Trump’s Tax Reform Plan Explained

Source: Joint Committee on Taxation

The IRS released new withholding brackets reflecting changes to the adverse income tax schedule, which employers began using on February 15, 2018.

The law raises the standard deduction to $24,000 for go couples filing jointly in 2018 (from $12,700), to $12,000 for single filers (from $6,300), and to $18,000 for intellects of household (from $9,550). These changes expire after 2025. The additional standard deduction, which the Building bill would have repealed, will not be affected. In 2019, the inflation gauge used to index the standard withdrawal changed in a way that is likely to accelerate bracket creep (see below).

The law ends the distinct mandate, a provision of the Affordable Care Act or “Obamacare” that provides tax penalties for individuals who do not obtain health insurance coverage, in 2019. (While the mandate technically carry ons in place, the penalty falls to $0.) According to the Congressional Budget Office (CBO), repealing the measure is likely to reduce federal losses by around $338 billion from 2018 to 2027, but lead 13 million more people to lack assurance at the end of that period and push premiums up by an average of around 10%. Unlike other individual tax changes, the repeal choose not be reversed in 2025.

Senators Lamar Alexander (R-Tenn.) and Patty Murray (D-Wash.) proposed a bill, the Bipartisan Health Woe Stabilization Act, on March 19, 2018, to mitigate the effects of repealing the individual mandate. The CBO estimates that this legislation desire still leave 13 million more people uninsured after a decade. The bill failed to make it into the $1.3 trillion shell out bill that was passed on March 23, 2018. As such, the burden of providing affordable health insurance will be on forms and health insurers.

The law changes the measure of inflation used for tax indexing. The Internal Revenue Service (IRS) currently shoot ups the consumer price index for all urban consumers (CPI-U), which will be replaced with the chain-weighted CPI-U. The latter mocks account of changes consumers make to their spending habits in response to price shifts, so it is considered to be more rigorous than burgee CPI. It also tends to rise more slowly than standard CPI, so substituting it will likely accelerate bracket slither. The value of the standard deduction and other inflation-linked elements of the tax code will also erode over time, grade pushing up tax burdens. The change is not set to expire.

The law temporarily raises the child tax credit to $2,000, with the first off $1,400 refundable, and creates a non-refundable $500 credit for non-child dependents. The child credit can only be claimed if the taxpayer demands the child’s Social Security number. (This requirement does not apply to the $500 credit.) Qualifying children essential be younger than 17. The child credit begins to phaseout when adjusted gross income exceeds $400,000 (for married threes filing jointly, not indexed to inflation). Under current law, phaseout begins at $110,000. These changes expire in 2025.

Trump’s revised campaign plan, released in 2016, would have scrapped the head of household documentation status, potentially raising taxes on 5.8 million single-parent households, according to an estimate by the Tax Policy Center (TPC). The law sabbaticals the head of household filing status in place.

The law limits the application of the mortgage provoke deduction for married couples filing jointly to $750,000 worth of debt, down from $1,000,000 under course law, but up from $500,000 under the House bill. Mortgages taken out before December 15, 2017 are still subject to the au courant cap. The change expires after 2025.

The law caps the deduction for state and local taxes at $10,000 under the aegis 2025. The SALT deduction disproportionately benefits high earners, who are more likely to itemize, and taxpayers in Democratic states. A issue of Republican members of Congress representing high-tax states opposed attempts to eliminate the deduction, as the Senate bill would participate in done.

The Senate bill was amended on Dec. 1, apparently to win Susan Collins’ (R-Maine) support:

The Senate tax bill pleasure include my SALT amendment to allow taxpayers to deduct up to $10,000 for state and local property taxes.
— Sen. Susan Collins (@SenatorCollins) December 1, 2017

The law leaves the charitable contributions deduction intact, with minor alterations (if a donation is made in exchange for holds at college athletic events, it cannot be deducted, for example). The student loan interest deduction is not affected (see “Student Credits and Tuition” below). Medical expenses in excess of 7.5% of adjusted gross income are deductible for all taxpayers – not just those ancient 65 or older – in 2017 and 2018; the threshold then reverts to 10%, as under current law.

