE INCOME VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

12 XII Page A. Current Year Inclusion of Global Intangible Low-Taxed Income by U.S. Shareholders (sec of the Act and sec. 78 and new secs. 951A and 960(d) of the Code) B. Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income (sec of the Act and new sec. 250 of the Code) C. Repeal of Treatment of Foreign Base Company Oil Related Income as Subpart F Income (sec of the Act and sec. 954(a) of the Code) D. Repeal of Inclusion Based on Withdrawal of Previously Excluded Subpart F Income from Qualified Investment (sec of the Act and sec. 955 of the Code) E. Modification of Stock Attribution Rules for Determining Status as a Controlled Foreign Corporation (sec of the Act and secs. 318 and 958 of the Code) F. Modification of Definition of United States Shareholder (sec of the Act and sec. 951 of the Code) G. Elimination of Requirement that Corporation Must Be Controlled for 30 Days Before Subpart F Inclusions Apply (sec of the Act and sec. 951(a)(1) of the Code) H. Limitations on Income Shifting Through Intangible Property Transfers (sec of the Act and secs. 367 and 482 of the Code) I. Certain Related Party Amounts Paid or Accrued in Hybrid Transactions or With Hybrid Entities (sec of the Act and sec. 267A of the Code) J. Shareholders of Surrogate Foreign Corporations Not Eligible for Reduced Rate on Dividends (sec of the Act and sec. 1(h)(11)(C)(iii) of the Code) SUBPART C MODIFICATIONS RELATED TO FOR- EIGN TAX CREDIT SYSTEM A. Repeal of Section 902 Indirect Foreign Tax Credits; Determination of Section 960 Credit on Current Year Basis (sec of the Act and secs. 902, 960, and 78 of the Code) B. Separate Foreign Tax Credit Limitation Basket for Foreign Branch Income (sec of the Act and sec. 904 of the Code) C. Source of Income from Sales of Inventory Determined Solely on Basis of Production Activities (sec of the Act and sec. 863(b) of the Code) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

13 XIII Page D. Election to Increase Percentage of Domestic Taxable Income Offset by Overall Domestic Loss Treated as Foreign Source (sec of the Act and sec. 904(g) of the Code) PART II INBOUND TRANSACTIONS A. Base Erosion and Anti-Abuse Tax (sec of the Act and sec. 6038A and new sec. 59A of the Code) PART III OTHER PROVISIONS A. Restriction on Insurance Business Exception to the Passive Foreign Investment Company Rules (sec of the Act and sec of the Code) B. Repeal of Fair Market Value Method of Interest Expense Apportionment (sec of the Act and sec. 864 of the Code) APPENDIX: TECHNICAL EXPLANATION OF MODI- FICATION OF DEDUCTION FOR QUALIFIED BUSI- NESS INCOME OF A COOPERATIVE AND ITS PA- TRONS (ENACTED MARCH 23, 2018, PUB. L. NO ) ESTIMATED BUDGET EFFECTS OF TAX LEGISLA- TION ENACTED IN PUBLIC LAW VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 5904 Sfmt 0484 E:\HR\OC\A137.XXX A137

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15 INTRODUCTION This document, 1 prepared by the staff of the Joint Committee on Taxation in consultation with the staffs of the House Committee on Ways and Means, the Senate Committee on Finance, and the Treasury Department s Office of Tax Policy, provides an explanation of Public Law No (also referred to as the Act throughout). 2 The explanation of the provisions follows the order of the Act. For each provision, the document includes a description of prior law, an explanation of the provision, and the effective date. The prior law section describes the law in effect immediately prior to enactment and does not reflect changes to the law made by the provision or by subsequent legislation. For contemporaneous legislative history related to the Act, please see the relevant House Ways and Means Committee report, 3 the reconciliation recommendations submitted by the Senate Budget Committee, 4 and the Conference Report. 5 This document includes citations to some, but not necessarily all, regulations and other administrative guidance issued as of the time of publication of the document. These citations are included strictly as reference tools for readers. Section references are to the Internal Revenue Code of 1986, as amended, (the Code ) unless otherwise indicated. 1 This document may be cited as follows: Joint Committee on Taxation, General Explanation of Public Law No (JCS 1 18), December Pub. L. No , 31 Stat Report of the Committee on Ways and Means on H.R. 1, the Tax Cuts and Jobs Act, H. Rep. No , November 13, Reconciliation Recommendations Pursuant to H. Con. Res. 71, S. Prt , December Conference Report to Accompany H.R. 1, the Tax Cuts and Jobs Act, Rep. No , December 15, (1) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6633 Sfmt 6633 E:\HR\OC\A137.XXX A137

