Newer Updates on the Tax Cuts and Jobs Act
For the latest updates on the Tax Cuts and Jobs Act, read New 2018 Tax Law (Tax Cuts and Jobs Act).
We’ve been waiting to see what our congressmen and women are going to decide for our 2018 tax law. As we’ve already entered the holiday season and can see the new year in sight, they are certainly cutting it close.
This so-called tax reform has a lot of unfavorable proposals. There are many differences between the House and Senate bills, but so far the two bills agree on repealing the state and local tax deduction, lowering the corporate tax rate, repealing Roth recharacterizations, and expanding 529 account usage. Many other details have not been settled between the House and the Senate.
One unsettled issue is the fate of Alternative Minimum Tax (AMT). With all the proposed changes to the brackets, deductions, and exemptions, Congress has to change how AMT works otherwise the people who would have gotten the biggest tax cut would instead see AMT increase to offset their tax decrease.
AMT, which is an almost a flat rate of 26% or 28%, is ironically used to make the tax code strongly progressive. The whole concept is that if somehow a tax payer managed to reduce their tax bill farther than the law makers would have wanted someone with their AGI to have done, then AMT is there to impose more tax.
Taxpayers are sometimes hit with AMT when a large amount of the tax they owe is capital gains tax. Capital gains is taxed at lower rates of 0%, 15%, 18.8% 20%, or 23.8%. Because capital gains is most commonly taxed at 15%, AMT assumes that the taxpayer is not paying enough tax and increases their tax bill. Capital gains often represents a second tax on income or simply a tax on inflation. Capital gains should not be included in income and should not be taxed at all.
Taxpayers are also hit with AMT when they are able to take a large amount of deductions in relationship to their income. In both of these cases the taxpayers AGI suggests they should pay more tax than the ultimately pay.
If you are hit with AMT, you can strangely get out of AMT and reduce your tax bill sometimes by increasing your AGI. When that is the case, we recommend using Roth conversions as your AGI increaser.
In the House bill, they repeal AMT entirely, amending all sections where it is mentioned so that AMT can just be gone. Their proposed section is longer as a result of this admirable goal.
The Senate, on the other hand, merely increased the exemptions you get under AMT. These increased exemptions effectively leave AMT alone, as an increase is necessary to match the changes to the brackets, deductions, and exemptions.
Here is the text of the bill:
subtitle B—Alternative minimum tax
SEC. 12001. Increased exemption for individuals.
(a) Increased exemption.—Section 55(d) is amended by adding at the end the following new paragraph:
“(5) SPECIAL RULE FOR TAXABLE YEARS BEGINNING AFTER 2017 AND BEFORE 2026.—
“(A) IN GENERAL.—In the case of any taxable year beginning after December 31, 2017, and before January 1, 2026—
“(i) paragraph (1) shall be applied—
“(I) by substituting ‘$109,400’ for ‘$78,750’ in subparagraph (A), and
“(II) by substituting ‘$70,300’ for ‘$50,600’ in subparagraph (B), and
“(ii) paragraph (3) shall be applied—
“(I) by substituting ‘$208,400’ for ‘$150,000’ in subparagraph (A),
“(II) by substituting ‘$156,300’ for ‘$112,500’ in subparagraph (B), and
“(III) in the case of a taxpayer described in paragraph (1)(D), without regard to the substitution under subclause (I).
“(B) INFLATION ADJUSTMENT.—
“(i) IN GENERAL.—In the case of any taxable year beginning in a calendar year after 2018, the amounts described in clause (ii) shall each be increased by an amount equal to—
“(I) such dollar amount, multiplied by
“(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2017’ for ‘calendar year 2016’ in subparagraph (A)(ii) thereof.
“(ii) AMOUNTS DESCRIBED.—The amounts described in this clause are the $109,400 amount in subparagraph (A)(i)(I), the $70,300 amount in subparagraph (A)(i)(II), the $208,400 amount in subparagraph (A)(ii)(I), and the $156,300 amount in subparagraph (A)(ii)(II).
“(iii) ROUNDING.—Any increased amount determined under clause (i) shall be rounded to the nearest multiple of $100.”.
(b) Effective date.—The amendments made by this section shall apply to taxable years beginning after December 31, 2017.
TITLE II—Alternative Minimum Tax Repeal
SEC. 2001. Repeal of alternative minimum tax.
(a) In general.—Subchapter A of chapter 1 is amended by striking part VI (and by striking the item relating to such part in the table of parts for subchapter A).
(b) Credit for prior year minimum tax liability.—
(1) LIMITATION.—Subsection (c) of section 53 is amended to read as follows:
“(c) Limitation.—The credit allowable under subsection (a) shall not exceed the regular tax liability of the taxpayer reduced by the sum of the credits allowed under subparts A, B, and D.”.
(2) CREDITS TREATED AS REFUNDABLE.—Section 53 is amended by adding at the end the following new subsection:
“(e) Portion of credit treated as refundable.—
“(1) IN GENERAL.—In the case of any taxable year beginning in 2019, 2020, 2021, or 2022, the limitation under subsection (c) shall be increased by the AMT refundable credit amount for such year.
