Now that congress has made final the latest tax act, I thought I would take a moment to share with you a summary of the changes so you may understand how they may affect you. These are in place 2018 until 2025.
Income Tax Rates
The 39.6% tax bracket has been removed and the rates have been condensed.
The system for taxing capital gains and qualified dividends did not change except the income levels for the 15% rate will start at $77,200 for married filing joint and $38,600 for single filers. The 20% rate will start at $479,000 for married filing joint and $425,800 for single filers.
The Standard Deduction
The standard deduction has been modified making it $24,000 for married filing joint and $12,000 for single filers. This will make the standard deduction more attractive than itemizing for many taxpayers.
Congress has eliminated the personal exemptions through 2025.
Pass Through Income Deduction
With the exception of accounting, law, consulting, health, athletics, financial services, brokerage services or any business where the principal asset of the business is the reputation or skill of one or more of the owners, taxpayers will be able to deduct 20% of “qualified business income” (net income, gain , deduction and loss with respect to the qualified trade or business. It does not include reasonable compensation of an S Corporation shareholder.) as well as 20% of REIT dividends, qualified cooperative dividends and qualified publicly traded partnership income. This exclusion phases out for single filers with taxable income in excess of $157,500 or $315,000 for married filing joint returns. Business owners in the exception category may use the deduction if their total income is less than the phase out amounts.
Child Tax Credit
The act increased the child tax credit to $2,000 per qualifying child ($1,400 refundable). A new $500 credit for qualifying dependents who are not qualifying children was also introduced.
The act has removed the overall limit on itemized deductions through 2025. However, they did make some changes to specific deductions:
Mortgage Interest – Home Mortgage Interest deductibility is reduced to $750,000 of acquisition indebtedness.
Home Equity Loan Interest – This interest is no longer deductible if the funds were not used for improvements on the secured property.
State and Local Taxes – Up to $10,000 of state and local income taxes and property taxes can be itemized.
Charitable Contributions – The act increased the income-based limit to 60% from 50%. Charitable deductions made for college athletic event seating rights are no longer allowed.
Miscellaneous Itemized Deductions – These were subject to a 2% floor under current law and included brokerage fees, attorney and accountant fees, and unreimbursed employee business expenses. Under the act, these are no longer deductible through 2025.
Medical Expenses – The threshold for deduction was lowered from 10% of adjusted gross income to 7.5%.
Alimony – For agreements executed after 12/31/2018, alimony and separate maintenance payments are no longer deductible by the payer and no longer included in the payee spouse’s income.
Moving Expenses – No longer deductible except for armed forces on active duty pursuant to an order.
IRA recharacterizations – The act removed the ability to undo an IRA to ROTH IRA conversion.
Estate, Gift and GST Tax – The estate and gift tax exemption was doubled to $10 million and indexed for inflation.
Alternative Minimum Tax – The exemption was raised to $109,400 for married filing joint and $70,300 for single tax payers. The phaseout thresholds were increased to $1 million for married filing joint and $500,000 for single filers.
Individual Mandate – The penalty for not having a qualified health plan has been reduced to zero from a maximum of approximately $14,000 per return (Effective after 2018).
From a business perspective, the act included many provisions that impact businesses. They are as follows:
Corporate Tax Rate – The double taxation trap of corporations remains real but the graduated tax rate has been removed and replaced with a flat rate of 21% beginning 1/1/2018. The Corporate AMT has been repealed too.
Depreciation - 100% bonus depreciation has been extended but will phase down over the coming years to 20% in 2016. Luxury automobile depreciation limits have also been increased and Section 179 expensing has been increased to $1 million with a new phaseout of $2.5 million.
Cash Basis Accounting – Business taxpayer may elect to use the cash basis/cash method of accounting if their three year average annual gross receipts is $25 million or less. Businesses that meet this rule will also not have to account for inventories and may treat them as nonincidental materials and supplies. Uniform Capitaization Rules do no change under this act.
Business Interest Deduction – Business interest is limited to the sum of business interest income, 30% of the adjustable taxable income for the tax year and the automotive floor plan financing interest for the tax year. Any disallowed business interest deduction can be carried forward indefinitely. If the business meets the $25 million gross receipts test above or are in real property development, construction, rental operation, leasing or brokerage trade or business or farming can elect out of the limitation.
Net Operating Losses – These are now limited to 80% of the taxable income and may carry forward any unused NOLs forward indefinitely.
Like Kind Exchanges – Section 1031 transactions will be limited to real property that is not primarily held for sale. This applies to all transactions started after 1/1/2018.
Entertainment Expenses – All expenses related to business entertainment are no longer deductible.
Meals Expense – Meals provided by the employer through an eating facility (onsite cafeteria, etc.) will be deductible at 50% through 2025 and not deductible thereafter. Travel meals and business meals where entertainment is not the purpose may still be deducted at 50%.
There were other items included but these are those that apply to our clients to the best of our knowledge.
If you are interested in learning what your taxes might be under the new rules, using a prior year return as an example, please let us know that you are interested in engaging us for that analysis.
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