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17 TITLE I SUBTITLE A INDIVIDUAL TAX REFORM PART I TAX RATE REFORM A. Modification of Rates (sec of the Act and sec. 1 of the Code) Prior Law In general To determine regular tax liability, an individual taxpayer generally must apply the tax rate schedules (or the tax tables) to his or her taxable income. The rate schedules are broken into several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer s income increases. Tax rate schedules Separate rate schedules apply based on an individual s filing status. For 2017, the regular individual income tax rate schedules are as follows: TABLE 1. FEDERAL INDIVIDUAL INCOME TAX RATES FOR If taxable income is: Then income tax equals: Single Individuals Not over $9, % of the taxable income Over $9,325 but not over $37, $ plus 15% of the excess over $9,325 Over $37,950 but not over $91, $5, plus 25% of the excess over $37,950 Over $91,900 but not over $191, $18, plus 28% of the excess over $91,900 Over $191,650 but not over $416, $46, plus 33% of the excess over $191,650 Over $416,700 but not over $418, $120, plus 35% of the excess over $416,700 Over $418, $121, plus 39.6% of the excess over $418,400 Heads of Households Not over $13, % of the taxable income Over $13,350 but not over $50, $1,335 plus 15% of the excess over $13,350 Over $50,800 but not over $131, $6, plus 25% of the excess over $50,800 Over $131,200 but not over $212, $27, plus 28% of the excess over $131,200 Over $212,500 but not over $416, $49, plus 33% of the excess over $212,500 Over $416,700 but not over $444, $117, plus 35% of the excess over $416,700 Over $444, $126,950 plus 39.6% of the excess over $444,550 Married Individuals Filing Joint Returns and Surviving Spouses Not over $18, % of the taxable income Over $18,650 but not over $75, $1,865 plus 15% of the excess over $18,650 Over $75,900 but not over $153, $10, plus 25% of the excess over $75,900 Over $153,100 but not over $233, $29, plus 28% of the excess over $153,100 Over $233,350 but not over $416, $52, plus 33% of the excess over $233,350 Over $416,700 but not over $470, $112,728 plus 35% of the excess over $416,700 Over $470, $131,628 plus 39.6% of the excess over $470,700 (3) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6601 Sfmt 6601 E:\HR\OC\A137.XXX A137

18 4 TABLE 1. FEDERAL INDIVIDUAL INCOME TAX RATES FOR Continued If taxable income is: Then income tax equals: Married Individuals Filing Separate Returns Not over $9, % of the taxable income Over $9,325 but not over $37, $ plus 15% of the excess over $9,325 Over $37,950 but not over $76, $5, plus 25% of the excess over $37,950 Over $76,550 but not over $116, $14, plus 28% of the excess over $76,550 Over $116,675 but not over $208, $26, plus 33% of the excess over $116,675 Over $208,350 but not over $235, $56,364 plus 35% of the excess over $208,350 Over $235, $65,814 plus 39.6% of the excess over $235,350 Estates and Trusts Not over $2, % of the taxable income Over $2,550 but not over $6, $ plus 25% of the excess over $2,550 Over $6,000 but not over $9, $1,245 plus 28% of the excess over $6,000 Over $9,150 but not over $12, $2,127 plus 33% of the excess over $9,150 Over $12, $3, plus 39.6% of the excess over $12,500 Unearned income of children Special rules (generally referred to as the kiddie tax ) apply to the net unearned income of certain children. 7 Generally, the kiddie tax applies to a child if: (1) the child has not reached the age of 19 by the close of the taxable year, or the child is a full-time student under the age of 24, and either of the child s parents is alive at such time; (2) the child s unearned income exceeds. $2,100 (for 2017); and (3) the child does not file a joint return. 8 The kiddie tax applies regardless of whether the child may be claimed as a dependent by either or both parents. For children above age 17, the kiddie tax applies only to children whose earned income does not exceed one-half of the amount of their support. Under these rules, the net unearned income of a child (for 2017, unearned income over $2,100) is taxed at the parents tax rates if the parents tax rates are higher than the tax rates of the child. 