Congress today gave final approval to the House and Senate conference committee agreement on tax reform legislation (HR 1) that will lower business and individual tax rates, modernize US international tax rules, and provide the most significant overhaul of the US tax code in more than 30 years.
HR 1 will lower permanently the US federal corporate income tax rate from 35 percent to 21 percent. The legislation will temporarily reduce the current 39.6-percent top individual income tax rate to 37 percent and revise other individual income tax rates and brackets. Both the new corporate tax rate and revised individual tax rates would be effective for tax years beginning after December 31, 2017. It also will repeal the corporate alternative minimum tax (AMT), while retaining a modified individual AMT with higher exemption amounts and phase-out thresholds.
The legislation provides the most significant overhaul of US international tax rules in more than 50 years by moving the United States from a ‘worldwide’ system to a 100-percent dividend exemption ‘territorial’ system. As part of this change, the Agreement includes two minimum taxes aimed at safeguarding the US tax base from erosion, along with other international tax provisions.
HR 1 includes a broad range of tax reform proposals affecting businesses and individuals, including a new 20-percent deduction for certain pass-through business income. In addition, the Agreement repeals or modifies many current-law tax provisions to offset part of the cost of the proposed tax reforms. The Joint Committee on Taxation staff have estimated that the net revenue effect of HR 1 will be to increase the on-budget federal deficit by $1.456 trillion over 10 years.
At this time, it is unclear whether President Trump will sign the legislation into law before the end of this year, or if the signing might be delayed until January 2018.
HR 1 is on track to be the most historic tax reform enacted since the Tax Reform Act of 1986. The current legislation represents years of effort to enact a reform of US tax law providing a more competitive tax system for business taxpayers and improved economic opportunities for individuals and families.
Stakeholders should remain engaged as the Treasury Department and the IRS begin the regulatory process to implement the legislation.