Now that the GOP tax reform bill is headed to President Trump’s desk to be signed into law, it’s time to take a look at how the new changes to the tax code, also known as the “Tax Cuts and Jobs Act,” may impact individuals and businesses. Below is a summary of the changes that may impact you:
Changes Affecting Individual Taxpayers
1. Individuals will see these changes to tax rates/brackets:
• There are now seven tax brackets – 10%, 12%, 22%, 24%, 32%, 35% & 37%.
• 37% bracket will begin at $600,000 for joint returns/surviving spouses.
• 37% bracket will begin at $500,000 for singe and head of household.
2. There are also new capital gains income tax brackets:
• A 15% breakpoint at $77,200 for married taxpayers filing jointly and at $38,600 for single taxpayers.
• A 20% breakpoint at $479,000 for married taxpayers filing jointly and at $425,800 for single taxpayers.
3. There is an increased standard deduction of $12,000 for single filers and $24,000 for joint filers.
4. The personal exemption is eliminated.
5. The Child Tax Credit increases to $2,000 per child.
6. The Obamacare individual mandate penalty tax is eliminated after 2019.
7. 529 education savings accounts can now be used to save for elementary, secondary and higher education costs.
8. There are several changes to itemized deductions including:
• The deduction for mortgage interest is limited to mortgage debt up to $750,000.
• Interest paid on home equity loans after December 31, 2017 are no longer deductible regardless of when the indebtedness was incurred.
• There are limited deductions for state and local income, sales and property taxes of $10,000.
• Expanded medical expense deductions for 2017 and 2018 for expenses exceeding 7.5% of adjusted gross income, which rises to 10% beginning in 2019.
• A repeal of the overall limitation on itemized deductions.
• Repealed deductions include all miscellaneous itemized deductions that are subject to the AGI 2% floor and personal casualty losses—except for losses incurred in a presidentially declared disaster and moving expenses.
• The 50% limitation of cash contributions to public charities and certain private foundations is increased to 60%. A payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event will no longer be considered a charitable contribution.
9. The following applies to any divorce or separation agreement executed after December 31, 2018:
• Alimony and separate maintenance payments are not deductible by the payer spouse.
• Alimony and separate maintenance payments are not included in the income of the payee spouse.
10. Changes to deductions from certain pass-through income are as follows:
• An individual taxpayer may deduct 20% of domestic qualified business income from a partnership, S corporation or sole proprietorship.
• Qualified services businesses such as law and accounting firms are not allowed to utilize this provision unless it is under the threshold amount referenced below. Architectural and engineering firms are allowed to utilize the provision regardless of threshold amount.
• The amount of the pass-through income deduction is limited to 50% of the W-2 wages of the taxpayer, or the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis—immediately after acquisition of all “qualified property” unless the taxable income of the affected individual is under the threshold limit referenced below. If under the threshold amount, then the 20% deduction is allowed regardless of wages of the taxpayer.
• The threshold amount for both the limitation on specified service businesses and the wage limit is $315,000 for married taxpayers filing jointly and $157,500 for single taxpayers. The total phase out would be $415,000 for married taxpayers filing jointly and $207,500 for single taxpayers.
• The 20% deduction is not allowed in the calculation of adjusted gross income, but it is allowed as a deduction for reducing taxable income, available to both itemizers and non-itemizers
11. The Alternative Minimum Tax exemption threshold amounts are:
• $109,400 for joint returns and surviving spouses.
• $70,300 for single taxpayers.
• $54,700 for married taxpayers filing separately.
Tax Changes Affecting Businesses
1. The corporate tax rate is lowered to 21% beginning in 2018.
2. The special tax rate for personal service corporations is eliminated, effective for tax years beginning after 2017.
3. The corporate Alternative Minimum Tax is repealed for tax years beginning after December 31, 2017.
4. Companies will be allowed to immediately write off the full cost of new equipment.
5. An increase in Code 179 small business expensing under the Act includes an increase of the limitation of expense amounts to $1 million and an increase to the phase-out amount to $2.5 million—effective for tax years beginning after 2017.
6. Small businesses can still write off interest on loans.
7. The Domestic Production Activities deduction is repealed. Taxpayers will be able to deduct a net operating loss carryover only to the extent of 80% of the taxpayer’s taxable income.
8. The act repeals all carrybacks, but provides a special two-year carryback for small businesses and farms in the case of certain casualty and disaster losses.
9. The Like Kind Exchange provisions have been reformed:
• The rule allowing the deferral of gains on like-kind exchanges is modified to allow like-kind exchanges only with respect to real property. This is effective for transfers occurring after 2017.
10. Changes to deductions for entertainment and other expenses, effective for amounts paid or incurred after 2017:
• No deductions will be allowed for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes. In addition, no deduction will be allowed for transportation fringe benefits, benefits in the form of on-premises gyms and other athletic facilities, or for amenities provided to an employee that are primarily personal in nature and that involve property or services not directly related to the employer’s trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee).
• The 50% limitation under current law will apply only to expenses for food or beverages and to qualifying business meals with no deduction allowed for other entertainment expenses.
As you can see, the Tax Cuts and Jobs Act includes some significant changes to the tax code that are likely to affect many taxpayers and businesses. If you have questions in regard to how they will impact your own tax situation, please contact RootAdvisors—we’re here to help!
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