On December 20, Congress passed, and President Trump later signed, the Tax Cuts and Jobs Act (“Act”). The Act includes numerous tax changes, which will impact the taxes owed by most Americans. While we can’t address each change in this article, we did want to highlight some significant changes that we believe will impact many taxpayers.
Effective Date: January 1, 2018
Most tax law changes from the Act take effect on January 1, 2018 and remain effective through the end of 2025. We’ll note the exceptions to this general rule.
Business Tax Changes
Corporate Rate Reduced. The Act changes the corporate tax rate to a flat 21% rate.
Dividends Received Reduction Reduced. The Act reduces the previously 80% dividends received deduction to 65%. The previously 70% dividends received deduction is reduced to 50%.
AMT Repealed. The Act repeals the corporate alternative minimum tax.
Increased Sec. 179 Expensing. The Act increases the maximum amount a taxpayer may expense under Sec. 179 to $1 million. The phase-out threshold amount is also increased to $2.5 million. For tax years beginning after 2018, these amounts (in addition to the $25,000 sport utility vehicle limitation) are indexed for inflation.
Temporary Expensing Of Qualifying Business Assets. A 100% first-year deduction for cost of qualified property is allowed for property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. In later years, this immediate deduction phases down (80% for 2023, 60% for 2024, 40% for 2025 and 20% for 2026).
Shortened Depreciation for Farming Equipment and Machinery. The depreciation period for most machinery and equipment used in a farming business, the original use of which begins with the taxpayer, is shortened from seven to five years.
Deduction For Pass-Through Businesses. Owners of pass-through businesses, including sole proprietorships, partnerships, limited liability companies (LLCs) and S corporations, may be allowed to deduct up to 20% of the income from their business from their taxable income. There are complex limitations on this deduction that could reduce the impact of this deduction for some business owners. In addition, the deduction is further limited for the owners of specified service businesses, including businesses in the fields of health, law, accounting, actuarial science, and certain consulting.
Individual Tax Rate and Bracket Changes
The most significant changes certainly involve the changes to the federal tax rates and brackets. Prior to the Act, tax rates and brackets were scheduled to be as follows for joint filers:
|15%||$19,050 to $77,400|
|25%||$77,400 to $156,150|
|28%||$156,150 to $237,950|
|33%||$237,950 to $424,950|
|35%||$424,950 to $480,050|
The Act has now changed the rates for all filers to 10, 12, 22, 24, 32, 35 and 37%. For joint filers, the rates and brackets are as follows:
|12%||$19,050 to $77,400|
|22%||$77,400 to $165,000|
|24%||$165,000 to $315,000|
|32%||$315,000 to $400,000|
|35%||$400,000 to $600,000|
Individual Deductions and Credits
Standard Deduction Doubled. The Act nearly doubles the standard deduction to $24,000 for joint filers, $18,000 for head of household filers and $12,000 for other individuals. This will be indexed for inflation after 2018.
Personal Exemptions Eliminated. Personal exemptions are eliminated. Where certain code provisions reference the personal exemption amount, such as for wage withholding, the dollar amount to be used is still $4,150.
Child Tax Credit Increased. The child tax credit is increased to $2,000. $1,400 of this amount is refundable. The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers).
State Tax Deduction Limitation. State, local, and foreign property taxes, as well as state and local sales taxes, are deductible only when paid in carrying on a trade or business or an activity for the production of income. A taxpayer may claim an itemized deduction of up to $10,000 for payments of other state and local taxes (including property, income and sales taxes).
No Prepayment Of State Taxes in 2017. In light of these changes, a taxpayer who, in 2017, paid an income tax that is imposed for a tax year after 2017 can’t claim an itemized deduction in 2017 for that prepaid income tax.
Mortgage Interest Deduction Limited. Before the Act, a taxpayer could deduct as an itemized deduction qualified residence interest, including interest paid on a mortgage secured by a principal residence or a second residence. The underlying mortgage loans could represent acquisition debt of up to $1 million for most taxpayers, plus home equity debt of up to $100,000.
Under the Act, the deduction for interest on home equity debt is suspended. In addition, the deduction for mortgage interest is limited to underlying debt of up to $750,000 ($375,000 for married taxpayers filing separately). The new lower limit doesn’t apply to any acquisition debt incurred before Dec. 15, 2017. A taxpayer who has entered into a contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before Apr. 1, 2018, shall be considered to incur acquisition debt prior to Dec. 15, 2017.
Threshold for Medical Expenses Temporarily Reduced. Before the Act, the threshold for deducting medical expenses was generally 10% of AGI. If a taxpayer (or his or her spouse) had reached the age of 65, the threshold was reduced to 7.5%.
For 2017 and 2018, the threshold for medical expense deductions is reduced to 7.5% for all taxpayers. In addition, the rule limiting the medical expense deduction for AMT purposes to 10% of AGI doesn’t apply to 2017 and 2018.
Increase In Charitable Contribution Deduction Limitation. The 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limit are generally allowed to be carried forward and deducted for up to five years.
No Deduction For Athletic Seating Rights. No charitable deduction is allowed for a payment to a college in exchange for which the donor receives the right to purchase tickets or seating at an athletic event.
Miscellaneous Itemized Deductions Suspended. The deduction for miscellaneous itemized deductions that are subject to the 2% floor, including the deduction for tax preparation expenses, is suspended.
Change In Alimony Rules. For any divorce or separation agreement executed after the end of 2018, alimony and separate maintenance payments cannot be deducted by the payor and are not included in the payee’s income. Rather, income used for alimony is taxed at the rates applicable to the payor.
Exclusion for Moving Expense Reimbursements Suspended. The exclusion for qualified moving expense reimbursements is suspended, except for certain members of the Armed Forces on active duty (and their spouses and dependents).
Moving Expenses Deduction Suspended. The deduction for moving expenses is suspended, except for certain members of the Armed Forces on active duty.
Repeal of Obamacare Mandate. Before the Act, the Affordable Care Act (also known as Obamacare) required that individuals who did not have minimum health insurance coverage were required to pay a penalty with their federal tax return. Under the Act, for 2019 and later years, the penalty is reduced to zero. This repeal is permanent.
The Act leaves intact the 0.9% additional Medicare tax and 3.8% net investment income tax, both enacted by Obamacare.
Individual Alternative Minimum Tax
Higher Exemption Amounts for Individuals. The Act increases the AMT exemption amounts for individuals. For joint filers, the exemption amounts were raised from $86,200 to $109,400. These exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the alternative taxable income of the taxpayer exceeds certain phase-out amounts. For joint filers, the phase-out amount is $1 million.
Estate and Gift Tax
Doubled Exemptions. Before the Act, the first $5.6 million of transferred property was scheduled to be exempt from estate and gift tax in 2018. In 2017, the first $5.49 million was exempt. Under the Act, for transfers made after December 31, 2017, the base estate and gift tax exemption amount was doubled from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million per person in 2018 ($22.4 million per married couple).