Congress enacts tax reform.

• Author: Schreiber, Sally P.

The Tax Cuts and Jobs Act, P.L. 115-97, which President Donald Trump signed into law on Dec. 22, enacted a large overhaul of many parts of the Internal Revenue Code. Here are many of the most important provisions in the new law that affect both individual taxpayers and businesses. All changes were effective Jan. 1, 2018, except as noted below.

Individuals

All of the changes in the act affecting individuals expire after 2025.

Tax rates

For tax years 2018 through 2025, rates apply to individuals as shown in the tables on the next page.

Special brackets will apply for certain children with unearned income.

The system for taxing capital gains and qualified dividends did not change under the act, except that the income levels at which the 15% and 20% rates apply were altered (and will be adjusted for inflation after 2018). For 2018, the 15% rate will start at $77,200 for married taxpayers filing jointly, $51,700 for heads of household, and $38,600 for other individuals. The 20% rate will start at $479,000 for married taxpayers filing jointly, $452,400 for heads of household, and $425,800 for other individuals.

Standard deduction: The act increased the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers was not changed by the act.

Personal exemptions: The act repealed all personal exemptions through 2025. The withholding rules will be modified to reflect the fact that individuals can no longer claim personal exemptions.

Passthrough income deduction

For tax years after 2017 and before 2026, individuals will be allowed to deduct 20% of "qualified business income" from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. (Special rules would apply to specified agricultural or horticultural cooperatives.)

A limitation on the deduction is phased in based on W-2 wages above a threshold amount of taxable income. The deduction is disallowed for specified service trades or businesses with income above a threshold.

For these purposes, "qualified business income" means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. These items must be effectively connected with the conduct of a trade or business within the United States. They do not include specified investment-related income, deductions, or losses.

"Qualified business income" does not include an S corporation shareholder's reasonable compensation, guaranteed payments, or--to the extent provided in regulations--payments to a partner who is acting in a capacity other than his or her capacity as a partner.

Single taxpayers Taxable income But not Is taxed over over at $0 $9,525 10% $9,525 $38,700 12% $38,700 $82,500 22% $82,500 $157,500 24% $157,500 $200,000 32% $200,000 $500,000 35% $500,000 37% Heads of household Taxable income But not Is taxed over over at $0 $13,600 10% $13,600 $51,800 12% $51,800 $82,500 22% $82,500 $157,500 24% $157,500 $200,000 32% $200,000 $500,000 35% $500,000 37% Estates and trusts Taxable income But not Is taxed over over at $0 $2,550 10% $2,550 $9,150 24% $9,150 $12,500 35% $12,500 37% "Specified service trades or businesses" include any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees.

Married taxpayers filing joint returns and surviving spouses Taxable income But not Is taxed over over at $0 $19,050 10% $19,050 $77,400 12% $77,400 $165,000 22% $165,000 $315,000 24% $315,000 $400,000 32% $400,000 $600,000 35% $600,000 37% Married taxpayers filing separately Taxable income But not Is taxed over over at $0 $9,525 10% $9,525 $38,700 12% $38,700 $82,500 22% $82,500 $157,500 24% $157,500 $200,000 32% $200,000 $300,000 35% $300,000 37% The exclusion from the definition of a qualified business for specified service trades or businesses phases out for a taxpayer with taxable income in excess of $157,500, or $315,000 in the case of a joint return.

For each qualified trade or business, the taxpayer is allowed to deduct 20% of the qualified business income for that trade or business. Generally, the deduction is limited to 50% of the W-2 wages paid with respect to the business. Alternatively, capital-intensive businesses may get a higher benefit under a rule that takes into consideration 25% of wages paid plus a portion of the business's basis in its tangible assets. However, if the taxpayer's income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 20% of the qualified business income for each respective trade or business.

Child tax credit

The act increased the amount of the child tax credit to $2,000 per qualifying child. The maximum refundable amount of the credit is $1,400. The act also created a new nonrefundable $500 credit for qualifying dependents who are not qualifying children. The threshold at which the credit begins to phase out was increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.

Other credits for individuals

The House version of the bill would have repealed several credits that are retained in the final version of the act. These include:

* The Sec. 22 credit for the elderly and permanently disabled;

* The Sec. 30D credit for plug-in electric drive motor vehicles; and

* The Sec. 25 credit for interest on certain home mortgages.

The House bill's proposed modifications to the American opportunity tax credit and lifetime learning credit also did not make it into the final act.

Education provisions

The act modifies Sec. 529 plans to allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather...