written by Jennifer Cochran
The Tax Cuts and Jobs Act will likely be implemented in the next few days. A large number of provisions affect individual and business taxpayers. Below is a recap of the most significant.
Unless indicated, the effective date for these changes is January 1, 2018.
Individual Provisions
The individual tax rate decreased 2.5% to 10% depending on the marginal income tax bracket of the taxpayer.
Standard deduction: The bill would increase the standard deduction for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of households, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers is retained.
Personal exemptions: The bill eliminates all personal exemptions.
Pass-through income deduction: Individuals allowed to deduct 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 rule does not apply to “specified service trades or businesses” with high income. “Specified service trades or businesses” include any trade or business in the fields of accounting, health, law, consulting, 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 its employees.
The exclusion from the definition of a qualified business for specified service trades or businesses phases in for a taxpayer with taxable income in excess of $157,500 for individuals and $315,000 joint returns.
The bill allows a $2,000 credit per qualifying child. The maximum refundable amount of the credit would be $1,400. The threshold at which the credit begins to phase out would be increased to $400,000 for married taxpayers filing a joint return and $200,000 for other single filers.
Itemized Deductions
The bill would repeal the overall limitation on itemized deductions, through 2025.
Mortgage interest: Existing mortgages are grandfathered. New mortgage interest will be limited if the balance exceeds $750,000.
State and local taxes: Deduction for state and local taxes or property taxes will be limited to $10,000 ($5,000 for married taxpayers filing separately). No deduction will be allowed for prepayment of 2018 taxes.
Charitable contributions: The bill increases the limit for donations to public charities from 50% of income to 60%.
Miscellaneous itemized deductions: All miscellaneous itemized deductions subject to the 2% floor are repealed through 2025.
Medical expenses: Medical expenses more than 7.5% of adjusted gross income are allowed for 2017 and 2018.
Other Provisions
Alimony: For any divorce or separation after Dec. 31, 2018, alimony is not deductible or taxable to the receiving spouse.
Alternative minimum tax: The AMT tax for individual is still in place but the thresholds are increased. The AMT exemption amount increases to $109,400 for married taxpayers filing a joint return and $70,300 for all single filers. The phaseout thresholds also increases to $1 million for married taxpayers and $500,000 for single filers. Non-military moving expenses are disallowed as deductions.
The penalty for not having insurance is reduced to zero. Lastly, the estate and gift tax exemption is doubled.
Business Provisions
Bonus depreciation: The deduction increase for bonus to 100% for assets placed in service between September 27, 2017 and December 31, 2017. The bill expands the eligibility of property to include used property. This remains in effect until 2022.
Section 179: The bill increased Section 179 to $1,000,000 after 2017. The phaseout threshold is increased to $2,500,000.
C-Corps: For tax years beginning after December 31, 2017, 21% flat corporate tax rate for C-Corporations. AMT for C-Corporations is repealed.
The bill increases the first-year deduction for passenger automobiles placed in service after December 31, 2017 to $10,000, $16,000 for the second year, $9,600 for the third year and $5,760 for the fourth year and later years.
The bill eliminates the separate definitions for qualified leasehold improvements, qualified restaurant property and qualified retail improvement property and replace it with one category, qualified improvement property. Qualified improvement property would have a recovery period of 15 year.
Domestic productions activity credit is repealed for tax years after December 31, 2017. In some cases, the business interest deduction is limited. Lastly, like-kind exchange rules will only apply to real estate.
We will continue to monitor any changes and updates. Please contact us if you have any questions 417-881-0145.