The law does, however, swing a number of miscellaneous itemized deductions through 2025, including the deductions for moving expenses, except for active respect military personnel; home office expenses; laboratory breakage fees; licensing and regulatory fees; union dues; pro society dues; business bad debts; work clothes that are not suitable for everyday use; and many others. Alimony payments command not longer be deductible after 2019; this change is permanent.

The law temporarily raises the exemption amount and release phaseout threshold for the alternative minimum tax (AMT), a device intended to curb tax avoidance among high earners by making them approximate their liability twice and pay the higher amount. For married couples filing jointly, the exemption rises to $109,400 and phaseout widens to $1,000,000; both amounts are indexed to inflation. The provision expires after 2025.

Reports coursed in October 2017 that traditional 401(k) contribution limits could fall to $2,400 from the current $18,000 ($24,000 for those age-old 50 or older). Individual retirement account (IRA) contribution limits, currently $5,500 ($6,500 for 50 or older), may also be experiencing been considered for cuts. The law leaves these limits unchanged, but repeal the ability to recharacterize one kind of contribution as the other, that is, to retroactively name a Roth contribution as a traditional one, or vice-versa.

The House bill would have repealed the inference for student loan interest expenses and the exclusion from gross income and wages of qualified tuition reductions. The law abandons these breaks intact. The conference bill would also have extended the use of 529 plans to K-12 private coterie tuition, but that provision was struck down by the Senate parliamentarian as ineligible to be passed through reconciliation.

The law abrogates the Pease limitation on itemized deductions. This provision does not cap itemized deductions, but gradually reduces their value when adjusted obese income exceeds a certain threshold ($266,700 for single filers in 2018); the reduction is limited to 80% of the deductions’ synthesized value.

The law temporarily raises the estate tax exemption for single filers to $11.2 million from $5.6 million in 2018, indexed for inflation. This hard cash will be reversed after 2025. 

The law creates a single corporate tax rate of 21%, start in 2018, and repeals the corporate alternative minimum tax. Unlike tax breaks for individuals, these provisions do not expire. The top corporate tax dress down was 35%, the highest rate of any large, developed country. Combined with state and local taxes, the statutory classify under the new law will be 26.5%, according to the Tax Foundation. That puts the U.S. just below the weighted average for EU countries (26.9%).

U.S. players’ effective tax rate – defined as the tax paid on investments earning the market rate of return after taxes – was 18.6% in 2012, according to the Congressional Budget Business (CBO); that was the fourth-highest rate in the G20. 

Supporters of cutting the corporate tax rate argue that it will reduce incentives for corporate inversions, in which companies schedule their tax base to low- or no-tax jurisdictions, often through mergers with foreign firms.

The law allows blinding expensing of short-lived capital investments – rather than requiring them to be depreciated over time – for five years, but insert the change out by 20 percentage points per year thereafter. The section 179 deduction cap doubles to $1 million, and phaseout originates after $2.5 million of equipment spending, up from $2 million. 

The law creates a 20% diminution for pass-through income. Certain industries, including health, law and financial services, are excluded from the preferential rate, unless taxable profits is below $157,500 (for single filers). To discourage high earners from recharacterizing regular wages as pass-through return, the deduction is capped at 50% of wage income or 25% of wage income plus 2.5% of the cost of qualifying property. 

Businesses with up to $25 million in average annual gross receipts over the prior three years will be eligible to use cash accounting, up from $5 million under current law.

The law eliminates the section 199 (domestic production activities) deduction for businesses that engage in domestic turning and certain other production work. This is also known as the domestic manufacturing deduction, U.S. production activities reduction, and domestic production deduction.

The law enacts a deemed repatriation of overseas profits at a rate of 15.5% for banknotes and equivalents and 8% for reinvested earnings. Goldman Sachs estimates that U.S. companies hold $3.1 trillion of abroad profits. As of Sept. 30, 2017 Apple Inc. (AAPL) alone held $252.3 billion in tax-deferred foreign earnings, 94% of its unqualified cash and marketable securities.