9 The remainder of a child s taxable income (i.e., earned income, plus unearned income up to $2,100 (for 2017), less the child s standard deduction) is taxed at the child s rates, regardless of whether the kiddie tax applies to the child. For these purposes, unearned income is income other than wages, salaries, professional fees, other amounts received as compensation for personal services actually rendered, and distributions from qualified disability trusts. 10 In general, a child is eligible to use the preferential tax rates for qualified dividends and capital gains. 11 The kiddie tax is calculated by computing the allocable parental tax. This involves adding the net unearned income of the child to the parent s income and then applying the parent s tax rate. A child s net unearned income is the child s unearned income less the sum of (1) the minimum standard deduction allowed to dependents ($1,050 for ), and (2) the greater of (a) such minimum 6 Rev. Proc , I.R.B. 707, Sec Sec. 1(g). 8 Sec. 1(g)(2). 9 Special rules apply for determining which parent s rate applies where a joint return is not filed. 10 Sec. 1(g)(4) and sec. 911(d)(2). 11 Sec. 1(h). 12 Sec of Rev. Proc , supra. VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6601 Sfmt 6601 E:\HR\OC\A137.XXX A137

19 13 Sec. 1(g)(4). 14 Sec. 1(g)(3). 15 Sec. 1(g)(6). See Form 8615, Tax for Certain Children Who Have Unearned Income. 16 Sec. 1(g)(1). 5 standard deduction amount or (b) the amount of allowable itemized deductions that are directly connected with the production of the unearned income. 13 The allocable parental tax equals the hypothetical increase in tax to the parent that results from adding the child s net unearned income to the parent s taxable income. 14 If the child has net capital gains or qualified dividends, these items are allocated to the parent s hypothetical taxable income according to the ratio of net unearned income to the child s total unearned income. If a parent has more than one child subject to the kiddie tax, the net unearned income of all children is combined, and a single kiddie tax is calculated. Each child is then allocated a proportionate share of the hypothetical increase, based upon the child s net unearned income relative to the aggregate net unearned income of all of the parent s children subject to the tax. Generally, a child must file a separate return to report his or her income. 15 The parents tax is not affected by the child s income, and the total tax due from the child is the greater of: 1. The sum of (a) the tax payable by the child on the child s earned income and unearned income up to $2,100 (for 2017), plus (b) the allocable parental tax on the child s unearned income, or 2. The tax on the child s income without regard to the kiddie tax provisions. 16 If a child s gross income is only from interest and dividends and the amount of the gross income (in 2017) is greater than $1,050, and less than $10,500, the parents may elect to report the child s gross income on the parents return and the child is treated as having no gross income. A tax at the rate of 10 percent is imposed on up to $1,050 of the child s gross income included on the parents return. Capital gains rates In the case of an individual, estate, or trust, adjusted net capital gain is taxed at rates of 0, 15, and 20 percent. The amount taxed at a zero rate is the amount that would otherwise be taxed at a 0-, 10-, or 15-percent rate if the gain were ordinary income; the amount taxed at a 15-percent rate is the amount that would otherwise be taxed at a 25-, 28-, 33-, or 35-percent rate if the gain were ordinary income; and the amount taxed at a 20-percent rate is the amount that would otherwise be taxed at a 39.6-percent rate if the gain were ordinary income. The same rates applicable to adjusted net capital gain under the regular tax apply to the alternative minimum tax. The maximum rate on unrecaptured section 1250 gain is 25 percent, and the maximum rate on net collectibles gain and certain gain from the sale of small business stock is 28 percent. The adjusted net capital gain of an individual is the net capital gain reduced (but not below zero) by the gain (if any) taxed at maximum rates of 25 and 28 percent. The net capital gain is reduced VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6601 Sfmt 6601 E:\HR\OC\A137.XXX A137