“(2) AMT REFUNDABLE CREDIT AMOUNT.—For purposes of paragraph (1), the AMT refundable credit amount is an amount equal to 50 percent (100 percent in the case of a taxable year beginning in 2022) of the excess (if any) of—
“(A) the minimum tax credit determined under subsection (b) for the taxable year, over
“(B) the minimum tax credit allowed under subsection (a) for such year (before the application of this subsection for such year).
“(3) CREDIT REFUNDABLE.—For purposes of this title (other than this section), the credit allowed by reason of this subsection shall be treated as a credit allowed under subpart C (and not this subpart).
“(4) SHORT TAXABLE YEARS.—In the case of any taxable year of less than 365 days, the AMT refundable credit amount determined under paragraph (2) with respect to such taxable year shall be the amount which bears the same ratio to such amount determined without regard to this paragraph as the number of days in such taxable year bears to 365.”.
(3) TREATMENT OF REFERENCES.—Section 53(d) is amended by adding at the end the following new paragraph:
“(3) AMT TERM REFERENCES.—Any references in this subsection to section 55, 56, or 57 shall be treated as a reference to such section as in effect before its repeal by the Tax Cuts and Jobs Act”..”.
(c) Conforming amendments related to AMT repeal.—
(1) Section 2(d) is amended by striking “sections 1 and 55” and inserting “section 1”.
(2) Section 5(a) is amended by striking paragraph (4).
(3) Section 11(d) is amended by striking “the taxes imposed by subsection (a) and section 55” and inserting “the tax imposed by subsection (a)”.
(4) Section 12 is amended by striking paragraph (7).
(5) Section 26(a) is amended to read as follows:
“(a) Limitation based on amount of tax.—The aggregate amount of credits allowed by this subpart for the taxable year shall not exceed the taxpayer’s regular tax liability for the taxable year.”.
(6) Section 26(b)(2) is amended by striking subparagraph (A).
(7) Section 26 is amended by striking subsection (c).
(8) Section 38(c) is amended—
(A) by striking paragraphs (1) through (5),
(B) by redesignating paragraph (6) as paragraph (2),
(C) by inserting before paragraph (2) (as so redesignated) the following new paragraph:
“(1) IN GENERAL.—The credit allowed under subsection (a) for any taxable year shall not exceed the excess (if any) of—
“(A) the sum of—
“(i) so much of the regular tax liability as does not exceed $25,000, plus
“(ii) 75 percent of so much of the regular tax liability as exceeds $25,000, over
“(B) the sum of the credits allowable under subparts A and B of this part.”, and
(D) by striking “subparagraph (B) of paragraph (1)” each place it appears in paragraph (2) (as so redesignated) and inserting “clauses (i) and (ii) of paragraph (1)(A)”.
(9) Section 39(a) is amended—
(A) by striking “or the eligible small business credits” in paragraph (3)(A), and
(B) by striking paragraph (4).
(10) Section 45D(g)(4)(B) is amended by striking “or for purposes of section 55”.
(11) Section 54(c)(1) is amended to read as follows:
“(1) regular tax liability (as defined in section 26(b)), over”.
(12) Section 54A(c)(1)(A) is amended to read as follows:
“(A) regular tax liability (as defined in section 26(b)), over”.
(13) Section 148(b)(3) is amended to read as follows:
“(3) TAX-EXEMPT BONDS NOT TREATED AS INVESTMENT PROPERTY.—The term ‘investment property’ does not include any tax-exempt bond.”.
(14) Section 168(k)(2) is amended by striking subparagraph (G).
(15) Section 168(k) is amended by striking paragraph (4).
(16) Section 168(k)(5) is amended by striking subparagraph (E).
(17) Section 168(m)(2)(B)(i) is amended by striking “(determined without regard to paragraph (4) thereof)”.
(18) Section 168(m)(2) is amended by striking subparagraph (D).
(19) Section 173 is amended by striking subsection (b).
(20) Section 263(c) is amended by striking “section 59(e) or 291” and inserting “section 291”.
(21) Section 263A(c) is amended by striking paragraph (6) and by redesignating paragraph (7) (as amended) as paragraph (6).
(22) Section 382(l) is amended by striking paragraph (7) and by redesignating paragraph (8) as paragraph (7).
(23) Section 443 is amended by striking subsection (d) and by redesignating subsection (e) as subsection (d).
(24) Section 616 is amended by striking subsection (e).
(25) Section 617 is amended by striking subsection (i).
(26) Section 641(c) is amended—
(A) in paragraph (2) by striking subparagraph (B) and by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively, and
(B) in paragraph (3), by striking “paragraph (2)(C)” and inserting “paragraph (2)(B)”.
(27) Subsections (b) and (c) of section 666 are each amended by striking “(other than the tax imposed by section 55)”.
(28) Section 848 is amended by striking subsection (i).
(29) Section 860E(a) is amended by striking paragraph (4).
(30) Section 871(b)(1) is amended by striking “or 55”.
