Tax Reform for the upcoming year via Tax Cuts and Jobs Act
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (H.R. 1), the largest major tax reform the U.S. tax code has seen in nearly thirty years. Key changes to the tax code include a significant reduction in the corporate tax rate, formation of new and lower individual tax brackets, favorable deductions for owners of pass-through entities, increased business expensing provisions, enhanced the child tax credit, among other things. Most provisions the Tax Cuts and Jobs Act are effective beginning in 2018. With that being said, planning strategies and opportunities need to be evaluated for the upcoming year, some of which require immediate attention. Listed below are several noteworthy changes of H.R. 1.
Individual Tax Changes
- Tax Brackets: Many people will pay a lower rate on their taxable income. While the number of brackets remain unchanged, the overall rates have been reduced. The new brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top bracket, which has been reduced from 39.6%, affects single taxpayers with income above $500,000 and married taxpayers with income above $600,000.
- Standard Deduction: The standard deduction nearly doubles from $6,350 to $12,000 for single taxpayers and $12,700 to $24,000 for married taxpayers. These amounts will be indexed for inflation through 2025.
- Child Tax Credit: The credit will be increased from its current value of $1,000 to $2,000 per child, with $1,400 of that amount being refundable. The adjusted gross income phase-out threshold is raised to $400,000 for married taxpayers and $200,000 for all others. H.R. 1 also includes a temporary $500 refundable credit for other qualifying dependents.
- Personal Exemptions: Personal exemptions have been eliminated. Congress attempted to balance this void by increasing both the standard deduction and child tax credits.
- State Income / Real Estate Tax Deductions: For taxpayers who itemized deductions, this deduction will be limited to $10,000 for 2018. Hopefully, many of you have analyzed your personal tax situation and prepaid as much as possible before December 31, 2017.
- Itemized Deduction Phase-out: The “Pease” limitation has been repealed. For the charitably inclined, many will receive full benefit of their charitable contributions.
- Home Indebtedness: For acquisition indebtedness occurring after December 15, 2017, H.R. 1 limits the mortgage interest deduction to $750,000 of indebtedness. For acquisition indebtedness incurred before this date, the $1 million limitation will continue to apply. However, no deduction will be allowed for interest paid on home equity indebtedness.
- Alimony: For divorce or separation instruments executed after December 31, 2018, alimony is no longer deductible by the payer, nor is it taxable to the recipient.
Business Tax Changes
- Corporate Tax Rate: The corporate tax rate has been reduced to flat rate of 21% from 35%. The reduced rate also applies to personal service corporations.
- Net Operating Losses (NOLs): Corporations will only be allowed to offset 80% of its taxable income for NOLs arising in tax years after December 31, 2017.
- Alternative Minimum Tax: For tax years beginning after December 31, 2017 is repealed.
- Pass-through Entity Taxation: For businesses operating as partnerships, S-Corporations or sole-proprietorships, H.R. 1 creates a 20% deduction of their pass-through income. Entities operating in the business of health, law and financial services are exempt from this deduction unless income is below $157,500 for single taxpayers or $315,000 for married taxpayers. The deduction may be limited to certain wage limitations paid by the entity.
- Capital Asset Expensing:R. 1 allows for full expensing of capital assets for assets purchased (both new and used) before December 31, 2022, and then phases-down 20% over the next five years. Beginning in 2018, up to $1 million of capital assets can be expensed annually under IRC Section 179, which is subject to an annual investment limitation of $2.5 million.
Over one thousand pages were needed to finalize H.R. 1. As such, there are many more issues which go beyond the scope of this article. In order to fully optimize the benefits of the Tax Cuts and Jobs Act, both short-term and long-term planning goals should be addressed. We encourage you to meet with your financial and tax advisors to discuss the implications of the bill, and the considerations which need to be taken into account.
Paul E. Valencic is a CPA with Maloney + Novotny LLC. He can be reached at (216) 344-5229, or email firstname.lastname@example.org.