Below is the special article that summarized the final version of the Tax Cuts & Jobs Act that RLH released on December 23, 2017.
The new tax bill maintains 7 individual income tax brackets (the same number as current law), however, most rates are reduced slightly, now ranging from 0%-37% with the income brackets also altered.
Currently, taxpayers can itemize interest paid on a home mortgage for indebtedness up to $1 million; after 2017 this is reduced to $750,000. Additionally, interest paid on home equity loans will no longer be deductible as it had been under current law.
State and local income taxes paid during the year as well as property taxes paid will still be an itemized deduction under the new bill, however, the maximum deduction allowed will be reduced to a combined total of $10,000.
Charitable contributions are still allowed under the new bill, with the maximum amount taxpayers would be allowed to deduct expanding from the current limitation of 50% to 60% of the taxpayers’ adjusted gross income (AGI).
Under current law, taxpayers are able to deduct medical expenses greater than 10% of their AGI, the new bill allows for taxpayers to deduct medical expenses greater than 7.5% of their AGI for 2018 and 2019. After 2019, the deduction will once again be limited to expenses greater than 10% of AGI.
All other miscellaneous itemized deductions subject to the 2% floor under current law will be repealed in the new bill through 2025. These include tax preparation fees, investment advisor fees and unreimbursed employee expenses to name a few.
Personal exemptions will be repealed in the new bill. For 2017, they stand at $4,050 per taxpayer, spouse, and each dependent which could be a sizeable deduction, especially for large families.
However, the Child tax credit is expanded from the current amount of $1,000 per qualifying child to $2,000 per qualifying child. The new bill provides good news for higher income families with qualifying children, bumping the phase out amounts of the credit for married couples from $110,000 to $400,000 and all other filers from $75,000 to $200,000.
Alimony payments under current law are recognized as income by the recipient and taken as a deduction by the payer, however, they will have no effect on taxes under the new bill. The new bill provides that for divorce or separation agreements executed after December 31, 2018, alimony payments will not be recognized as income nor take as a deduction.
Moving expenses will no longer be deductible as they are under current law.
The current estate tax exemption is increased to $11 Million and indexed for inflation for individuals passing away after December 31, 2017 through December 31, 2025, but will be restored to the current $5 Million exemption, indexed for inflation for individuals passing away after 2025.
Corporations will now be taxed at a flat rate of 21% and permanently excludes corporations from Alternative Minimum Tax. Current corporate tax rates range from 15% - 35%. Keep in mind that this is a flat tax rate structure, so if you previously paid corporate taxes at the 15% rate, you could be looking at a tax increase and may want to talk to us about the implications of electing S Corporation status, depending on your type of business.
Individuals owning Partnerships, S Corporations, and Proprietorships are set to receive a 20% deduction based on “qualified business income” through 2025. However, there are limitations outlined in the bill for “specified service businesses” and further limitations depending on the Wages paid to the pass-through entities employees or the capital intensive nature of the business. This area of the new bill appears to add several complications that will need to be more clearly defined when the Internal Revenue Service sets regulations to meet the complex requirements and new definitions set forth under the bill. Stay tuned for more information to come in the area of pass-through entities.
Section 179 will still allow businesses to fully expense tangible, personal, property placed in service during the year. For 2017, businesses are able to deduct purchases in qualifying property up to $510,000, with the deduction starting to phase out when those total purchases exceed $2,000,000. Under the new bill, the deduction is bumped to $1,000,000, with the phase-out starting at $2,500,000. Keep in mind the Section 179 deduction cannot create a loss for your business.
Bonus depreciation currently allows for immediate expensing of 50% of the cost of new property placed in service during the year. Under the new regulations, bonus depreciation is increased to 100% expensing for both new and used property. This is effective for assets placed in service after September 27, 2017.
Section 1031 exchanges, more commonly known as like-kind exchanges allow a taxpayer to defer the gain on the sale of a fixed asset when it was traded-in on a similar asset for both real property and personal property. The new bill limits like-kind exchanges to real property transactions only.
The Domestic Production Activities deduction will be eliminated.
What can you do now?
With most of the brackets garnering lower rates, it will generally be more important this year than most to defer income and pay for expenses and deductions before the end of 2017 in order to get the most you can from the reduced overall rates.
For high income taxpayers, keep in mind that the overall limitation on itemized deductions for taxpayers with adjusted gross income over $261,500 ($313,800 for married couples) will be eliminated through 2025. If you are over these income thresholds and normally have your itemized deductions limited, you may want to delay those itemized deductions that you will NOT otherwise lose in 2018, such as charitable contributions.
Given all of the aforementioned itemized deductions that will no longer be available or will have significant limitations next year regardless of income levels, you may want to consider prepaying those that you are able to before the end of the year. State and local income taxes due either for fourth quarter estimates (due in January) or expected balances due (due in April), can be paid by December 31st, in order to deduct those on your 2017 tax return.
Unreimbursed employee expenses are another example of an itemized deduction lost under the new tax law. Now would be a good time to talk to your employer about changing your compensation arrangement—for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now. Even if this means lowering your salary by an amount that approximates those expenses, in most cases, such reimbursements would not be subject to tax.