On December 22, 2017, President Trump signed into law H.R. 1 (originally known as the “Tax Cuts and Jobs Act”). Included are some of the most extensive changes to the US tax reform in years, discussed below.
US Federal Personal Income Tax Brackets
- Top marginal tax rate is reduced to 37%, down from 39.6% starting with the 2018 taxation year
- Top marginal tax rate bracket for married filing jointly (MFJ) taxpayers increased to $600,000, ($300,000 for married filing separately (MFS) taxpayers and $500,000 for single or head of househould (HOH) taxpayers) up from $480,050 ($240,025 for MFS taxpayers, $426,700 for single taxpayers, and $453,350 for HOH taxpayers)
Implications: Changes to the US individual tax brackets and lower marginal tax rates should attract a lower effective tax rate for most individuals. Canadian personal tax rates are typically higher than the new proposed US tax brackets, meaning the changes will have little impact on Americans residing in Canada. However, the further lowering the US tax rates may make moving to the US more attractive for Canadians.
Corporate Tax Rate Cut
- Elimination of corporate progressive tax structure, currently imposing a maximum corporate tax rate of 35%, and replacement with a 21% flat tax, effective for tax years starting after January 1, 2018
- Elimination of the special corporate tax rate on personal service corporations (PSCs)
Implications: This significant decrease in tax rate makes the US corporate tax more competitive with rates imposed by other countries and could realistically make doing business in the US more attractive for Canadians. The new tax rates may also affect choice-of-entity decisions for some business entities operating in the US as the flat 21% corporate tax rate differs from the effective tax rate for US business income of individuals earned through certain pass-through entities as the PSC tax rate is reduced to the general corporate tax rate. Generally, a PSC is a corporation that (i) substantially all of the activities consist of the performance of services in the fields such as accounting, health, law, consulting, etc. and (ii) the employees performing the services own, directly or indirectly, substantially of its stock. By reducing the general corporate and PSC rate to 21%, and providing for a top 37% rate for individuals while limiting the pass-through deduction for personal service income, the new law may encourage the incorporation of personal service businesses. The new law also does not distinguish between investment income and business income.
US Estate, Generation-Skipping, and Gift Tax
- Estate, generation-skipping, and gift tax exemption will double to $11 million per individual, with these amounts indexed for inflation through 2025
Implications: The increase to the estate tax exemption will reduce both the estate tax due for US citizens residing in Canada and Canadians owning US property subject to estate tax. Although, even non-US citizens residing in Canada are not subject to US estate tax on their US property, they may still be required to file an estate return to claim the benefits of the Canada-US Income Tax Treaty if the fair market value of the US property exceeds U$60,000.
State and Local Tax Itemized
- Allows a maximum $10,000 itemized deduction for state and local property tax deductions; however, eliminates state and local income tax deduction, unless state and local income taxes are incurred in carrying on a trade or business
Implications: The reduction of the state and local tax deduction may be one of the only changes, which increase tax costs to some. At the very least, this change may negatively affect some of the other savings for individuals who pay tax to high income tax states such as California, Hawaii, and New Jersey.
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