20 6 by the amount of gain that the individual treats as investment income for purposes of determining the investment interest limitation. Net capital gain is increased by the amount of qualified dividend income. In addition, a tax is imposed on net investment income in the case of an individual, estate, or trust. In the case of an individual, the tax is 3.8 percent of the lesser of net investment income, which includes gains and dividends, or the excess of modified adjusted gross income over the threshold amount. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in the case of any other individual. Explanation of Provision The provision temporarily replaces the existing rate structure with a new rate structure. TABLE 2. FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 If taxable income is: Then income tax equals: Single Individuals Not over $9, % of the taxable income Over $9,525 but not over $38, $ plus 12% of the excess over $9,525 Over $38,700 but not over $82, $4, plus 22% of the excess over $38,700 Over $82,500 but not over $157, $14, plus 24% of the excess over $82,500 Over $157,500 but not over $200, $32, plus 32% of the excess over $157,500 Over $200,000 but not over $500, $45, plus 35% of the excess over $200,000 Over $500, $150, plus 37% of the excess over $500,000 Heads of Households Not over $13, % of the taxable income Over $13,600 but not over $51, $1,360 plus 12% of the excess over $13,600 Over $51,800 but not over $82, $5,944 plus 22% of the excess over $51,800 Over $82,500 but not over $157, $12,698 plus 24% of the excess over $82,500 Over $157,500 but not over $200, $30,698 plus 32% of the excess over $157,500 Over $200,000 but not over $500, $44,298 plus 35% of the excess over $200,000 Over $500, $149,298 plus 37% of the excess over $500,000 Married Individuals Filing Joint Returns and Surviving Spouses Not over $19, % of the taxable income Over $19,050 but not over $77, $1,905 plus 12% of the excess over $19,050 Over $77,400 but not over $165, $8,907 plus 22% of the excess over $77,400 Over $165,000 but not over $315, $28,179 plus 24% of the excess over $165,000 Over $315,000 but not over $400, $64,179 plus 32% of the excess over $315,000 Over $400,000 but not over $600, $91,379 plus 35% of the excess over $400,000 Over $600, $161,379 plus 37% of the excess over $600,000 Married Individuals Filing Separate Returns Not over $9, % of the taxable income Over $9,525 but not over $38, $ plus 12% of the excess over $9,525 Over $38,700 but not over $82, $4, plus 22% of the excess over $38,700 Over $82,500 but not over $157, $14, plus 24% of the excess over $82,500 Over $157,500 but not over $200, $32, plus 32% of the excess over $157,500 Over $200,000 but not over $300, $45, plus 35% of the excess over $200,000 Over $300, $80, plus 37% of the excess over $300,000 Estates and Trusts Not over $2, % of the taxable income Over $2,550 but not over $9, $255 plus 24% of the excess over $2,550 Over $9,150 but not over $12, $1,839 plus 35% of the excess over $9,150 Over $12, $3, plus 37% of the excess over $12,500 VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6601 Sfmt 6602 E:\HR\OC\A137.XXX A137

21 7 The provision s rate structure does not apply to taxable years beginning after December 31, Under the provision, the brackets applicable to single filers, married taxpayers filing separately, and heads of household are rounded down to the nearest $25, while other brackets are rounded down to the nearest $ Simplification of tax on unearned income of children The provision temporarily simplifies the kiddie tax by separating the child s tax from the tax situation of the child s parent or of any sibling. It is intended that the net unearned income (both ordinary income and net capital gain) of a child to whom the provision applies is taxed according to the tax table applicable to a trust, while earned taxable income 18 of a child is taxed according to the tax table applicable to the child (normally the table applicable to unmarried individuals) A technical correction may be needed in order to round the bracket breakpoints applicable to heads of household down to the nearest $25. The correction would retain uniformity between those bracket breakpoints and the bracket breakpoints for single filers, which are intended to be identical for the 32-, 35-, and 37-percent brackets. 18 For this purpose, earned taxable income means taxable income reduced (but not below zero) by net unearned income. Sec. 1(j)(4)(D). 