On Friday, December 22nd, President Trump signed the tax reform legislation into law. The legislation makes sweeping changes to the tax code: It caps the state and local tax deduction at $10,000 per taxpayer, lowers the top marginal rate for individuals and trusts from 39.6% to 37%, scales back the alternative minimum tax, eliminates miscellaneous itemized deductions (including the deduction for investment-related expenses), requires that carried interest be held for at least three years in order to be treated as long-term capital gains, and cuts the corporate rate from 35% to 21%. The legislation also allows individuals to deduct up to 20% of (1) certain real estate investment trust dividend income, (2) certain income from publicly traded partnerships (including master limited partnerships), and (3) qualifying business income from a pass-through entity, such as an LLC or a trust. “Qualifying business income” is defined as the net income or gain from a U.S. “qualified trade or business” (a category that excludes most service businesses as well as investment, investment management, and securities or commodities trading businesses), less any compensation or passive-type income (such as capital gains). The deduction for qualifying business income cannot exceed the greater of (a) 50% of wages paid or (b) 25% of wages paid plus 2.5% of capital assets.
