The biggest tax reform law in thirty years.
Congress is enacting the biggest tax reform law in thirty years. These changes will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Here's a brief summary of some of the changes.
Lower tax rates: The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year with the maximum individual rate at 37 percent.
Personal Exemptions: The new tax law repeals personal exemptions, which are valued at $4,050 per taxpayer, spouse and dependent in 2017.
Child Tax Credit: The new law expands the Child Tax Credit up to $2,000 per eligible child.
Itemized Deductions: Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state taxes and any anticipated state balance due for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date.
The itemized deduction for charitable contributions won't be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers; $12,000 for single filers), charitable contributions after 2017 may not yield a tax benefit for many because they won't be able to itemize deductions. If you think you will fall in this category next year, consider accelerating some charitable giving in 2017.
Donations made to universities will no longer be deductible if the donations are made in exchange for the right to purchase tickets or seating at an athletic event. Any such donations should be made in 2017.
The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018, these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017, it was 7.5% of AGI for age-65-or-older taxpayers. Keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated.
Alternative Minimum Tax: The new law substantially increases the alternative minimum tax (AMT) exemption amount for individuals beginning with the 2018 tax year.
Alimony Payments: Under current rules, alimony payments generally are an above-the-line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren't deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017.
Moving Expenses: The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses.
Miscellaneous Itemized Deductions: Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017.
Like-Kind Exchange: Like-kind exchanges will be possible only if they involve real estate that isn't held primarily for sale. If you are considering a like-kind swap of other types of property, do so before year-end. Like-kind exchange rules will continue to apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
Pass-throughs: Individuals receiving income through partnerships, limited liability companies, and S-corporations that pass their incomes to their owners receive a 20 percent deduction on the profits, subject to limits.
Corporate tax rate: The act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%. The new rate will take effect Jan. 1, 2018.
Corporate AMT: The act repealed the corporate AMT.
Depreciation: The act extended and modified bonus depreciation, allowing businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The act also removed the rule that made bonus depreciation available only for new property.
For passenger automobiles placed in service after 2017 and for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years.
Sec. 179 expensing: The act increased the maximum amount a taxpayer may expense under Sec. 179 to $1 million and increased the phase-out threshold to $2.5 million, to be indexed for inflation after 2018.
Net operating losses: The act limits the deduction for net operating losses (NOLs) to 80% of taxable income (determined without regard to the deduction) for losses. (Property and casualty insurance companies are exempt from this limitation.)
Taxpayers are allowed to carry NOLs forward indefinitely. The two-year carryback and special NOL carryback provisions were repealed. However, farming businesses are still allowed a two-year NOL carryback.
Domestic production activities: The act repealed the Sec. 199 domestic production activities deduction.
Entertainment expenses: The act disallows a deduction for (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items.
Meals: Under the act, taxpayers are still generally able to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after Dec. 31, 2017, and until Dec. 31, 2025, the act expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer.
Rehabilitation credit: The act modified the Sec. 47 rehabilitation credit to repeal the 10% credit for pre-1936 buildings and retain the 20% credit for certified historic structures. However, the credit must be claimed over a five-year period.
Employer credit for paid family or medical leave: The act allows eligible employers to claim a credit equal to 12.5% of the amount of wages paid to a qualifying employee during any period in which the employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account for any employee in any tax year is 12 weeks. However, the credit is only available in 2018 and 2019.
Business Interest Deduction: Under the act, the deduction for business interest is limited to the sum of (1) business interest income; (2) 30% of the taxpayer’s adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year for taxpayers exceeding the $25 million gross-receipts test. Any disallowed business interest deduction can be carried forward indefinitely (with certain restrictions for partnerships).
The limitation will also not apply to any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Farming businesses are allowed to elect out of the limitation.
Long-term Contracts: The act increases the $10 million average gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts to $25 million for tax years beginning in 2018. Businesses that meet such exception would be permitted to use the completed-contract method (or any other permissible exempt contract method).
Estate Tax Exclusion: The annual exclusion amount for estate, gift, and generation-skipping taxes is doubled from $5 million to $10 million through 2025 and is indexed for inflation providing an exclusion of $11.2 million in 2018.
Please keep in mind that we've described only some of the changes that will affect individuals and businesses. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call or email us.