What Tax Reform Means for Individuals and Businesses
The House of Representatives passed H.R. 1, known as the, “Tax Cuts and Jobs Act,” for a second time on Wednesday, by a vote of 224–201. This solidifies passage of the most extensive rewrite of the U.S. Tax code in over 30 years. The bill will now go to President Donald Trump for his signature, who is expected to sign before year end.
The highlights of the bill include reductions to income tax rates for most individual tax brackets, significant reduction to the income tax rate for corporations and the elimination of the corporate alternative minimum tax (AMT).
What are the Major Changes Affecting Individuals?
Tax Rates: The final bill retains the current bracket of seven individual tax rates, but lowers the top bracket to 37%. A full comparison of current rates and the rates included in H.R. 1 is included below.
Standard Deduction: The standard deduction has been increased through 2025 to $24,000 for married taxpayers filing jointly, $18,000 for heads of households, and $12,000 for all other individuals.
Personal Exemptions: All personal exemptions are repealed through 2025.
Alternative Minimum Tax: For tax years 2018 – 2025, the AMT exemption amount increases to $109,400 for married taxpayers filing a joint return, $54,700 for married taxpayers filing a separate return and $70,300 for all other taxpayers (not including estates and trusts).
Itemized Deductions: The overall limitation on itemized deductions has been repealed through 2025.
Mortgage Interest: The home mortgage interest deduction has been modified to reduce the limit on acquisition indebtedness to $750,000 (from the current-law $1 million).
Home Equity Loans. The home equity loan interest deduction has been repealed through 2025.
Moving Expenses: The deduction for moving expenses (with an exception for members of the military in certain circumstances) has been eliminated through 2025.
Personal Casualty: The deduction for personal casualty and theft loss has been repealed (with an exception for circumstances deemed a federal disaster) through 2025.
State and Local Taxes (SALT): Under the final bill, individuals will be allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes. The legislation specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.
Charitable Contributions: The income-based percentage limit has been increased for charitable contributions of cash to public charities to 60% of AGI.
Child Tax Credit: The legislation doubles the child tax credit to $2,000 per qualifying child. The maximum refundable amount of the credit will be $1,400. The legislation also creates a non-refundable $500 credit for qualifying dependents who are not qualifying children.
Sec. 529 Plans: The legislation modifies Sec. 529 plans to allow distributions of no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school/ per student.
IRA Recharacterizations: The legislation closes the loophole allowing taxpayers to use recharacterization to unwind a Roth conversion.
Insurance Mandate under ACA: The legislation repeals the penalty imposed on taxpayers who do not obtain insurance that provides at least minimum essential coverage, effective after 2018.
Pass-through Income Deduction: For tax years 2018 – 2025, individuals will be allowed to deduct up to 20% of “qualified business income” from a partnership, S corporation, or sole proprietorships, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. The deduction would also be disallowed for specified service trades or businesses with income above a threshold.
Estate, Gift, and Generation-skipping Transfer Taxes: The legislation doubles the estate and gift tax exemption for estates of decedents dying and gifts made between 2018 and 2025. The basic exclusion amount would increase from $5 million to $10 million (indexed for inflation occurring after 2011).
What are the Major Changes Affecting Businesses?
Corporate Tax Rate: The legislation replaces the current graduated corporate tax rate, (for business with income over $10 million) at 35%, with a flat rate of 21%.
Corporate AMT: The corporate alternative minimum tax (AMT) has been repealed.
Bonus Depreciation: Businesses are allowed to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The legislation removes the requirement that bonus depreciation only applies to new property. Other enhancements include increases in the depreciation limits to luxury automobiles.
Sec. 179 Expenses: The maximum amount taxpayers may expense under Sec. 179 has been increased to $1 million. Additionally, the phase-out threshold has been expanded to $2.5 million The legislation goes on further to expand the definition of qualified property under Section 179.
UNICAP: Taxpayers that meet the cash-method $25 million gross-receipts test will be exempted from the uniform capitalization rules of Sec. 263A.
Interest Deduction Limitation: The legislation disallows deductions for net interest expense in excess of 30% of the business’s adjusted taxable income. (*Exceptions apply)
Net Operating Losses (NOL): The legislation limits the deduction for net operating losses (NOLs) to 80% of taxable income for losses.
Like-kind Exchanges: The legislation limits like-kind exchanges to real property that is not held primarily for sale.
Domestic Production Activities Deduction: The Sec. 199 domestic production activities deduction has been repealed.
Meals and Entertainment Expenses: The legislation eliminates deductions on employee fringe benefits, membership dues and some activities deemed entertainment. However, under the bill taxpayers would still be able to deduct 50% of the food and beverage expenses associated with operating their business (e.g., meals during work travel).
Year-End Tax Planning
The Tax Cuts and Job Acts is incredibly comprehensive. This synopsis only skims the surface on the major changes affecting individuals and businesses. In response to the Tax Cuts and Jobs Act, you may have limited opportunities for year-end tax planning, but action prior to December 31, 2017 is necessary. Please remember that every situation is unique, if you have questions about the bill or are interested in exploring ways to maximize your tax savings, please give us a call.