Tax Cuts and Jobs Act

On Wednesday, December 20, 2017, the Tax Cuts and Jobs Act passed the House and the Senate and is awaiting the President’s signature. Here are highlights of the Act.

BUSINESSES

Corporate Tax Rate
The top corporate tax rate is reduced to 21% from the current 35%. The corporate AMT has also been repealed.

Depreciation
50% bonus depreciation has been increased to 100% depreciation on assets placed in service between 9/27/17 and 1/1/23. The requirement for the assets to be “new” has also be removed, so that purchases of used assets qualify.

Limits for business-use vehicles have also been increased to $10,000 from $3,160 in the first year of service.

Section 179 expensing is increased to $1 million with an increased investment limit of $2.5 million.

Interest Deductions
The interest deduction is capped at 30% of adjusted taxable income, among other criteria. Exceptions exist for small businesses with average gross receipts of less than $25 million.

Pass-Through Businesses
The new bill allows a 20% deduction of net income for qualifying businesses, subject to limitations. Limited businesses included certain service businesses such as accounting firms, lawyers, doctors, etc. Other limitations are imposed when individual taxable income is above $157,500 and $315,000 for single and married filing jointly taxpayers, respectively.

Generally the deduction is limited to the lower of 20% of net income or the following:
• 50% of the owner’s W-2 wages paid by business
• 25% of the owner’s W-2 wages paid by the business, plus 2.5% of the unadjusted basis of property used in the production of income (such as a rental property)

Net Operating Losses
NOLs are now limited to 80% of taxable income for years beginning after 12/31/17. NOLs will also no longer be able to be carried back, but will be able to be carried forward indefinitely.

INDIVIDUALS

Tax Rates
The tax rates will change to 10, 12, 22, 24, 32, 35 and 37 percent from 10, 15, 25, 28, 33 and 39.6 under current law.

ACA – Affordable Care Act
The taxes imposed under the ACA such as the net investment income tax and additional Medicare tax are still in place. The only repeal is the penalty for not having health insurance under the “individual mandate.”

Standard Deduction
The standard deduction is increased to $12,000 for single filers, $18,000 for those filing as head of household, and $24,000 for those who are married filing jointly. Many taxpayers will no longer claim itemized deductions and will instead use the increased standard deduction amount. Additionally, due to the increased standard deduction, the personal exemptions are eliminated.

Itemized Deductions
State and local taxes will now be capped at $10,000 for income and property taxes combined. This is a major reduction from current law, which has no cap on the deduction. This especially impacts our area of the country, as we have higher property and income taxes combined than other areas. It should be noted that prepaying income taxes in 2017 beyond what is due for 2017 DOES NOT generate a deduction on your 2017 personal income tax return. Prepaying your 2018 property taxes may generate an additional 2017 deduction. There are limitations on this deduction, such as if your locality will accept early payments, and whether an assessment has been made. It is uncertain yet whether estimated 2018 property taxes will be allowable as a deduction on your 2017 income tax return.

The bill limits the mortgage interest deduction to interest paid on up to $750,000 of acquisition indebtedness, down from $1,000,000 currently. For those who acquired the indebtedness before 12/15/17, the limit stays at $1,000,000. The interest deduction is still allowed on second homes, but not on home equity debt.

Miscellaneous itemized deductions subject to the 2% floor are eliminated.

Medical expenses are now allowed in excess of 7.5% of AGI, as opposed to the current 10% of AGI.

Family Incentives
The bill temporarily increases the child tax credit from $1,000 to $2,000 per qualifying child, with phaseouts beginning at $200,000 and $400,000 AGI for taxpayers filing as single and married filing jointly, respectively. Up to $1,400 of the credit may be refundable.

Alimony
The bill repeals the alimony deduction and corresponding income inclusion for payments and receipts. This repeal is affective for divorce and separation agreements executed after 12/31/18.

Federal Estate Tax
The estate and gift tax exclusion is doubled for estates of decedents dying and gifts made after 12/31/17 and before 1/1/26. This brings the exclusion for married couples up to $22 million for 2018.

If you would like to discuss how this ACT affects you personally or your business, please reach out to our office to schedule a consultation.  Additionally, as more information on the Act becomes available, we will provide further insight.