Tax Cuts & Jobs Act - Major Changes
Tax rate changes:
Both individual (see comparison of '18 rates to '17 individual rates here) and corporate rates have changed. The maximum individual rate is reduced to 37% and the corporate rate is now a flat 21%. The rate change could benefit you — or in some cases cause your tax liability to go up.
Standard deduction increases:
The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. However, there are no more personal exemption deductions allowed ($4,050 per individual on your tax return). So this may help you — or hurt you.
Increased Child Tax Credit and new Dependent Credit:
The credit is increased for each child to $2,000 (up to $1,400 of which is refundable for each child) and each non-child dependent can now receive a new credit of $500. But you will have no exemption credit or deduction for yourself, your spouse, or your dependents.
The phaseout thresholds for these credits are drastically increased. Married taxpayers filing a joint return can claim the full credits if their adjusted gross income is $400,000 or less ($200,000 for all others). The credits are fully phased out for married taxpayers filing a joint return when their adjusted gross income reaches $440,000 ($240,000 for all others). This means that many more taxpayers will be able to claim these credits in 2018 and beyond.
Disappearing deductions: Beginning with the 2018 tax year, you will no longer be able to deduct:
· State income tax and property taxes above $10,000 per year in total;
· Moving expenses (with an exception for certain military);
· Employee business expenses such as mileage, travel, entertainment, home office expenses, union dues, tax preparation fees, and investment fees, among others;
· Mortgage interest beyond interest on $750,000 of acquisition debt, if you purchase a new home; and
· Mortgage interest paid on equity debt (this is no longer deductible for any taxpayers).
Some new benefits for individuals: These new benefits include:
· The medical expense AGI threshold will temporarily drop to 7.5% of AGI for 2017 and 2018;
· The AMT threshold is increased, so fewer middle-income taxpayers will be subject to AMT;
· Expands use of 529 education savings plans: Tax-deductible contributions to 529 education savings plans can now be used to pay tuition for students in K-12 private schools;
· The estate tax exclusion has nearly doubled, to $10 million (adjusted for inflation); and
· The annual gift tax exclusion remains the same ($14,000 for 2017 and $15,000 for 2018), but the maximum rate on gifts is 35%.
What stays the same for individuals:
· Itemized charitable deductions: Remain largely the same.
· Itemized medical expense deductions: Remain largely the same. The deduction threshold drops back to 7.5 percent of adjusted gross income for 2017 and 2018, but reverts to 10 percent in the following years.
· Some above-the-line deductions: Remain the same, including educator expenses and student loan interest.
· Gift tax deduction: Remains and increases to $15,000 from $14,000 for 2018.
· Kiddie tax threshold: Remains at $2,100 (amount of unearned income that can be taxed at your child’s lower tax rate).
Farewell to the healthcare individual mandate penalty
One of the changes in the tax bill is the repeal of the Affordable Care Act (also known as “Obamacare”) individual mandate penalty. The penalty is set to zero starting in 2019, but remains in place for 2018 and prior years.
· Tip: Retain your Form 1095s this year, which will provide evidence of your healthcare coverage. Without it, you may have to pay the higher of $695 or 2.5 percent of income, though 2018 may be the last year you’ll need to worry about it.
Small business benefit:
Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxed as a C corporation), partnership, S corporation, and rental activity. The rules are incredibly complex but there is a lot of planning that we can do to maximize this deduction for you.
Please see the flyer on the 20% Qualified Business Income Deduction here
Key changes for small businesses:
Here are some of these key items in the tax reform bill that affect businesses:
· Cuts the corporate tax rate: Corporate tax gets cut and simplified to a flat 21 percent rate, changed from a multi-bracket structure with a 35 percent top rate.
· Reduces pass-through taxes: Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.
· Beefs up capital expensing: Through 2022, short-lived capital investments in such items as machinery and equipment may be fully expensed as soon as they are placed in service, using bonus depreciation. This now also applies to used items instead of only new ones; they just need to be placed in service for the first time in your business. After 2022, allowable bonus depreciation is then lowered incrementally over the next four years.
· Strengthens Section 179 deduction: Section 179 deduction limits get raised to enable expensing of up to $1 million, and the phaseout threshold increases to $2.5 million. Section 179 may now also be used on expenses related to improvements to nonresidential real estate.
· Nixes the corporate alternative minimum tax (AMT): The 20 percent corporate AMT applied to businesses goes away entirely.
· Expands use of cash-method accounting: Businesses with less than $25 million in gross receipts over the last three years may adopt the cash method of accounting.
· Reforms international taxation: Treatment of international income moves to the territorial system standard, in which foreign investments are generally only taxed in the place in which they operate. The new laws allow tax deductions for certain foreign-sourced dividends, reduced tax rates for foreign intangible income and reduced tax rates for repatriation of deferred foreign income.
· Repeals business entertainment deduction: Businesses will no longer be able to deduct 50 percent of the cost of entertainment, amusement or recreation directly related to their trade or business. The 50 percent deduction for business-related meals remains in place, however.
· Modifies several business credits: Several business credits are maintained but modified, including the orphan drug credit, the rehabilitation credit, the employer credit for paid family or medical leave and the research and experimentation credit.
· Boosts luxury automobile depreciation: Luxury automobiles placed in service after 2017 will have allowable depreciation of $10,000 for the first year, $16,000 the second, $9,600 the third and $5,760 for subsequent years.
Here is the full text of the law for those interested.