19 A technical correction may be necessary for the kiddie tax to fully reflect this intent. As currently enacted, a child to whom the kiddie tax applies uses modified unmarried and estates and trusts brackets to calculate tax on income. The brackets are modified so that the total amount taxed at a given rate does not exceed the amount that would be taxed at that rate in the case of an individual to whom the kiddie tax does not apply. The following examples illustrate how the tax for a child to whom the kiddie tax applies may be calculated, by applying the estates and trusts brackets to net unearned income and applying modified unmarried brackets to earned taxable income. Example 1. Assume a child to whom the kiddie tax applies is a dependent of another taxpayer and has interest income of $8,000 and no other income for taxable year The child is allowed a standard deduction of $1,050 (section 63(c)(5)(A) limits the basic standard deduction in the case of certain dependents to the greater of, for 2018, (i) $1,050 or (ii) the sum of $350 and the child s earned income) and thus the child s taxable income is $6,950. The child s net unearned income is $8,000 less $2,100 (section 1(g)(4)(A) provides for a reduction in the amount of net unearned income by twice the basic standard deduction, which for 2018 is $1,050, if the child does not itemize deductions), which is $5,900. The child s earned taxable income is $1,050 ($6,950 less $5,900). The tax on the net unearned income of $5,900 may be calculated by computing the tax on a trust with that amount of taxable income. The tax is $255 plus 24 percent of the excess over $2,550, which is $1,059 ($255 plus $804). Next, the tax brackets for unmarried taxpayers are reduced by any net unearned income taxed at that same rate. $2,550 of unearned income is taxed at 10 percent, so the top of the 10-percent bracket is reduced to $6,975 ($9,525 less $2,550). $3,350 of unearned income is taxed at 24 percent, so the top of the 24-percent bracket is reduced to $154,150 ($157,500 less $3,350). No changes are made to the top of the 12-, 22-, 32-, and 35-percent brackets. The tax on $1,050 of earned taxable income is subject to this revised rate schedule. Thus, the tax on this income is $105 ($1,050 at 10 percent). The child s total tax liability is $1,164 ($1,059 plus $105). Note that in this example, a portion of the child s income is subject to tax under a rate schedule other than the estates and trusts rate schedule, notwithstanding that the taxpayer has only unearned income. This is a result of reducing unearned income by two standard deductions to arrive at net unearned income. Example 2. Assume a child to whom the kiddie tax applies is a dependent of another taxpayer and has interest income of $18,000 and wages of $18,000 for the taxable year The child is allowed a standard deduction of $12,000 (which is less than the sum of $18,000 plus $350) and thus the child s taxable income is $24,000. The child s net unearned income is $15,900 ($18,000 less $2,100). The child s earned taxable income is $8,100 ($24,000 less $15,900). The tax on the net unearned income of $15,900 may be calculated by computing the tax on a trust with that amount of taxable income. The tax is $3, plus 37 percent of the excess over $12,500, which is $4, ($3, plus $1,258). Next, the tax brackets for unmarried taxpayers are reduced by any net unearned income taxed at that same rate. $2,550 of net unearned income is taxed at 10 percent, so the top of the 10-percent bracket is reduced to $6,975 ($9,525 less $2,550). $6,600 of net unearned income is taxed at 24 percent, so the top of the 24-percent bracket is reduced to $150,900 ($157,500 less $6,600). $3,400 of net unearned income is taxed at 35 percent, so the top of the 35-percent bracket is reduced to $496,600 ($500,000 less $3,400). No changes are made to the endpoints of the 12-, 22-, or 32-percent brackets. Continued VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6601 Sfmt 6602 E:\HR\OC\A137.XXX A137

22 8 The provision s simplification of the kiddie tax does not apply to taxable years beginning after December 31, Maximum rates on capital gains and qualified dividends The provision generally retains the prior-law maximum rates on net capital gain and qualified dividends. The breakpoints between the zero- and 15-percent rates ( 15-percent breakpoint ) and the 15- and 20-percent rates ( 20-percent breakpoint ) are based on the same amounts as the breakpoints under prior law, except the breakpoints are indexed using the Chained Consumer Price Index in taxable years beginning after Thus, for 2018, the 15-percent breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals. The 20-percent breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals. Therefore, in the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent breakpoint, the gain is not taxed. Generally, any adjusted net capital gain that would result in taxable income exceeding the 15-percent breakpoint but not exceeding the 20-percent breakpoint is taxed at 15 percent. 