United States: 2017 Tax Legislation Impacts All Taxpayers

On 22 December 2017, major new US federal tax legislation was enacted into law. The effect of the new law on high net worth individuals and family offices is summarised below. Most of the changes affect taxpayers in the 2018 through 2025 taxable years.

• Tax Rates –The maximum rate on ordinary income has dropped from 39.6% to 37%. The threshold for the top rate increases for taxpayers filing a joint return (from USD 480,050 to USD 600,000), but not significantly for single taxpayers.
• State Taxes – The personal deduction for state and local taxes is now limited to USD 10,000.
• Alternative Minimum Tax – The individual AMT is retained. However, both the exemption and the phase-out increase. As a result, it is doubtful that many individuals will be liable for AMT in the future.
• Business Income – Owners of unincorporated businesses and S corporations (including passive businesses) are now allowed to exclude up to 20% of their net profit. This potentially reduces the maximum rate to 29.6%. However, owners of service businesses will not generally benefit from this change.
• Business Losses – Net business losses are now subject to limitation. A loss in excess of USD 500,000 (USD 250,000 for single taxpayers) will now be carried forward (and can only offset 80% of taxable income in future taxable years). The limitation on passive losses continues to apply.
• Business Interest – The deduction of business interest (whether paid to related or unrelated persons) is now limited to 30% of EBITDA. Disallowed interest can be carried forward indefinitely. The limit does not apply to small businesses (gross receipts of less than 25 million) or to real estate businesses that elect to use a less-favourable depreciation table. 
• Cost Recovery – The rate for bonus depreciation increases from 50% to 100%. The 100% deduction applies to property placed in service from 28 September 2017 until 31 December 2022. Bonus depreciation now applies to used property (if purchased from an unrelated person and in a taxable transaction).
• Charitable Contributions – The general limitation on deductions of charitable contributions increases from 50% to 60% of adjusted gross income.
• Mortgage interest – The limitation on mortgage interest has decreased. The amount of mortgage principal for which a deduction is allowed has decreased from USD 1.1 million to USD 750,000. However, debt incurred on or before 15 December 2017 is grandfathered to the extent of $1 million of principal.
• Miscellaneous Deductions – Deductions (including investment expenses) that had previously been subject to a 2% threshold are no longer deductible. As a result, family office expenses are no longer deductible unless attributable to a trade or business.
• Deferred Foreign Income – 10% US shareholders (including individuals) of foreign corporations will generally be required to include their share of post-1986 accrued earnings. The tax can be paid in instalments (starting in 2017) at a reduced tax rate.
• Estate and Gift Tax – For US tax residents, the estate and gift tax lifetime exclusion amount has increased from USD 5.49 million to USD 10.98 million. This change does not affect non-residents, who still must rely on a tax treaty to get a meaningful reduction in estate and gift tax on the transfer of US property.

Many planning ideas that worked in the past, may no longer be viable (or may have limited benefit). High net worth individuals and managers of family offices should consider the impact of these changes.