Tax Cuts and Jobs Act – Individuals and Businesses
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) was signed by President Trump. The final bill contains sweeping law changes that impact individuals and businesses. Generally, most law changes are effective as of January 1, 2018. Below contains a summary of the major changes.
Individuals:
Tax Rates
Temporarily reduced with changes in rates effective starting Jan 1, 2018 and expire Jan 1, 2026.
Income ranges for respective tax brackets are as follows:
Rate Joint Return Individual Return 10% $0 - $19,050 $0 - $9,525 12% $19,050 - $77,400 $9,525 - $38,700 22% $77,400 - $165,000 $38,700 - $82,500 24% $165,000 - $315,000 $82,500 - $157,500 32% $315,000 - $400,000 $157,500 - $200,000 35% $400,000 - $600,000 $200,000 - $500,000 37% Over $600,000 Over $500,000
Standard Deduction
New standard deductions are nearly doubled as follows:
MFJ: $24,000
HOH: $18,000
All other individuals: $12,000
Effective dates: Jan 1, 2018 – Dec 31, 2025
*Increases are indexed for inflation for tax years beginning after 2018, using chained CPI.
Additional standard deduction for the elderly and the blind are retained at $1,300 for married taxpayers and $1,600 for single taxpayers.
Mortgage Interest Deduction
The new law limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 for married filing separate) for tax years beginning after Dec 31, 2017 and beginning before Jan 1, 2026.
For acquisition indebtedness incurred before Dec 15, 2017, the new law allows current homeowners to keep the current limitation of $1 million (500,000 for married filing separate).
Also allows taxpayers to continue to include mortgage interest on second homes, but within those lower dollar caps.
No interest deduction allowed for interest on home equity indebtedness.
State, Local and Property Taxes
H.R. 1 limits annual itemized deductions for all nonbusiness state and local taxes deductions, including property taxes, to $10,000 ($5,000 for MFS).
Sales taxes may be included as an alternative to claiming state and local income taxes.
Charitable Contribution
For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to 5 years, subject to the later year's ceiling.
Miscellaneous Itemized Deductions
Deductions subject to the 2% floor under current law are temporarily repealed (disallowed) under new law.
Medical Expenses
Lowers threshold for the deduction to 7.5% of AGI for tax years 2017 and 2018, provisionally enhancing the medical expense deduction.
Child Tax Credit
Increases from $1,000 to $2,000 per qualifying child.
Up to $1,400 refundable
AGI phaseout thresholds increasing to $400,000 for MFJ and $200,000 for all others.
$500 nonrefundable credit for qualifying dependents other than qualifying children.
Education
Modifies section 529 plans and ABLE accounts
The above-the-line deduction for educators that incur expenses (up to $250) has not been renewed and will no longer apply for 2018
Educator expenses (teachers) of $250.00 has been repealed
Alimony
Repeals the deduction for alimony payments and their exclusion in the income of the recipient.
Applies only to divorce or separation instruments executed after Dec 31, 2018, to allow taxpayers an adjustment period in weighing benefits and burdens.
Retirement
Repeals rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions to unwind a Roth conversion.
Hardship rules modified.
Federal Estate Tax
Estate and gift tax exclusion amounts doubled for decedents dying and gifts made after Dec 31, 2017 and before Jan 1, 2026. Starting in 2018 the exemption per person will be $11,000,000 (adjusted for inflation) per individual and a married couple would have a $22,000,000 exemption.
Generation-skipping transfer tax exemption doubled.
Alternative Minimum Tax
Increases exemption amount to $109,400 for MFJ and $70,300 for others (except trusts and estates).
Increases exemption phase-out levels so that the AMT will apply to an income level of $1 million for MFJ and $500,000 for others, subject to annual inflation adjustment.
Affordable Care Act
Repeals the ACA individual shared responsibility requirement.
Effective after 2018
Under current law, for tax year 2017, it will not consider a return complete and accurate if the taxpayer does not report full year coverage, claim a coverage exemption, or report a shared responsibility payment on the return.
Long-Term Capital Gains
Holding period increased to 3 years with respect to certain partnership interests transferred in connection with the performance of services.