(31) Section 882(a)(1) is amended by striking “55,”.
(32) Section 897(a) is amended to read as follows:
“(a) Treatment as effectively connected with united states trade or business.—For purposes of this title, gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest shall be taken into account—
“(1) in the case of a nonresident alien individual, under section 871(b)(1), or
“(2) in the case of a foreign corporation, under section 882(a)(1),
as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such trade or business.”.(33) Section 904(k) is amended to read as follows:
“(k) Cross reference.—For increase of limitation under subsection (a) for taxes paid with respect to amounts received which were included in the gross income of the taxpayer for a prior taxable year as a United States shareholder with respect to a controlled foreign corporation, see section 960(b).”.
(34) Section 911(f) is amended to read as follows:
“(f) Determination of tax liability.—
“(1) IN GENERAL.—If, for any taxable year, any amount is excluded from gross income of a taxpayer under subsection (a), then, notwithstanding section 1, if such taxpayer has taxable income for such taxable year, the tax imposed by section 1 for such taxable year shall be equal to the excess (if any) of—
“(A) the tax which would be imposed by section 1 for such taxable year if the taxpayer’s taxable income were increased by the amount excluded under subsection (a) for such taxable year, over
“(B) the tax which would be imposed by section 1 for such taxable year if the taxpayer’s taxable income were equal to the amount excluded under subsection (a) for such taxable year.
For purposes of this paragraph, the amount excluded under subsection (a) shall be reduced by the aggregate amount of any deductions or exclusions disallowed under subsection (d)(6) with respect to such excluded amount.
“(2) TREATMENT OF CAPITAL GAIN EXCESS.—
“(A) IN GENERAL.—In applying section 1(h) for purposes of determining the tax under paragraph (1)(A) for any taxable year in which, without regard to this subsection, the taxpayer’s net capital gain exceeds taxable income (hereafter in this subparagraph referred to as the capital gain excess)—
“(i) the taxpayer’s net capital gain (determined without regard to section 1(h)(11)) shall be reduced (but not below zero) by such capital gain excess,
“(ii) the taxpayer’s qualified dividend income shall be reduced by so much of such capital gain excess as exceeds the taxpayer’s net capital gain (determined without regard to section 1(h)(11) and the reduction under clause (i)), and
“(iii) adjusted net capital gain, unrecaptured section 1250 gain, and 28-percent rate gain shall each be determined after increasing the amount described in section 1(h)(4)(B) by such capital gain excess.
“(B) DEFINITIONS.—Terms used in this paragraph which are also used in section 1(h) shall have the respective meanings given such terms by section 1(h).”.
(35) Section 962(a)(1) is amended—
(A) by striking “sections 1 and 55” and inserting “section 1”, and
(B) by striking “sections 11 and 55” and inserting “section 11”.
(36) Section 1016(a) is amended by striking paragraph (20).
(37) Section 1202(a)(4) is amended by inserting “and” at the end of subparagraph (A), by striking “, and” and inserting a period at the end of subparagraph (B), and by striking subparagraph (C).
(38) Section 1374(b)(3)(B) is amended by striking the last sentence thereof.
(39) Section 1561(a) is amended—
(A) by inserting “and” at the end of paragraph (1), by striking “, and” at the end of paragraph (2) and inserting a period, and by striking paragraph (3), and
(B) by striking the last sentence.
(40) Section 6015(d)(2)(B) is amended by striking “or 55”.
(41) Section 6211(b)(4)(A) is amended by striking“, 168(k)(4)”.
(42) Section 6425(c)(1)(A) is amended to read as follows:
“(A) the tax imposed under section 11 or subchapter L of chapter 1, whichever is applicable, over”.
(43) Section 6654(d)(2) is amended—
(A) in clause (i) of subparagraph (B), by striking “, alternative minimum taxable income,”, and
(B) in clause (i) of subparagraph (C), by striking “, alternative minimum taxable income,”.
(44) Section 6655(e)(2)(B)(i) is amended by striking “The taxable income and alternative minimum taxable income shall” and inserting “Taxable income shall”.
(45) Section 6655(g)(1)(A) is amended by adding “plus” at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).
(46) Section 6662(e)(3)(C) is amended by striking “the regular tax (as defined in section 55(c))” and inserting “the regular tax liability (as defined in section 26(b))”.
(d) Effective dates.—
(1) IN GENERAL.—Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2017.
(2) PRIOR ELECTIONS WITH RESPECT TO CERTAIN TAX PREFERENCES.—So much of the amendment made by subsection (a) as relates to the repeal of section 59(e) of the Internal Revenue Code of 1986 shall apply to amounts paid or incurred after December 31, 2017.
(3) TREATMENT OF NET OPERATING LOSS CARRYBACKS.—For purposes of section 56(d) of the Internal Revenue Code of 1986 (as in effect before its repeal), the amount of any net operating loss which may be carried back from a taxable year beginning after December 31, 2017, to taxable years beginning before January 1, 2018, shall be determined without regard to any adjustments under section 56(d)(2)(A) of such Code (as so in effect).
Photo by Dan Edwards on Unsplash
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