President Trump signed the Tax Cuts and Jobs Act last week. This largest tax reform bill in 30 years lowers the individual and corporate tax rates, repeals a number of tax credits and deductions, enhances the child tax credit, repeals the individual penalty for not having health insurance, and more. Most of the changes made to individual taxes are temporary, in effect for 2018 through 2025. Most of the business tax changes are “permanent”, meaning they will apply until the tax law is changed again in the future. Below are highlights of some of the provisions that will impact the most people. The changes will impact taxpayers in different ways, so for more detail on how the changes will affect you, contact your CPA to discuss.
INDIVIDUAL TAX LAW CHANGES
Lower Tax Rates – Effective January 1, 2018 through December 31, 2025, everyone should enjoy lower tax rates on ordinary income with all but two rates going down (including the top rate going from 39.6% to 37%) and wider ranges of income at each rate. The tax on capital gains and qualified dividends is not changed. The IRS expects new withholding tables to be in place by February at which time you should notice an increase in your paycheck net amount.
Increased Standard Deduction – The standard deduction nearly doubles in 2018, increasing to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals. This higher standard deduction should simplify filing for many taxpayers by eliminating the need to itemize deductions. To offset the higher standard deduction, the new law eliminates the deduction for personal exemptions. So, the benefit from the higher standard will be lessened by the loss of personal exemptions, especially for larger families.
Change in Itemized Deductions – In addition to increasing the standard deduction, the new law changes or eliminates many of the itemized deductions. These changes will only impact taxpayers that still have enough itemized deductions to exceed the increased standard deduction. The deduction for state and local taxes is limited to $10,000 ($5,000 for married filing separate returns). The deduction for miscellaneous itemized deductions subject to the two-percent floor (includes investment fees, unreimbursed employee expenses, tax preparation fees and other items) is eliminated. The deduction for medical expenses is enhanced for 2017 and 2018 reducing the threshold for the deduction from 10% of AGI to 7.5% of AGI. The limit for deducting charitable donations increased from 50% of AGI to 60% of AGI. The deduction for home equity loan interest is repealed. The deduction for home mortgage interest is limited to the loans up to $750,000 (reduced from $1 million in 2017). These changes are temporary with all but the medical expense change lasting from 2018-2025.
Increased Child Tax Credit – The child tax credit increases from $1,000 in 2017 to $2,000 (refundable up to $1,400) in 2018. A new $500 tax credit will be available for qualifying dependents who are not children. The increased credit expires after 2025. The phaseout threshold for claiming the credit is also increased. Taxpayers will start to lose the credit when AGI exceeds $400,000 for married taxpayers filing a joint return and $200,000 for others. For middle-class families, this change should provide the largest tax cut.
Education Provisions – While the final bill did not change existing tax credits for education expenses, it did modify Section 529 education savings plans to allow for up to $10,000 per year to be distributed from a 529 account to pay for tuition at elementary and secondary schools. Before, the plans could only be used for college expenses, but now can be used to pay for your child’s private school education as well. Keep in mind that Georgia allows a deduction from state income tax for contributions to Georgia 529 accounts, increasing the benefit of using these accounts to save for education expenses.
Alimony Treatment Changed – For any divorce or separation agreement executed after December 31, 2018, the payment of alimony will no longer provide a deduction for the payor nor will the receipt of alimony be treated as income for the recipient.
Alternative Minimum Tax – The Act does not repeal the AMT, but for tax years 2018-2025 does increase the exemption amount to $109,400 for joint-filers and raises the exemption phase-out levels so that AMT will impact fewer taxpayers.
Moving Expense Deduction Eliminated – The Act repeals for 2018-2025 the deduction for qualified moving expenses (those incurred due to a change in employment location.) It also eliminates the exclusion from income for qualified moving expense reimbursements. So, moving expenses no longer get preferential tax treatment. The change does not apply to expenses incurred by members of the armed forces moved to a permanent change in station.
Affordable Care Act Penalty Removed – The shared responsibility payment amount (penalty for not having required health insurance) is reduced to $0 for penalties assessed after 2018. The payment will still be enforced for the current year. In addition, the IRS will not accept as complete any tax returns filed for 2017 that do not include information about health insurance coverage for the year.
BUSINESS TAX LAW CHANGES
Corporate Tax Rate Reduced – The tax rate for corporations changes from a tiered rate with a maximum of 35% in 2017 to a flat rate of 21% in 2018. In addition, the corporate AMT is repealed starting in 2018.
Pass-Through Income Deduction – The biggest change for small business comes from a new deduction of up to 20% of income from pass-through entities (partnerships, LLCs, S corporations, sole-proprietorships). Currently, owners of pass-through entities pay tax at the individual rates, with the highest rate at 39.6%. Beginning in 2018, for most small businesses formed as a pass-through entity, the owner should enjoy a deduction of up to 20% of the income from the business that is passed through to the owner’s personal tax return.
The deduction is not allowed for owners of a handful of service businesses with income over $315,000 for joint filers ($157,500 for single filers). The handful of service businesses include most traditional professional service firms such as accountants, attorneys, and doctors (but not engineers and architects), along with athletes, performing artists, investment managers, and any business that depends primarily on the skill or reputation of one or more employees or owners. Many complex rules and limitations apply, so consult your tax advisor about how this deduction may benefit you.
Enhanced Depreciation Expense – The Act increases the Section 179 expense dollar limitation from $510,000 in 2017 to $1 million in 2018. It also increases the 50-percent bonus depreciation to 100% for property placed in service after September 27, 2017 and before January 1, 2023. The change also allows for bonus depreciation on equipment purchased used (before the change, bonus depreciation was only allowed on the purchase of new equipment). In addition, the limits placed on the first-year depreciation of business vehicles will increase for vehicles placed in service after December 31, 2017.
Other Business Changes – Currently, deductions for meals and entertainment expenses are limited to 50% for most expenses, with no limit for certain meals provided at a workplace. Under the new law, deductions for entertainment expenses (including membership dues for clubs) are no longer allowed. Also, all meal expenses will be limited to 50% deduction. A number of other business tax preferences are eliminated, including the Code Section 199 domestic production activities deduction and like-kind exchanges for non-real property (such as autos).