Updated: January 22, 2018.
The Tax Cut and Jobs Act was passed by Congress on December 20th and signed by the President on December 22nd.
Changes to the tax code are effective January 1, 2018 with the exception of the bonus depreciation provision which was provided taxpayers the option of applying the new provision on assets purchased after September 27, 2017.
Most individual changes would expire at the end of 2025, so the old tax code rates and deductions would be back in 2026.
Here’s a look at what’s in the new law:
For Individuals:
New Tax brackets and rates
Lowers (many) individual rates: The bill preserves seven tax brackets, but changes the rates that apply to: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Today’s rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
Here’s how much income would apply to the new rates:
— 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
— 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
— 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
— 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
— 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
— 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
— 37% (over $500,000; over $600,000 for couples)
Standard Deduction:
Standard deduction is increased, from $12,700 in 2017 to $24,000 in 2018 for couples filing jointly. For individuals, the amount goes from $6,350 to $12,000
Exemptions:
Personal exemptions are eliminated, which in 2017 reduce taxable income by $4,050 each for taxpayers, spouses and dependent children.
An update on some the Adjustments to income:
Alimony – starting in 2019, alimony would no longer be deductible by the payor for new decrees. Payments would be excluded from the recipient’s income. Alimony payments per decrees before year 2019 will continue to be deductible for the payor and income for the recipient.
Moving expenses are no longer deductible with the exception of the military if the move is pursuant to a military order.
Itemized Deductions are changing:
Medical expenses – taxpayers continue to deduct medical expenses. For 2018 and 2019, expenses exceeding 7.5% of income are deductible; that percentage increases to 10%, the current level, in 2020.
Limited State and local tax deduction (combined with real estate tax) – new maximum of $10,000 for a combination of property and income taxes or property and sales taxes.
Mortgage interest-remains deductible for those who itemize, but for mortgages on first and second homes, only the interest on the first $750,000 borrowed is deductible. The interest on home equity loans is no longer deductible. Currently that’s allowed on loans up to $100,000.
Charitable contributions-remain deductible for those who itemize, and the current limitation of 50% of income is increased to 60%.
Casualty losses-no longer deductible unless covered by specific federal disaster declarations.
Some changes for credits:
Child tax credit-increased from $1,000 per child in 2017 to $2,000 in 2018 of which $1,400 is refundable, meaning it would be paid to parents even if they do not owe income tax. Value of the credit begins to decrease when family income exceeds $400,000.
Creates temporary credit for non-child dependents: The new law allows parents to take a $500 credit for each non-child dependent whom they’re supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability.
Provisions discussed and not changed:
Capital gains rates remain intact.
School supplies-teachers still deduct supplies they buy for their classrooms at $250.
Student loan interest continues to be deductible
Retirement accounts such as 401(k) plans stay the same. No changes to the amounts people are allowed to put into 401(k)s, IRAs and Roth IRAs.
There is still the 3.8% Net Investment Income Tax on net investment income above $200,000 for individuals and $250,000 for couples.
The Earned income tax credit remains
The Adoption tax credit is still available
Estate tax:
Estate tax- the exemption is doubled from 2017 so no estate worth nearly $11 million will be taxed. A married couple could pass on twice that amount or $22 million to their heirs. The Minnesota estate tax exemption will be $2.4 million in ’18, $2.7 million in ’19 and $3 million thereafter.
Health insurance:
The Affordable Care Act mandate that requires health insurance or face a fine imposed by the IRS is repealed starting in 2019.
Alternative Minimum Tax:
Alternative minimum tax remains for individuals, but the exemption is raised to $70,300 for singles, up from $54,300 in 2017; and to $109,400, up from $84,500, for married couples.
FOR BUSINESSES AND CORPORATIONS
Corporations
The corporate rate drops to flat 21% in 2018; down from the 35% rate in effect for 2017. Alternative minimum tax on corporations is repealed.
Pass-through businesses
Lowers tax burden on pass-through businesses: The tax burden on owners, partners and shareholders of LLC’s, partnerships and S-corporations is lowered by a 20% deduction.
There is a limitation on the deduction based on W-2 wages which is similar to the domestic production deduction limitation (i.e. the deduction cannot exceed 50% of wages). In addition, there is a special rule for real estate investors that bases the limitation on 2.5% of the unadjusted basis of property plus 25% of wages.
The deduction is not available to “specified service trades or businesses” which includes any business in the fields of accounting, health, law, consulting, athletics, financial services or brokerage services. However, the specified service business limitation does not apply in the case of a taxpayer whose taxable income does not exceed $315,000 if married ($157,500 if single). The benefit of the deduction for service business is phased out over the next $100,000 of income for married taxpayers ($50,000 for others).
Expensing Equipment
Bonus depreciation– businesses could fully and immediately deduct the cost of certain equipment purchased after Sept. 27, 2017 and before Jan. 1, 2023. In addition, bonus depreciation applies to new or used equipment. In the past, bonus depreciation was only available to new equipment purchases.
Section 179 deduction-the new law increased the maximum annual Section 179 deduction to $1 million and increase the phase-out threshold to $2.5 million
Luxury Auto depreciation limits have increased substantially- the §280(f) limits will be about 3 times greater than the 2017 limits ($10k in year 1, $16k year 2, $9.6k year 3 and $5.76k thereafter).
More businesses could use cash method of Accounting
The new law allows a C corporation or partnership with a C corporation partner to use the cash method of accounting if its annual gross receipts for the prior three years does not exceed $25 million. (2017 limit was $5 million)
Limits on Deducting Interest Expense
Deductions for business interest expense in tax years beginning in 2018 and beyond generally will not exceed 30% of the business’s adjusted taxable income (subject to exceptions). Adjusted taxable income adds back depreciation and amortization among other adjustments.
Production Deduction
The domestic production activities deduction in eliminated for years beginning after 12-31-17.
Net Operating Losses
Taxpayers could generally use an NOL carryover to offset only 80% of taxable income (versus 100% under current law). In addition, NOLs cannot be carried back to earlier tax years but could be carried forward indefinitely. The new NOL rule applies to NOL’s created in ’18 and later. NOL’s generated before ’18 can offset 100% of taxable income.
Meals & Entertainment
The new law eliminates the deduction entertainment expenses (in ’17 entertainment expenses were 50% deductible).
The 50% deduction for meals is retained.
Note that the provisions of §274(e) which allow a 100% deduction for several entertainment expenses are retained. This includes recreational or social activities for the benefit of taxpayer’s employees, other than highly compensated employees.
Carried Interest related to Partnerships
To get the long-term rate associated with carried interest now requires a three-year holding period vs. the one year holding period under old law.
U.S. Multinational Taxation
Under the old rules, U.S. companies would owe tax on all their profits, regardless of where the income is earned. They were allowed to defer paying U.S. tax on foreign profits until the money came back to the U.S. This was not consistent with most foreign competitors who come from countries with territorial tax systems, meaning they do not owe tax to their own governments on income they make offshore.
Our new law switches the U.S. to a territorial system. It also includes anti-abuse provisions. The law also requires companies to pay a one-time, low tax rate on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets.
This article did not cover all the provisions in the law, but covers many of the provisions making the news for both individuals and businesses.
For information on Boyum Barenscheer’s tax services, contact John Csargo at jcsargo@boybarcpa.com or 952.858.5553