20 The remaining adjusted net capital gain is taxed at 20 percent. Unrecaptured section 1250 gain generally is taxed at a maximum rate of 25 percent, and net collectibles gain and certain gain from the sale of small business stock is taxed at a maximum rate of 28 percent. Paid preparer due diligence requirement for head of household status The provision directs the Secretary of the Treasury to promulgate due diligence requirements for paid preparers in determining eligibility for a taxpayer to file as head of household. For 2018, a penalty of $520 is imposed for each failure to meet these requirements. 21 The Treasury Department has provided guidance addressing Federal income tax withholding for Effective Date The provision applies to taxable years beginning after December 31, The tax on $8,100 of earned taxable income is subject to this revised rate schedule. Thus the tax on this income is $ ($6,975 at 10 percent and $1,125 at 12 percent). The child s total tax liability is $5,102 ($4, plus $832.50). 20 In certain circumstances adjusted net capital gain in this range may be taxed at different rates due to the fact that the 15-percent breakpoints ($38,600, $51,700, and $77,200 for unmarried, head of household, and married filing jointly respectively) are $100 or $200 less than the top of the 12-percent ordinary bracket ($38,700, $51,800, and $77,400 for unmarried, head of household, and married filing jointly respectively). 21 This amount is indexed for inflation. Sec. 6695(h). 22 See Internal Revenue Service, Publication 15, (Circular E), Employer s Tax Guide 2018, pp and the IRS withholding calculator available at irs.gov/w4app. VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6601 Sfmt 6602 E:\HR\OC\A137.XXX A137

23 9 B. Inflation Adjustments Based On Chained CPI (sec of the Act and sec. 1(f) of the Code) Prior Law Many dollar amounts in the Code are adjusted for inflation to protect taxpayers from the effects of rising prices. Under prior law, most of the adjustments are based on annual changes in the level of the Consumer Price Index for All Urban Consumers ( CPI U ). The CPI U is an index that measures prices paid by typical urban consumers on a broad range of goods and services, and is developed and published by the Department of Labor. Generally, the Code adjusts applicable calendar year amounts for cost of living by using the percentage by which the price index for the preceding calendar year exceeds the price index for a base calendar year. 23 The IRS annually issues a publication setting forth the inflation-adjusted amounts for taxable years beginning in the next calendar year. Among the inflation-indexed individual income tax amounts are the following: (1) the regular income tax brackets; (2) the basic standard deduction; (3) the additional standard deduction for the aged and blind; (4) the personal exemption amount; (5) the thresholds for the overall limitation on itemized deductions and the personal exemption phase-out; (6) the phase-in and phase-out thresholds of the earned income credit; (7) IRA contribution limits and deductible amounts; and (8) the saver s credit. Explanation of Provision The provision requires the use of the Chained Consumer Price Index for All Urban Consumers ( C CPI U ) to adjust amounts currently indexed by the CPI U. The C CPI U, like the CPI U, is a measure of the average change over time in prices paid by urban consumers. It is developed and published by the Department of Labor, but differs from the CPI U in accounting for the ability of individuals to alter their consumption patterns in response to relative price changes. 24 Another notable difference is that, unlike the CPI U, initially released C CPI U index values are subject to a quarterly schedule of revisions until finalized in the following year. 25 The values of C CPI U used for cost-of-living adjustments for any given calendar are the latest values published as of the date on which the initial C CPI U index is published for the month of August for the preceding year. 26 Generally, this date is in September of such preceding year. Under the provision, indexed amounts in the Code use the C CPI U and the CPI U or solely the C CPI U in taxable years beginning after December 31, In the case of applicable dollar 23 Sec. 1(f). Under prior law, the indexing base calendar year is the year referenced in section 1(f)(3)(B) as modified. 24 The C CPI U accomplishes this by allowing for consumer substitution between item categories in the collection of consumer goods and services that make up the index, while the CPI U only allows for modest substitution within item categories. 25 Bureau of Labor Statistics, CPI Detailed Report June 2017, Table 1C. 26 Sec. 1(f)(6)(A). VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6601 Sfmt 6602 E:\HR\OC\A137.XXX A137