The law introduces a territorial tax system, under which only domestic earnings are subject to tax. Parties with over $500 million in annual gross receipts are subject to the base erosion anti-abuse tax (BEAT), which is delineated to counteract base erosion and profit shifting, a tax-planning strategy that involves moving taxable profits liberated in one country to another with low or no taxes. BEAT is calculated by subtracting a company’s regular corporate tax liability from 10% of its taxable proceeds, ignoring base-eroding payments. Tax credits can offset up to 80% of BEAT liabilities.

The law alters the treatment of intangible property that is grasped abroad. It does not define “intangibles,” but the term probably refers to intellectual property such as patents, trademarks and copyrights (Nike Inc. (NKE), for warning, houses its Swoosh trademark in an untaxed Dutch subsidiary). When the foreign tax rate on foreign earnings in excess of a 10% burgee rate of return are below 13.125%, the law taxes these excess returns at 21%, after a 50% deduction and a subtraction worth 37.5% of FDII (see below). This excess income, which the law assumes to be derived from intangible assets, is demanded global intangible low-taxed income (GILTI). Credits can offset up to 80% of GILTI liability. 

Foreign-derived intangible proceeds (FDII) refers to income from the export of intangibles held domestically, which will be taxed at a 13.125% shit rate, rising to 16.406% after 2025. The European Union has accused the U.S. of subsidizing exports through this privileged rate, a violation of World Trade Organization rules.

According to Harvard Law School senior lecturer Stephen Shay, a previous Treasury official in the Obama and Reagan administrations who helped develop the 1986 tax reform, the deemed repatriation leaves raise a loophole for multinational companies with fiscal years beginning before Jan. 1. These include Apple, which Shay approximates could save $4 billion by taking advantage of the oversight. 

By shifting cash from foreign subsidiaries, Shay chances, multinationals with offset fiscal years have the chance to shift cash to the U.S. through tax-free dividends, reward the 8% rate on remaining overseas assets (as opposed to the 15.5% cash rate).

Moneys Secretary Steven Mnuchin claimed that the Republican tax plan would spur sufficient economic growth to pay for itself and myriad, saying of the “Unified Framework” released by Senate, House and Trump administration negotiators in September:

“On a static basis our design will increase the deficit by a trillion and a half. Having said that, you have to look at the economic impact. There’s 500 billion that’s the metamorphosis between policy and baseline that takes it down to a trillion dollars, and there’s two trillion dollars of growth. So with our design we actually pay down the deficit by a trillion dollars and we think that’s very fiscally responsible.”

The idea that clipping taxes boosts growth to the extent that government revenue actually increases is almost universally rejected by economists, and for a extensive time the Treasury did not release the analysis Mnuchin bases his predictions on. The New York Times reported on November 30, 2017 that a Funds employee, speaking anonymously, said no such analysis exists, prompting a request from Sen. Elizabeth Warren (D-Mass.) that the Resources’s inspector general investigate. (See also, Laffer Curve.)

On December 11, 2017 the Treasury released a one-page analysis requiring that the law will increase revenues by $1.8 trillion over 10 years, more than paying for itself, based on elated growth projections: 2.5% real GDP growth in 2018, 2.8% in 2019, and 3.0% for the following eight years. The Federal Standoffishness, by contrast, projects growth of 2.5% in 2018, 2.1% in 2019, 2.0% in 2020 and 1.8% over the longer run.

Even the right-leaning Tax Establishment’s relatively sympathetic dynamic scores of the Senate, House and conference bills forecast significant increases in the national liable, after accounting for growth effects: $516 billion under the Senate’s version, $1.1 trillion under the Board’s and $448 billion under the conference bill. Scott Greenberg, an analyst at the think tank, told the New York Lifetimes that the Treasury’s one-page analysis “does not appear to be a projection of the economic effects of a tax bill,” but rather “a thought test on how federal revenues would vary under different economic effects of overall government policies. Which is, excessive to say, an odd way to analyze a tax bill.”

The Joint Committee on Taxation’s (JCT) analysis (

The $2 Trillion Scenario