Page 3 - Tax Act First Look: The Complex New World Of The Qualified Business Deduction Rule

In
FOCUS
tant prerequisite to understanding the changes to the pass-through regimes, such as partnerships and S corporations, as well as for determining the tax rates on capital gains. It is also helpful to understand the coming changes made to the individual alternative minimum tax.
39.6%, adjusted long-term capital gain is taxed at a 20% rate. Adjusted net cap- ital gain is increased by the amount of “qualified dividend income,” as defined under IRC section 1(h)(11)(B), which includes dividends received from domes- tic corporations and qualified foreign cor- porations. [A special holding period requirement is set forth with respect to qualified dividend income. Moreover, dividends received from a passive for- eign investment company, per IRC sec- tion 1297, in either the year of the distribution or the preceding taxable year, are not qualified dividends. A dividend is treated as investment income for pur- poses of IRC section 163(d) (Limitation on invested interest) only where the tax- payer elects to treat the dividend as not
joint return or a surviving spouse), $125,000 (for a married individual filing a separate return), or $200,000 (for any other individuals).
Reduction of Individual Income Tax Rates
The Conference Committee adopted the seven-bracket approach of the Senate bill and adopted rates ranging from 10% on taxable income not over $9,525 for indi- viduals ($19,050 for married couples fil- ing jointly (MFJ) to a maximum of 37% for taxable income over $500,000 for individuals ($600,000 for MFJ). The Conference Committee bill therefore imposes a marriage penalty on married couples filing jointly. For married indi- viduals filing separately, the 37% thresh- old is attained at taxable income over $300,000. No tax relief is provided for estates and trusts other than a reduction in the maximum rate to 37%. The con- ference agreement retains the present-law maximum rates on net capital gains and qualified dividends. The tax bill’s reduc- tion in overall individual rates expires for taxable years starting in 2025, in which event the current rates spring forward for taxable years beginning on or after January 1, 2026.
Current law. Under current law, indi- viduals are subject to federal income tax at graduated rates, starting at 10% on tax- able income not over $9,235, and climb- ing to a maximum marginal rate of 39.6% for taxable income over $418,400. In seven tax brackets, the rate of tax increases as taxable income levels climb over higher thresholds. For married cou-
Conference Committee agreement.
The Conference Committee adopted the seven-bracket approach of the Senate bill and adopted rates ranging from 10% to a maximum of 37%.
ples filing joint returns, the marginal tax rate of 39.6% applies to joint taxable income over $470,700. Estates and trusts, as treated under current law, quickly hit the maximum marginal rate of 39.6% on taxable income over $12,500.
eligible for the reduced rates.] A qualified foreign corporation is one that is eligible for benefits under an income tax treaty with the United States that includes an exchange of information provision. For income realized in the form of depreci- ation subject to recapture under IRC sec- tion 1250, the maximum rate of tax is 25%, while capital gains from the sale of a collectible is taxed at a maximum rate of 28%.
The individual income tax brackets are subject to adjustment for inflation based on annual changes in the level of the Consumer Price Index for All Urban Consumers [see IRC section 1(f)]. The indexing adjustment rule is permanent and will later apply to present law rates for taxable years beginning after 2025.
With respect to capital gains, for an individual, estate, or trust, the amount of adjusted net capital gain, which other- wise would be taxed at the 10% or 15% rate, is not taxed at all. Adjusted net cap- ital otherwise taxed at rates over 15% but below 39.6% (over $37,950 in tax- able income but less than $418,400 in taxable income for single individuals for example) is taxed at a 15% rate. For tax- able income levels subject to the maxi- mum individual income tax rate of
Current law. The alternative minimum tax (AMT) is imposed on an individual, estate, or trust in the amount by which the tentative minimum tax exceeds the regular income tax for the taxable year. Under present law, the tentative mini- mum tax is the sum of: 1) 26% of tax- able income under $187,800 [$93,900 for married filing separately (MFS)]; and 2) 28% of the remaining excess. The
24
JANUARY 2018 / THE CPA JOURNAL
Individuals are currently subject to a 3.8% Additional Medicare Tax under IRC section 1411 on the lesser of their net investment income, including capital gains and dividends, or modified adjusted gross income over a threshold amount of $250,000 (for married couples filing a
Individual Alternative Minimum Tax