The House and Senate passed the Tax Cuts and Jobs Act (TCJA) bill in December 2017 and President Trump signed the law into effect. This large tax reform package will lower tax rates on corporations, passthrough entities, individuals, and estates, move the US toward a territorial-style system for taxing foreign-source income of domestic multinational corporations, and will scale back or eliminate deductions and credits. Following are some of the highlights of the reform.
Individuals
• The TCJA retains the seven individual tax brackets reducing the top level from 39.6 percent to 37 percent for single filer with taxable income over $500,000 (married filing joint tax payers reach the 37 percent tax bracket at $600,000 of taxable income).
• The bill retains the 20 percent tax rate for long-term capital gains and qualified dividend income; the 3.8 percent tax rate on certain levels of net investment income; and the .9 percent FICA-HI tax on certain levels of earned income.
• The TCJA retains the alternative minimum tax (AMT) but increases the AMT exemption.
• Personal exemptions are eliminated.
• The standard deduction increases to $12,000 for single taxpayers and $24,000 for married taxpayers. Additional standard deductions for the blind and elderly were kept.
• Itemized deductions:
o Mortgage interest deduction is limited to a reduced $750,000 of acquisition indebtedness on a taxpayer’s primary and secondary residences ($375,000 for married filing separate taxpayers). Mortgages on or before December 15, 2017 are grandfathered in at the $1 million threshold.
o The interest deduction for home equity indebtedness is repealed.
o Medical and dental expense deductions are allowed to the extent they exceed 7.5 percent of adjusted gross income.
o Miscellaneous itemized deductions and personal casualty losses are limited.
o Nonbusiness state and local income or sales tax and property tax deductions are limited to $10,000 ($5,000 for married taxpayers filing a separate return).
o Charitable deduction for payments made in exchange for college athletic event seating is eliminated.
• Moving expense deduction is repealed except for members of the Armed Forces of the United States; qualified moving expense reimbursement may no longer be excluded from gross income.
• The child tax credit increases to $2,000 per qualifying child with $1,400 per qualifying child refundable. The credit begins to phase out for married filing joint taxpayers with adjusted gross income in excess of $400,000.
• The individual mandate penalty for individuals who do not maintain health insurance is reduced to zero for months beginning after December 31, 2018.
Estate, Gift and GST Tax Provisions
• The estate, gift, and GST tax exemptions were increased to $11.2 million per individual for transfers occurring after December 31, 2017.
Corporations
• The TCJA replaces the graduated corporate rate structure to flat 21 percent.
• Repeals the corporate alternative minimum tax (AMT).
• Repeals the Domestic Production Activity Deduction.
• Eliminated the NOL carryback; made the NOL carryforward period indefinite.
All Business
• Section 168 bonus depreciation will be 100 percent for qualified property placed in service after September 27, 2017 and before January 1, 2023. TCJA eliminates the provision that the original use of the property begins with the taxpayer.
• Section 179 expense election threshold increases to $1 million with the phase-out beginning when cost of qualifying property reaches $2.5 million.
• The TCJA expands the definition of section 179 property to include certain property used in furnishing lodging, and roofs, heating, ventilation, air-conditioning property, fire protection and alarm systems, and security systems for nonresidential real property that are placed in service after December 31, 2017.
• Allows amortized assets to be fully expensed in the year placed in service through 2022.
Passthroughs (S Corporations, LLC’s, Partnerships)
• Allows a deduction of up to 20 percent of the domestic qualified business income with respect to a qualified trade or business (a specified service business is not a qualified trade or business) from a partnership, S Corporation or sole proprietorship (subject to certain limitations based on W-2 wages and capital and, with respect to specified service business, only below certain taxpayer income thresholds), and 20 percent of aggregate qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income.
• Qualified business income does not include any amount paid by an S Corporation that is treated as reasonable compensation of the taxpayer or payments to a partner for services rendered with respect to the trade or business to include guaranteed payments.
• For taxpayers with income below $157,000 for single filers and $315,000 for joint filers there is no wage limitation on the 20 percent deduction for qualified business income. There is a limitation on the 20 percent deduction for taxpayers above the threshold amount.
• Specified service businesses (not eligible for the 20 percent deduction) means any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any other business where the principal asset is the reputation or skill of one or more of its employees or owners. Any business involving engineering or architecture are not considered specified service businesses and do qualify for the 20 percent deduction.
This is just a summary of some of the changes under the TCJA. The Widmer Roel professionals would be happy to work with you to see how these changes affect you.