The new tax law, commonly called the "Tax Cuts and Jobs Act," is the biggest federal tax law change in over 30 years. The following information summarizes a small portion of this recently enacted legislation. It is important to recognize that every individual and business are under different circumstances and thus will be affected in different ways. Therefore, it is vital to consult with your certified public accountant to ensure that you are taking every opportunity to maximize the benefits while mitigating the pitfalls.
*Except where noted, changes are effective for tax years beginning after December 31, 2017. Any suspended provisions are effective through 2025.
Opportunities for individuals:
- Phase-out of itemized deductions based on adjusted gross income (AGI) is suspended.
- Effective for 2019, the shared responsibility tax under the Affordable Care Act for not having minimum essential health insurance coverage has been eliminated.
- The threshold for deducting medical expenses has been lowered, back to 7.5% of AGI for all taxpayers for 2017 and 2018.
- The Child Tax Credit increased to $2,000 per qualifying child and the phase-out threshold has increased to $400,000 in AGI.
- There is a new Family Tax Credit of up to $500 for dependents who are not a qualifying child for purposes of the Child Tax Credit.
- For the charitable contribution deduction, the percentage of AGI limitation for cash to public charities and certain other organizations increased from 50% to 60%.
- The estate and gift tax exemption amount doubled to $10 million, before any adjustment for inflation.
Challenges for individuals:
- Personal exemption deductions are suspended.
- Miscellaneous itemized deductions subject to the 2% floor are no longer allowed. Examples include investment expenses, unreimbursed employee business expenses, and tax preparation fees.
- Personal casualty loss and theft deductions are eliminated, unless the loss is incurred in a federally declared disaster area.
- The moving expense deduction and income exclusion is allowed only to members of the Armed Forces (or their spouses or dependents).
- Effective January 1, 2019, for new settlement cases, alimony is no longer deductible by the payer nor includible in income by the recipient.
- The home mortgage interest deduction debt limit is reduced to $750,000 MFJ ($375,000 MFS/S) on new mortgages closed after December 15, 2017. This is for combined primary and second residence.
- The itemized deduction for state and local taxes is limited to $10,000 ($5,000 MFS). (This limit includes both state and local income taxes as well as real property taxes.)
The following charts compare prior tax rates, brackets, phase outs and deductions with newly enacted legislation beginning in 2018.
The Estate and Trusts Income Tax Rates have been revised as well. These changes are as follows:
The Standard Deduction has been increased substantially. These changes are as follows:
The 2018 alternative minimum tax (AMT) exemption and phase-out ranges have also been increased, greatly reducing the number of taxpayers affected by it. These changes are illustrated here:
The long-term capital gain and qualified dividend income maximum tax brackets no longer follow the tax brackets for regular income tax purposes.
- The 2018 breakpoints are:
The parent's rate is no longer used to calculate the kiddie tax. Instead, taxable income attributable to net unearned income is taxed at the estates and trusts tax rates for both ordinary income and net capital gains.
The Tax Cuts and Jobs Act has opened the door for all new planning opportunities that when proactively administered, can save small business owners a substantial amount of personal income tax. The following is just a broad overview of some of the recent changes.
- There is no longer a separate tax rate for personal service corporations (PSCs).
- AMT for C corporations has been repealed.
- The two-year carryback provision for net operating losses (NOLs) have been eliminated on loses after 2017, and can be carried forward indefinitely, but with limitations.
- There is no meals and entertainment deduction for membership dues or activities generally considered to be entertainment, amusement or recreation.
- All taxable income of a C corporation is taxed at a flat rate of 21%.
- The 70% dividends received deduction is reduced to 50%. The 80% dividends received deduction is reduced to 65%.
- The net operating loss deduction (NOL) is limited to 80% of taxable income.
- An individual taxpayer generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship. In the case of a partnership or S corporation, the deduction applies at the partner or shareholder level. The deduction is disallowed for specified service trades or businesses when taxable income exceeds the threshold amount and is subject to other caps and limitation. Careful planning can be done in this area to maximize income tax savings.
- Special (bonus) depreciation is increased to 100% of property acquired and placed in service after September 27, 2017, with a new phase-down schedule for years after 2022. The new law allows special depreciation for both new and used property.
- The Section 179 deduction is increased to $1,000,000 and the phase-out threshold amount increased to $2,500,000.
- The new law expanded the definition of Section 179 property to include certain property used predominantly to furnish lodging.
- The depreciation limitations for luxury automobiles have been increased.