Simple Explanation of H.R. 1 (2017-2018 Tax Reconciliation Act)

This bill, often called the “Tax Cuts and Jobs Act,” was passed by the 115th U.S. Congress in 2017 and brought many changes to the tax code affecting individuals, families, and businesses for the years 2018 through 2025. Here is an easy-to-understand summary of some of the major parts:

1. Individual Tax Changes

• New Tax Rates and Brackets: The bill changes the income tax rates for individuals, families, and married couples, generally lowering the rates but adjusting the brackets compared to previous years.
• Increased Standard Deduction: The standard deduction amount nearly doubles (e.g., $24,000 for married couples in 2018), meaning fewer people need to itemize deductions.
• Personal Exemptions Temporarily Suspended: The personal exemption (a fixed deduction per person) is set to zero temporarily, partially offset by the higher standard deduction.
• Child Tax Credit: The child tax credit is increased from $1,000 to $2,000 per child, with a higher income limit to qualify.
• State and Local Tax Deduction Limit: Deductions for state and local taxes are capped at $10,000.
• Mortgage Interest Deduction Limit Reduced: Interest on mortgage debt is deductible only up to $750,000 of home loans, down from $1 million for new loans after 2017.

2. Business Tax Changes

• Lower Corporate Tax Rate: The top corporate tax rate drops from 35% to a flat 21% rate starting in 2018.
• Pass-Through Business Deduction: Many small business owners and partnerships can deduct up to 20% of their “qualified business income” to reduce their taxable income.
• Limit on Business Interest Deduction: Businesses can only deduct 30% of their taxable income as interest expense, with some exceptions for small businesses.
• Immediate Expensing (Bonus Depreciation): Businesses can immediately deduct 100% of the cost of certain new equipment and qualified property placed in service before 2023, phasing down after that.
• Simplified Accounting Methods: The rules for using certain accounting methods like cash method and treating inventory are relaxed for small businesses.
• Repeal of Domestic Production Activities Deduction: The deduction that benefited manufacturers and producers inside the U.S. was eliminated.

3. Tax on Certain Executive Compensation

For tax-exempt organizations (like charities) and large companies, the bill limits the deductibility of high executive compensation. Tax-exempt organizations pay a new excise tax on payments over $1 million to their top 5 highest paid employees.

4. International Tax Provisions

• Participation Exemption: U.S. corporations generally do not pay tax on most dividends from their foreign subsidiaries, encouraging companies to bring profits back to the U.S.
• One-Time Tax on Overseas Profits: The bill imposes a one-time tax on accumulated foreign profits of U.S. companies (called “deemed repatriation”) with payments possibly spread over 8 years.
• New Taxes on Foreign Income: A new minimum tax applies to certain foreign earnings called “Global Intangible Low-Taxed Income” (GILTI) for U.S. shareholders of foreign subsidiaries.
• Base Erosion and Anti-Abuse Tax (BEAT): This adds a minimum tax on large companies that make certain deductible payments to related foreign parties to prevent tax base erosion.

5. Other Notable Provisions

• Estate and Gift Tax Exemption Increased: The exemption amount for estates and gifts doubles to $10 million per person (indexed for inflation) through 2025.
• Temporary Suspension of Some Itemized Deductions: Miscellaneous itemized deductions subject to the 2% AGI floor are suspended.
• Repeal of Individual Mandate Penalty: The penalty for not having health insurance (from the Affordable Care Act) is eliminated starting 2019.
• Allowable 529 Plan Uses Expanded: Education savings accounts (529 plans) can be used for up to $10,000 per year in K-12 tuition expenses.
• Increased Limits for Charitable Contributions: Taxpayers can deduct up to 60% of their income for cash charitable donations (up from 50%) through 2025.

6. Important Dates and Duration

Many of these tax provisions, such as the altered individual tax rates, increased standard deduction, child tax credit increases, and some business changes, are set to expire after December 31, 2025, unless extended by future legislation.

Summary

This bill is a major overhaul of the tax code designed to cut taxes for individuals and businesses, simplify certain rules, and encourage economic growth. It lowers corporate taxes, changes individual income tax brackets, introduces a new deduction for small businesses, changes international tax rules to encourage repatriation of profits, and includes various other changes that impact families, education, charities, and more.

Note: This explanation covers major highlights and is not exhaustive. Tax laws are complex, and individual situations vary. Always consult a tax professional for personal tax advice.