Tax Cuts and Jobs Act – 2017 Tax Reform

The Tax Cuts and Jobs Act was signed into law on December 22, 2017.  The Act makes several fundamental changes to the tax structure for individuals and businesses. Most changes for individuals are effective only for tax years 2018 through 2025.  Below are some of the key provisions of the new law.

Standard Deductions, Exemptions, Tax Rates (including AMT), Child & Family Tax Credits

Individuals will see larger standard deductions: $24,000 for married-joint returns, $12,000 for single and married-separate, and $18,000 for head of household.  Personal and dependent exemptions have been eliminated.

Tax rates are going down.  The number of tax brackets remained the same at seven, but the rates for almost every bracket have been decreased and the brackets expanded.  The new tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.  The top tax bracket begins at $500,000 the single and head of household filing status, $600,000 for married – joint, and $300,000 for married – separate.

The preferential tax rates for long-term capital gains and qualified dividends will remain in effect with the 0%, 15% and 20% maximum rates tied to prior tax law thresholds.

Alternative Minimum Tax survived the tax reform process, but with increased exemption amounts and a much higher phase-out range for the exemptions.  The AMT exemption for married-joint returns will be $109,400 and will not begin to be reduced until alternative minimum taxable income exceeds $1 million.

The child tax credit is increased to $2,000 per child with up to $1,400 being refundable.  A new credit of $500 is available for each non-child dependent.

Affordable Care Act Individual Mandate Repeal

The Act effectively repeals the penalty for not maintaining minimum essential coverage for months after December 31, 2018.  Rather than repealing the law, the Act reduces the penalty amount to $0.

Itemized Deduction Changes

Medical expenses will be allowed with the threshold being reset to 7.5% for all taxpayers for 2017 & 2018.

State and local income taxes and property taxes will be allowed with a combined maximum deduction of $10,000 per year. Sales tax can be claimed in lieu of income tax.

Mortgage interest for any debt incurred after December 15, 2017 will be limited to amounts paid on a maximum of $750,000 (375,000 married separate) of acquisition debt.  There will be no deduction for interest paid on equity debt.  Acquisition debt incurred on or before December 15, 2017 will be grandfathered along with any refinance of grandfathered debt.

Charitable contributions remain fully deductible, with a new maximum for most contributions of 60% of AGI.

Casualty losses will only be deductible for presidentially-declared disasters.  This will eliminate casualty losses for thefts and losses suffered by individuals not part of major widespread catastrophic events.

Miscellaneous itemized deductions subject to the 2% floor are repealed.  No deductions will be allowed for any investment expenses, unreimbursed employee business expenses, tax preparation fees or investment advisory fees.  Miscellaneous itemized deductions not subject tot he 2% floor will remain as allowable deductions, i.e. Gambling losses.

The itemized deduction phase-out is eliminated.

Deduction for business income of pass-thru entities

The Act allows a new deduction for 20% of qualified business income.  In short, an individual will be able to deduct 20% of the net income from all business activities reported on their tax return.  This new provision is full of limitations, exclusions, phase-outs, thresholds and a large amount of uncertainty.  Look for more information as the IRS releases much needed guidance this coming year.

Estate and Gift Taxes

The Act increases the lifetime exclusion for estates and gifts to $10 million (as indexed for inflation).  The new exclusion applies to decedents dying and gifts made after December 31, 2017.  The annual gift exclusion is up to $15,000 in 2018.

Business, Business, Business

The tax rate for C corporations will change from a graduated rate system (15% to 35%) to a flat 21%.

Bonus depreciation for assets placed in service after September 27, 2017 through December 31, 2022 will be 100%.  The rate drops down to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026.  Property with longer production periods and some aircraft will have an extra year before the rate drops.

Business vehicle depreciation limits are increased to $10,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for every year after.

The Section 179 expense limits under the Act are increased to $1 million with a phase-out that begins at $2.5 million.

Repair or supply?  Even with the increase in bonus depreciation and Section 179, taxpayers should keep in mind that the de minimis safe harbor election is available only when an accounting policy is in place at the beginning of the year.  While the policy does not have to be in writing for taxpayers without an applicable financial statement, we recommend having it in writing to avoid any question.  You can access a free-to-copy sample capitalization policy here: Sample Capitalization Policy.

Business interest expense will generally be limited to interest income plus 30% of business income.  There is an exception for small businesses with gross receipts of less than $25 million.

Like-kind (1031) exchanges are now only applicable to real property.

Entertainment expenses are disallowed under the Act.

Multiple definitions of leasehold improvements are consolidated under the Act and assigned a 15-year recovery period.

Planning with Tax Reform

Tax planning for changes made by the Tax Cuts and Jobs Act is mostly prospective.

Many individuals have scrambled to prepay state taxes and miscellaneous itemized deductions in 2017 in order to garner a deduction that will be lost next year.  As long as any property taxes being paid have been assessed in 2017, or any state income taxes have been reasonably estimated, the deductions will be allowable.  Because alternative minimum tax is not altered until 2018, paying these items may not have any tax benefit as both state taxes and miscellaneous itemized deductions are preference items for AMT.

The Act has made substantial changes in many areas of the tax law.  If you need to know how the Tax Cuts and Jobs Act impacts your taxes, contact the professionals at Seid & Company, CPAs.