Businesses:
Corporate Taxes
New law creates a permanent 21% corporate tax rate beginning in 2018.
80% and 70% Dividends received deduction is reduced to 65% and 50%, respectively.
Alternative Minimum Tax for corporations is repealed.
Bonus Depreciation
Increases bonus depreciation allowance from 50% to 100% for property placed in service after Sept 27, 2017 and before Jan 1, 2023 (Jan 1, 2024 for longer production period property and certain aircraft).
20% phase-down schedule would commence thereafter.
Removes requirement that original use of qualified property must commence with original taxpayer, which allows bonus depreciation on the purchase of used property.
Vehicle Depreciation
Increases cap placed on depreciation write-offs of business-use vehicles.
1st year (placed in service): $10,000 (from $3,160)
2nd year: $16,000 (from $5,100)
3rd year: $9,600 (from $3,050)
Subsequent years: $5,760 (from $1,875) until costs are fully recovered
Effective for property placed in service for taxable years after Dec 31, 2017.
Section 179 Expensing
Dollar limitation: $1 million (indexed for inflation)
Investment limitation: $2.5 million (indexed for inflation)
Deductions and Credits
Elimination of Selected Deductions:
Domestic Production Activities Deduction
Non-real property like-kind exchanges
Revises Rules for Business Meals and Entertainment
The 50% limit on deducting food or beverage expenses applies now to an employer's expenses of providing food and beverages to employees at an eating facility that qualifies as a de minimis fringe benefit. After December 31, 2025 no deduction will be allowed for such expenses.
Repeals rule that allowed a deduction for entertainment, amusement, or recreation expenses that were directly related to or associated with the active conduct of the taxpayer's trade or business.
Repeals rule that allowed a deduction for a club if the taxpayer established that the facility was used primarily for the furtherance of the taxpayer's trade or business and that the item was directly related to the active conduct of that trade or business.
Repeals the 50% deduction limit on expenses for activities or facilities generally considered to be entertainment, amusement, or recreation.
No deduction is allowed for: (1) an activity generally considered to be entertainment, amusement, or recreation, (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes, or (3) a facility used in connection with any of the above items.
Transportation fringes
No deduction is allowed for the expense of a qualified transportation fringe, provided to an employee of the taxpayer.
Act also provides that no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer for travel between the employee's residence and place of employment, except as necessary for ensuring the employee's safety.
New law retains the research and development credit, but requires 5 year amortization of R&D expenditures
New law creates a temporary credit for employers paying employees on family and medical leave
Interest Deductions
Caps the deduction of net interest expenses at 30% of adjusted taxable income
Exceptions exist for small businesses with average gross receipts of $25 million or less
Pass-Through Entities
Individual rates through the end of 2017.
New law effective 2018 will allow a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship to deduct:
(1) the lesser of: (a) the “combined qualified business income amount” of the taxpayer, or (b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year; plus
(2) the lesser of: (a) 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year, or (b) taxable income (reduced by the net capital gain) of the taxpayer for the tax year.
Limitations. With a few exceptions the deduction cannot exceed the greater of
50% of the W-2 wages with respect to the qualified trade or business (“W-2 wage limit”), or
the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.” Qualified property is tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year.
Exception. The above limitation does not apply for taxpayers with taxable income below the “threshold amount” ($315,000 for married individuals filing jointly, $157,500 for other individuals, indexed for inflation after 2018). The application of the limit is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly ($50,000 for other individuals). Thus, for 2018, the limit fully applies to married taxpayers with taxable income over $415,000 and other individuals with taxable income over $207,500.
Net Operating Losses
Limited to 80% of taxable income for losses arising in tax years beginning after Dec 31, 2017.
Carryback of NOLs are disallowed in most cases, with an indefinite carryforward, subject to the percentage limitation.
Performance-based Compensation
The Tax Cuts and Jobs Act eliminates the exceptions for performance-based compensation and commissions from the definition of “applicable employee remuneration” that is subject to the $1 million deduction limit (IRC 162M).
Note: The impact of the loss of this deduction is somewhat softened by the reduction in the corporate tax rate to a flat 21% rate, a change that reduces the value of corporate tax deductions.