Shape of the new US tax heart

Transcription

1 Shape of the new US tax heart As a candidate, President Donald J. Trump had a campaign promise to deliver significant reform to the United State tax code. On December 22, 2017, he delivered on that promise by signing into law Public Law , an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (the Act ) to amend the Internal Revenue Act of The Act is the most extensive US reform since 1986 due to the volume and large impact of all the changes made in the legislation. Originally, President Trump and legislators intended to make tax filing as simple as completing a postcard, but they ultimately fell short of this lofty goal. Though the Act failed to simplify tax filing requirements, there are many notable tax changes that impact individuals and vast changes to the US corporate tax regime. For those US citizens or greencard holders residing outside of the US, or foreign individuals with US investments, it is an important time to review their income tax situation and determine whether any changes to investment structures would be beneficial.

2 Tax provisions affecting individuals The Act reduces the federal tax brackets from 5 to 4 and shifts the brackets downward. This change reduces the bottom rate to 10% from 15% and the top rate from 39.6% to 37%. The capital gains and qualified dividends rates remain the same (0%, 15% and 20%) with the same break points (15% rate for taxable income above $2,600, 20% for taxable income above $12,700). The highest rate at 37% for single filers will apply to taxable income over $500,000 ($600,000 for married filing jointly), adjusted for inflation. It is also worth mentioning that the so-called bubble rate first proposed by the House of Representatives was not adopted, which is good news for high-income taxpayers with income above $1,000,000. Seven brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37% (rates reduced, bracket thresholds adjusted) The rate cut is part of an overall reduction of the tax burden faced by individuals when coupled with substantially increased standard deductions to $12,000 for singles and $24,000 for married filing jointly, compared to the previous $6,350 and $12,700, respectively. The Act also expanded a number of deductions and credits (e.g. medical and dental, charitable, child credit and non-child dependent care credit, etc.). The taxable base, in front, expanded due to limitation and elimination of the following: Personal exemptions repealed (previously $4,050 per taxpayer, spouse and dependent in 2017); Principal cap on deductible home mortgage interest for new mortgages (after 12/15/17) reduced to $750,000 from $1 million, with the deduction retained for second homes, but no longer available for home equity lines; Elimination of itemized deductions, including but not limited to investment fees, tax preparation fees, moving expenses, business expenses, casualty and theft losses except in disaster areas, alimony payments; and State and local tax deduction capped at $10,000 of property and income (or sales) taxes. It is also worth noting that the medical expense deduction retained with a lowered threshold of 7.5% of adjusted gross income (AGI) for tax years 2017 and 2018, but the threshold will return to 10% of AGI in tax years thereafter. Also worth noting is the elimination of the shared responsibility fee implemented under the Affordable Care Act ( ACA ). Congress failed to repeal the ACA as a whole and taxpayers will still need to acquire a health insurance policy that meets the requirements under the ACA, but the penalty for failing to do so was repealed under the Act. Though early versions of the Act attempted a full repeal, the estate tax was not repealed under the Act. However, the lifetime exclusion amount doubled. Under the new Act, just over $11 million of assets for an individual and $22 million of assets for married couples, adjusted for inflation, may be exempted from federal estate tax. However, only US citizens and those who are US estate tax residents receive the $11 million exemption. For those who are not US citizens nor domicilied in the US for estate tax purposes, only $60,000 of US situs property is being exempt from estate tax. This creates a major risk for those who purchase US situs property, such as US real estate. Another target of tax reform, not removed under the Act, is the alternative minimum tax ( AMT ). In simple terms, the AMT guarantees that taxpayers with certain levels of income pay a minimum amount of tax by disregarding certain deductions. Fortunately, the AMT exemption amounts were increased and the phase-out thresholds for these exemptions have significantly risen under the Act. As a result, primarily high-income households are subject to the AMT. What is probably the most significant addition under the Act, is the deduction for qualified business income ( QBI ). The QBI deduction permits an individual to deduct 20% of QBI from flow-through entities such as partnerships, S corporations or sole proprietorships. QBI is the net amount of domestic qualified items of income, gain, deduction and loss from the 2

3 taxpayer's qualified business. A taxpayer's "qualified business" includes any trade or business that generates items effectively connected with the conduct of a trade or business within the US (does not generally include specified service trades or businesses with some exceptions). The IRS intends on issuing additional guidance regarding this deduction in the near future to aid taxpayers in planning for the 2018 tax year. Other notable items include: Net capital gains and qualified dividends retained the previous rates, and such investments are still subject to the existing 3.8% net investment income tax; The AGI limitation for charitable contributions increased to 60% from 50% for gifts of cash to specified organizations. Though many of the above individual provisions are set to expire for tax years after 2025, and further tax reform could still happen it is highly recommend that taxpayers consult with their tax professional to determine which might apply to their individual circumstances. Corporate tax provisions The Act also included significant changes for corporate taxpayers, some of which are briefly summarized below. Corporate tax brackets have been compressed to a single flat rate of 21%. Corporate AMT has been repealed and taxpayers may claim refund on any AMT carryovers incurred. The Act also provides a 100% deduction for foreign-source portion of dividends received from specified 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a 1- year holding period. No Foreign tax credit or deduction for foreign taxes paid is allowed with respect to such qualifying dividend. Transition tax The Act implements a new transition tax that will apply to certain foreign earnings on which US income tax is currently deferred, at rates of 15.5% for cash and 8% for all other earnings. Non-corporate taxpayers are also subject to this tax. The transition tax applies if you are a US individual shareholder of a specified foreign income company ( SFC ) with deferred earnings (i.e. positive accumulated, untaxed post-1986 E&P). A SFC is any controlled foreign corporation ( CFC ) or any foreign corporation with one or more direct, indirect or constructively owned at least a 10% voting interest US shareholder. The tax hit may be significant, and any taxed owed may be due with your 2017 income tax return. Miscellaneous changes The following are a few other new provisions that are worth briefly mentioning: Broad-based anti-deferral provision taxes global intangible low-taxed income ( GILTI ) on a current basis at 10.5% effective tax rate (some foreign tax credits available). A new base erosion anti-abuse tax ( BEAT ) has also been included in the Act, which is imposed on certain payments made by a US company to a related foreign company, known as a taxpayer s base erosion minimum tax amount. The minimum tax of 10% will begin in tax years after 2018, with a 5% transition rate in The Act expands the definition of covered employee for purposes of compensation deduction limits under 162 million to include the CEO, CFO and the three mosthighly compensated officers for the taxable year. Net operating losses ( NOL ) no longer carryback, but carryforward indefinitely. NOLs are also subject to an 80% limitation, depending on a taxpayer s taxable income. 3

4 Final thoughts State governments across the US have also been impacted by the Act. As such, state and local tax consequences should also be considered, especially with regards to the limitation on the deduction for state and local taxes. A separate conversation with a tax professional regarding these issues is necessary. Currently, legislators and the IRS are busy ensuring that all the mentioned changes, as well as many others introduced by the Act but not mentioned here, are implemented as initially intended. For further information, please contact the authors of this publication: Anton Ionov Anton.Ionov@ru.ey.com Ksenia Pavlova Ksenia.Pavlova@ru.ey.com 4

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