24 10 amounts with a base calendar year 27 prior to 2016, the provision indexes these amounts as if the CPI U applies through 2017 and the C CPI U applies for years thereafter; the provision does not index these applicable amounts from their base years using only the C CPI U. However, amounts with cost-of-living adjustment base years of 2016 and later are indexed using solely the C CPI U. Therefore, amounts that are reset for 2018 (and given indexing base years of 2017) 28 are indexed by the C CPI U in taxable years beginning after December 31, The Treasury Department has published cost-of-living adjustments for 2018 and Effective Date The provision applies to taxable years beginning after December 31, Under the provision, the indexing base calendar year is the year referenced in section 1(f)(3)(A)(ii) as modified. 28 For example, the basic standard deduction. Sec. 63(c)(7). 29 Rev. Proc , I.R.B. 392 (March 2, 2018); Rev. Proc , I.R.B. 827 (Nov. 15, 2018). VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6601 Sfmt 6602 E:\HR\OC\A137.XXX A137

25 PART II DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS-THRU ENTITIES A. Deduction for Qualified Business Income (sec of the Act and sec. 199A of the Code) Prior Law Individual income tax rates To determine regular tax liability, an individual taxpayer generally applies the tax rate schedules (or the tax tables) to his or her taxable income. The rate schedules are broken into several ranges of income, known as income brackets, and the taxpayer s marginal tax rate increases as income increases. Separate rate schedules apply based on an individual s filing status (i.e., single, head of household, married filing jointly, or married filing separately). For 2017, the regular individual income tax rate schedule provides rates of 10, 15, 25, 28, 33, 35, and 39.6 percent. Partnerships Partnerships generally are treated for Federal income tax purposes as passthrough entities not subject to tax at the entity level. 30 Items of income (including tax-exempt income), gain, loss, deduction, and credit of the partnership are taken into account by the partners in computing their income tax liability based on the partnership s method of accounting and regardless of whether the income is distributed to the partners. 31 A partner s deduction for partnership losses is limited to the partner s adjusted basis in its partnership interest. 32 Losses not allowed as a result of that limitation generally are carried forward to the next year. A partner s adjusted basis in a partnership interest generally equals (1) the sum of (a) the amount of money and the adjusted basis of property contributed to the partnership, or the amount paid for the partnership interest, (b) the partner s distributive share of partnership income, and (c) the partner s share of partnership liabilities, reduced by (2) the sum of (a) the partner s distributive share of losses allowed as a deduction and certain nondeductible expenditures, and (b) any partnership distributions to the partner. 33 Partners generally may receive distributions of partnership property without recognition of gain or loss, subject to some exceptions Sec Sec. 702(a). 32 Sec. 704(d). In addition, passive loss and at-risk limitations limit the extent to which certain types of income can be offset by a partner s share of partnership deductions (secs. 469 and 465). These limitations do not apply to corporate partners, except certain closely-held corporations. 33 Sec Sec Gain or loss may nevertheless be recognized, for example, on the distribution of money or marketable securities in excess of basis, distributions with respect to contributed property, or in the case of disproportionate distributions (which can result in ordinary income). (11) VerDate Sep :24 Dec 19, 2018 Jkt PO Frm Fmt 6604 Sfmt 6604 E:\HR\OC\A137.XXX A137