Tax Cuts and Jobs Act 2017
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (TCJA), the most significant change to the Internal Revenue Code in over thirty years. Most individual provisions will go into effect for tax year 2018 and will sunset after 2025, when it will revert to the old tax code unless another law passes before then. Most of the corporate provisions are permanent. The following highlights the tax reform bill:
INDIVIDUALS
There will be seven tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37% with varying wage ranges in each bracket, the top rate being for taxable income greater than $600,000 married filing jointly (MFJ), $500,000 single(S)/head of household (HoH), and $300,000 married filing single (MFS).
The alternative minimum tax (AMT) exemptions will be $109,400 MFJ ($70,300 S and $54,700 MFS). The phase-outs are increased to $1,000,000 MFJ ($500,000 for all others).
The estate and gift tax exemption is doubled, increasing to $11,200,000 in 2018.
The kiddie tax for unearned income of children under 19 and college students under 24 will be taxed at 10%, 24%, 35% and 37% (the top rate for taxable income greater than $12,500).
The child tax credit will increase to $2,000 per qualifying child (refundable up to $1,400). Other qualifying dependents will have a temporary $500 nonrefundable credit. Phase-outs will begin for Adjusted Gross Income (AGI) greater than $400,000 MFJ ($200,000 for all others).
There will be no education changes to student loan interest deduction, the American Opportunity Credit or Lifetime Learning Credit. However, up to $10,000 of Section 529 plan distributions can be used for elementary or secondary education.
The standard deduction will increase to $24,000 MFJ ($12,000 S/MFS and $18,000 HoH), but the personal exemption is repealed. An additional amount of $1,600 for unmarried individuals or $1,300 for each spouse is allowed if over age 65, blind or disabled.
With respect to itemized deductions, only medical expenses, taxes, mortgage interest, charitable contributions, disaster losses and other deductions NOT subject to 2% of AGI will be allowed. All other itemized deductions are repealed, as is the phase-out for upper-income individuals.
Deductible medical expenses for 2017 and 2018 are subject to expenses exceeding 7.5% of AGI, increasing to 10% in 2019.
Although individuals can still claim a deduction for state and local income tax, sales tax or real property tax, the combined deduction will be limited to $10,000.
Mortgage interest is deductible on a first or second home, but will be capped at $750,000 of debt. Interest on home equity loans, however, will no longer be deductible.
Charitable contributions are deductible only if taxpayers can still itemize.
Only federal disaster declaration casualty losses will be allowed beginning in 2018.
Adjustments to income retained teacher expenses up to $250 as deductible, repealed the exclusion from income of moving expense reimbursements (except Armed Forces), and repealed the domestic production activities deduction. Beginning in 2019 alimony payments are no longer deductible and no longer taxable to the recipient.
IRA recharacterizations can no longer be used to unwind a Roth IRA conversion. However, an individual may still make a Roth contribution and recharacterize it as traditional before the due date of the return. An individual may also still make a traditional IRA contribution and convert it to a Roth, but may not later unwind the conversion through recharacterization.
The Affordable Care Act penalty for not having minimum essential coverage is repealed beginning in 2019. However, insurance will still be required for 2018.
CORPORATIONS AND BUSINESSES
Beginning in 2018 the corporate tax rate is decreasing from a maximum of 35% to 21% and is made permanent. The corporate AMT has been eliminated.
Pass-through businesses including sole proprietorships, partnerships and S-corporations with domestic qualified business income (QBI) will allow non-corporate taxpayers to deduct 20% of business-related income (disallowed for personal service businesses and subject to restrictions).
Like-kind exchanges allow non-recognition of gain for real property (not personal property).
Net operating losses are limited to 80% of taxable income for losses beginning in 2018. The carryback provisions are repealed except for farming, but carryovers are allowed indefinitely.
Section 179 expenses increases to a maximum of $1,000,000 while the phase-out threshold increases to $2,500,000. This includes the nonresidential real property of roofs, HVACs, fire & alarm systems, and security systems. Computers and peripherals are no longer listed property.
Bonus depreciation for the first year is available for new and used property, repealing the first qualified use requirement begin with the taxpayer. It is phased out in 2020 for property acquired before September 27, 2017, and in 2027 for property acquired after September 27, 2017.
Beginning in 2018 vehicle depreciation is increased to $10,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 each subsequent year until cost is fully recovered. The higher limits are allowed when additional first-year depreciation is not claimed.
Entertainment expenses are disallowed for: (1) any entertainment, amusement, or recreation activity, (2) membership dues for any business, pleasure, recreation, or social club, or (3) any facility or portion used in connection with the foregoing. The provision also disallows deductions for expenses providing qualified transportation fringe benefits to employees and payment or reimbursement expenses for commuting. The 50% food and beverage business deduction is maintained. This limitation is expanded from 2018 through 2025 to apply also to employer expenses through an employee eating facility.
Technical terminations of partnerships rules are repealed beginning in 2018.
Since the US is switching to a territorial system of taxation, companies will no longer owe federal taxes on income made offshore. There will be a one-time transition tax rate on existing overseas profits of 15.5% on cash assets and 8% on non-cash assets.
Subsequent tax laws have superceded or modified some of the above provisions of the TCJA so refer to tax law changes after 2017 for updated information.
In addition, if you are the owner of an existing small business or are thinking about starting a small business, Judy can advise you on the best business structure for your needs. Call (603) 432-0310 today to set up an appointment.