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Tax Cuts and Jobs Act of 2017

Congress has enacted the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay.  Most of these changes do not go in affect until tax year 2018.

Here's a quick rundown of some of the changes included in the Tax Cuts and Jobs Act.

Individual Tax Changes

Lower tax rates coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Tax rates are lower and tax brackets are wider resulting in an even larger tax savings.  The top tax rate has been reduced to 37% from 39.6% under the prior law. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.

Personal exemptions and standard deduction. The Tax Cuts and Jobs Act eliminates the deduction for personal exemptions and nearly doubles the standard deduction.  For tax year 2018, it increases the standard deduction from $13,000 to $24,000 for married individuals filing a joint return; $9,550 to $18,000 for head-of-household filers; and $6,500 to $12,000 for all other individuals. These standard deduction amounts are indexed for inflation for tax years beginning after 2018.

 

Itemized deductions. The phaseout of itemized deductions is suspended for tax years 2018 through 2025.

Mortgage interest deduction. The Tax Cuts and Jobs Act limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), for tax years beginning 2018 through 2025. For acquisition indebtedness incurred before December 15, 2017, the Tax Cuts and Jobs Act allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately). Taxpayers may continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.

State and local taxes. The Tax Cuts and Jobs Act limits annual itemized deductions for all nonbusiness state and local taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayer filing a separate return) for 2018 through 2025. Sales taxes may be included as an alternative to claiming state and local income taxes. 

Miscellaneous itemized deductions. The Tax Cuts and Jobs Act repeals all miscellaneous itemized deductions for tax years 2018 through 2025 that are subject to the two-percent floor under current law. This includes investment advisory fees, tax preparation costs, and unreimbursed employee expenses.

Medical expenses. The Tax Cuts and Jobs Act lowers the threshold for the deduction to 7.5% of adjusted gross income (AGI) for tax years 2017 and 2018.

Child Tax Credit. The enhanced child credit has been highlighted as one of the provisions that will lower overall tax liability for middle-class families. The Tax Cuts and Jobs Act temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child (up to $1,400 of that amount is refundable). The child tax credit is also expanded to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. More families will be able to take advantage of the credit due to an increase in the adjusted gross income phaseout thresholds, starting at $400,000 for joint filers ($200,000 for all others).

Retirement. The Tax Cuts and Jobs Act repeals the special rule permitting recharacterization of Roth conversions for tax years beginning after December 31, 2017. Therefore, for example, a conversion contribution establishing a Roth IRA during a tax year can no longer be recharacterized as a contribution to a traditional IRA (thereby unwinding the conversion). The Tax Cuts and Jobs Act does not preclude an individual from making a contribution to a traditional IRA and converting the traditional IRA to a Roth IRA. Rather, the provision would preclude the individual from later unwinding the conversion through a recharacterization.

Education – 529 plans. The Tax Cuts and Jobs Act expands qualified distributions made after December 31, 2017. Plan participants may withdraw not more than $10,000 in expenses for tuition incurred during the tax year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. Any excess distributions received by the individual are treated as distributions subject to tax under the general rules of section 529.

Estate and gift tax. For the estates of decedents dying and gifts made after 2017 and before 2026, the basic exclusion amount for purposes of federal estate and gift taxes is doubled from $5 million to $10 million, as adjusted for inflation. Accordingly, the estate and gift tax basic exclusion amount applicable to the estates of decedents dying and gifts made in 2018 is $11.2 million, as adjusted for inflation. For a married couple using portability, the maximum applicable exclusion amount would be doubled again to $22.4 million.

 

Business Tax Changes

Corporate Taxes. A reduced 21-percent corporate tax rate is permanent beginning in 2018. Also, the 80-percent and 70-percent dividends received deductions under current law are reduced to 65-percent and 50-percent, respectively. The Tax Cuts and Jobs Act also repeals the alternative minimum tax on corporations.

Pass-Through Businesses. Currently, up to the end of 2017, owners of partnerships, S corporations, and sole proprietorships – as "pass-through" entities – pay tax at the individual rates, with the highest rate at 39.6 percent. The Tax Cuts and Jobs Act allows a temporary deduction in an amount equal to 20 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications. The Tax Cuts and Jobs Act contains rules that will prevent pass-through owners—particularly service providers such as accountants, doctors, lawyers, etc.—from converting their compensation income taxed at higher rates into profits taxed at the lower rate.

Bonus Depreciation. The bonus depreciation rate has fluctuated wildly over the last 15 years, from as low as zero percent to as high as 100 percent. It is often seen as a means to incentivize business growth and job creation. The Tax Cuts and Jobs Act temporarily increases the 50-percent "bonus depreciation" allowance to 100 percent. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.

Section 179 Expensing. The Tax Cuts and Jobs Act sets the Code Sec. 179 dollar limitation at $1 million and the investment limitation at $2.5 million. Although the differences between bonus depreciation and Code Sec. 179 expensing would now be narrowed if both offer 100-percent write-offs for new or used property, some advantages and disadvantages for each will remain. For example, Code Sec. 179 property is subject to recapture if business use of the property during a tax year falls to 50 percent or less; but Code Sec. 179 allows a taxpayer to elect to expense only particular qualifying assets within any asset class.

If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call.