The American Tax Reform (HR 1) was approved on December 22, 2017, and many people still do not know how this will affect their tax planning. This is the biggest change in US tax law in the last 30 years.
The new rules have been described and analyzed in a document with more than 560 pages. Thankfully, there’s no need to memorize the information of each of these pages to organize your finances: you can always count on the guidance of a certified public accountant (CPA—a professional who deals with legal, tax and accounting issues under the seal of approval of the US government) to decide your next steps.
Here are some of the key changes brought about by the Reform so that you’ll get to know which ones apply to you and your business. Remember: the changes took effect in 2018 and are valid until 2025. After that, there may be changes.
Legal Entities
- Adjustment in the Income Tax for Legal Entities: The main point of the Tax Reform is the reduction of taxes for companies: the rate fell from 35% to 21%, already in 2018. With the reduction, the US follows the trend of members of the Organization for Economic Cooperation and Development (OECD), which reduced the average of this tax from 32.5% in 2000 to 24.2% in 2016. But be aware: the new tax rate applies to corporations with a profit from operations in U.S.
- Elimination of the Alternative Minimum Tax (AMT) for corporations: The AMT existed to ensure that all corporations would pay a minimum tax rate on their taxable income and allow credits for these payments to be transferred from one year to the next. With the reform, the AMT is gone and corporations are exposed to a 21% rate on their profit from this year.
- Deduction of taxation on the repatriation of dividends: Dividends from foreign subsidiaries that are distributed to shareholders (corporate entity with more than 10% equity interest for a period longer than 1 year) are 100% deductible for US Income Tax purposes.
Attention! On the other hand, the credit related to Income Tax paid abroad or the deduction of this amount by companies that fall under the exemption described above is no longer allowed.
- Taxation on retained earnings in foreign subsidiaries: Retained earnings not distributed by foreign subsidiaries will be taxed at 15.5% for amounts held in cash (or equivalent) and 8% for amounts held in non-liquid assets. This tax can be paid in a period of up to 8 years.
- Increase in deduction in Section 179: With the reform, the limit for depreciation deduction of assets allocated in the operation in a given company fiscal year has increased: from USD 510,000 it has risen to USD 1,000,000.
Individuals
- Adjustments in the Income Tax thresholds for individuals: The thresholds for personal income tax have changed. The new values are valid between the years 2018 and 2025. Check it out:
| Tax Income – Individuals | 2018-2025 rates | |
| Individual | |
| Annual income | Tax |
| USD 0 to USD 9.525 | 10% |
| USD 9.525 to USD 38.700 | 12% |
| USD 38,700 to USD 82.500 | 22% |
| USD 82,500 to USD 157.500 | 24% |
| USD 157,500 to USD 200.000 | 32% |
| USD 200.000 to USD 500.000 | 35% |
| Over USD 500.000 | 37% |
| Heads of household | |
| Annual income | Tax |
| USD 0 to USD 13.600 | 10% |
| USD 13.600 to USD 51.800 | 12% |
| USD 51.800 to USD 82.500 | 22% |
| USD 82.500 to USD 157.500 | 24% |
| USD 157.000 to USD 200.00 | 32% |
| USD 200.00 to USD 500.00 | 35% |
| Over USD 500.000 | 37% |
| Couples declaring together | |
| Annual Income | Tax |
| USD 0 to USD 19.050 | 10% |
| USD 19.050 to USD 77.400 | 12% |
| USD 77.400 to USD 165.000 | 22% |
| USD 165.000 to USD 315.000 | 24% |
| USD 315.000 to USD 400.000 | 32% |
| USD 400.000 to USD 600.000 | 35% |
| Over USD 600.000 | 37% |
| Couples declaring separately | |
| Annual income | Tax |
| USD 0 to USD 9.525 | 10% |
| USD 9.525 to USD 38.700 | 12% |
| USD 38.700 to USD 82.500 | 22% |
| USD 82.500 to 157.500 | 24% |
| USD 157.500 to USD 200.000 | 32% |
| USD 2000.000 to USD 300.000 | 35% |
| Over USD 300.000 | 37% |
| Source: Joint Committee on Taxation |
- Increase in the standard deduction: Between 2018 and 2025, the new standard deduction values are: (i) individual statements: USD 12,000; (ii) couples declaring together: USD 24,000; (iii) heads of household: USD 18,000.
- Temporary Deduction for Qualified Business Income: Taxpayers with incomes from entities taxed as passthrough may qualify for a temporary deduction (up to 2025) of the total value of the qualified operating income or 20% of the taxable income, provided that they meet the criteria set forth in section 199A of the American Tax Code. Check with your CPA if you are eligible!
- Causes mortis tax and transfer tax: The individual exemption for US tax residents in the application of the Causa mortis tax and transfer tax has grown from USD 5.49 million to USD 11.2 million between 2018 and 2025. Pay attention: nothing changes for non-resident taxpayers, who continue to have a USD 60,000 exemption.
- Deductibility of Local and State Tax Expenses: The amounts spent on local and state taxes may be deducted from the income tax return, up to USD 10,000 per year.
Remember that it is critical to consult your CPA to understand how these changes affect you and your business.