Republicans managed to pass a tax overhaul bill in both the House and the Senate in December 2017. With the vast majority of the provisions within the bill activating on January 1st, 2018, most Americans are wondering what will change for them now. The reform bill is far-reaching and touches essentially all corners of the United States tax code, meaning individuals, small businesses, corporations, and so forth are all affected in some way or another.
Some of the most important or widespread changes under the tax reform bill are:
- Nonpermanent changes for individuals: The tax reform bill was surrounded in controversy as it was being drafted due to the fact that many of the benefits for an individual tax filer are temporary, ending on December 31st, 2025. Contrarily, some of the best tax breaks for corporations and high-asset filers are permanent.
- Flat corporate tax rate: Corporations will no longer be held to a graduated tax rate based on profits and expenditures. Instead, each corporation will be taxed 21% regardless of finances and assets.
- NOL taxes: Corporations cannot deduct more than 80% of its income for net operating losses (NOL). Any additional losses are now permitted to be perpetually carried into future years without any time limitation.
- Reduced rates for high earners: Individual filers earning more than $500,000 in income each year, or married joint filers earning more than $600,000, will be taxed 37% instead of 39.6%. The tax break will end in 2026.
- Caps on SALT deductions: State and local taxes (SALT) will be limited to $10,000 deductions. This is a largely new provision which may change how many people decide to file their taxes. This will negatively impact taxpayers in states with high state income tax rates, such as New York and California.
- Home equity and mortgage interests: While the home mortgage interest deduction is still available, it no longer applies to interest associated with a home equity line of credit. The home mortgage interest deduction for purchases or binding contracts for purchase made on or after December 16, 2017, are capped to the interest associated with the first $750,000 of principal.
- Individual filer estate taxes: The estate of any decedent who passes away on or after December 16, 2017, will have a doubled exclusion amount. The flat 40% tax rate on estate taxes remains.
- Business “pass-through”: Many individual filers with small businesses will be able to deduct a maximum of 20% of business income with a modified pass-through provision. The pass-through is set to expire in 2025.
- Executive compensation: Any public company that provides compensation to employees as part of work evaluations may not exclude that compensation from Section 162(m) limits. CEOs, CFOs, and the “next three highest paid officers” are all now included as “employees” under the provision.
- Territorial international taxes: Highly complex tax law changes have been implemented in regards to corporate international tax filings. The overarching goal of these changes is encouraging corporations with international presences to keep more offices in the United States and hire more American employees. It attempts to accomplish this encouragement by modifying dividends received deductions (DRD), implementing a one-time tax against a select group of foreign corporation shareholders, ongoing taxes on controlled foreign corporation shareholder income, and more. Further research and analysis will be released by our firm in the coming days with regard to the international tax changes.
While the entirety of the Republican tax reform bill has potential for complexity, the provisions regarding international tax law are especially intricate. Any business or individual with an invested interest in international taxes should not attempt to navigate the new tax landscape alone. Castro & Co. is a team of international tax lawyers that have earned the respect of sophisticated investors, American entrepreneurs, and multinational corporations for our impeccable international tax planning. We are more than capable of helping you understand your new tax situation, how to structure your business to minimize tax impact, and protect your company’s best interests.
Get ahead of the new tax changes today by contacting our tax attorneys headquartered in Washington DC and serving clients throughout the world.