Congress Enacts Tax Reform
For the first time in 31 years, Congress and the President have overhauled the US Tax Code. That, coupled with regulatory relief currently being felt by US businesses, is helping to stimulate much needed economic growth in the US economy. Indeed, many observers take note of soaring consumer confidence in the economy, a stock market seeing a sustained bull run, and an unemployment rate that has consistently fallen.
Prior to this just-enacted law, the US Tax Code was perceived to be highly complex and impenetrable to perhaps all but tax attorneys and accountants.
In the three decades since Congress last enacted major tax reform, many believed that this highly uncompetitive Code had grown out of step with our economy and livelihoods. Just before Christmas 2017, Congress passed, and the President signed into law, a sweeping overhaul of federal tax law. For middle class families and businesses, most of these provisions took effect on January 1st, 2018 with some corporate changes to quickly follow. Andeavor believes that the new US tax reform law can:
- Return more money to individuals, middle-class families and businesses,
- Help American companies compete globally while fostering domestic investment; and
- Simplify and clarify tax law for all.
US manufacturers have worked within a Tax Code riddled with rates that were amongst the highest in the world, arcane rules and significant compliance costs – a Code that vexed domestic manufacturers and workers alike. Our new, reformed Code seeks to help keep money where it’s needed most — in the hands of American families and, businesses and communities.
Individual/Family Deductions Changes:
In exchange for lower individual and married filer rates, deductions were modified or eliminated (through 2025). These include:
- Capping home mortgage interest and state/local tax deductions,
- Eliminating home equity debt,
- Personal casualty and theft loss (except for federally-declared disasters),
- Miscellaneous itemizations subject to the 2% floor (i.e., certain investment, professional fees and unreimbursed employee business expenses),
- AGI-based reduction of certain itemized deductions,
- Moving expense (except for military members in certain circumstances),
- Personal exemptions; and
- Ending the Affordable Care Act’s individual mandate penalty (after December 31, 2018).
The standard deduction is now $24,000 for joint filers, $18,000 for household heads, and $12,000 for others (all indexed to inflation after 2018). The additional standard deduction for age and blindness remains. Currently, about two-thirds of individuals use standard deductions; a number that will increase by some estimates to 90% of filers under these new higher standard deductions.
Predicting the effects of the revised Code on individual filers is dependent upon a range of variables (income, dependents, and deductions taken). However, the non-partisan Tax Policy Center estimates that 80% of all households will get a tax cut in 2018, with an average reduction of $1600. Additionally, the Center anticipates 5% will see a tax increase and the remainder will experience no change from 2017. However, it may be well into 2019 when most taxpayers will see these positive benefits when they sit down to do their 2018 tax returns.
The federal Corporate Tax Rate was cut from 35% to 21% and made permanent. Additionally, assets acquired after Sept. 27, 2017 will receive 100% Bonus Depreciation. For acquisitions before that date, 40% applies, if placed into service in 2018. Additionally, foreign profits of US Companies will no longer be taxed in the United States. Profits earned by such foreign subsidiaries can be distributed to the US without tax.
A Look Ahead:
What happens next? We may glean some answers by looking back to the last major comparable legislation: the Tax Reform Act of 1986. It offers a reasonable model of how the 2017 law may roll out. Previously, in 1986, the Joint Congressional Committee on Taxation (JCCT) released a comprehensive General Explanation of the Tax Reform Act of 1986. This was made available roughly six months after the 1986 Act’s enactment. At 1379 pages, it was longer than the Act’s actual 879-page length. Now, a new General Explanation is already under development. Once issued, it will be a defining document on the 2017 Act, and like the 1986 exercise, demonstrates that implementation of the law is often far more complicated than its re-writing.
In the longer term, the US Treasury Department and Internal Revenue Service must issue guidance and, ultimately, implementing rules, for the practical application of the new law. Here again, 1986 may offer credible guidance.
Administrative implementation of the ’86 Act spanned from January 1987 into April of 1989. The IRS’ initial plan anticipated the publishing 135 regulations, 25 revenue rulings, 13 revenue procedures, 33 notices, and 11 announcements. The vast majority of these were slated for publication before the 1988 filing season (i.e., for Tax Year 1987). Ultimately, while most of the revenue rulings, notices, and announcements were published in time, only 11 regulations had been issued by April of 1988. And in addition to these planned items, more than 150 other issuances were also published as unanticipated matters cropped up.
Although the Treasury Department’s initial 2017-18 Priority Guidance Plan (PGP) was released in October, (before the new law was enacted), it’s clear that substantial changes will soon emerge (the PGP is updated quarterly).