With the Tax Cuts and Jobs Act (TCJA) being passed by both the House and Senate and sent to President Trump on December 20, 2017, the United States will see the most significant tax reform in over 30 years. As with any tax reform, there will be a multitude of tax planning strategies to implement over the 2018 tax year. We are including a comparison chart for individuals and businesses that highlights the current law as of 2017 compared to the reform under the TCJA which will mostly take effect for tax years beginning January 1, 2018.
Tax Cuts and Jobs Act – Individual
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Current Law
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New Law
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For tax years beginning after December 31, 2017
(unless otherwise mentioned)
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Tax Brackets
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10%, 15%, 25%, 28%,
33%, 35%, and 39.6%
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10%, 12%, 22%, 24%, 32%,
35%, and 37%
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Personal Exemptions
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An individual may claim a personal exemption of $4,050 for each person he or she claims as a dependent on his or her tax return.
Exemption phases out when AGI exceeds:
$313,800 for Married filing Joint
$287,650 for Head of Household
$261,500 for Single
$156,900 for Married filing Separate
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No Personal Exemptions available
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Standard Deduction
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Filing Status – 2017 standard deduction
Married filing jointly – $12,700
Married filing separately – $6,350
Head of household – $9,350
Single – $6,350
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Filing Status – 2018 standard deduction
Married filing jointly – $24,000
Married filing separately – $12,000
Head of household – $18,000
Single – $12,000
Indexed for inflation each year using a C-CPI-U (chained CPI)
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Medical Expenses
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For 2017, the threshold on medical expense deductions is reduced to 7.5% for all taxpayers.
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For 2018, the threshold on medical expense deductions remains at 7.5% of AGI for all taxpayers
Reverts to 10% of AGI for all taxpayers after 2018
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Property Taxes
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Local, state, and foreign real property taxes are deductible on Schedule A by the person whom they are imposed in the year in which they are paid.
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An individual may deduct up to $10,000 if MFJ ($5,000 for MFS) in a combination of property, sales, or state and local income tax
State, local, and foreign property taxes and sales taxes are deductible when paid or accrued in carrying on trade or business or an activity described in Code Sec. 212
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State and Local Income Taxes
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An individual may generally deduct either:
1)Â Â Â Â State, local, and foreign income taxes paid during the year or
2)Â Â Â Â Elect to claim state and local general sales taxes as an itemized deduction in lieu of state and local income taxes
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An individual may deduct up to $10,000 in a combination of property, sales, or state and local income tax
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Mortgage Interest Deduction
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An individual may generally deduct qualifying mortgage interest for purchases of up to $1,000,000 plus an additional $100,000 for home equity debt.
$1,000,000 cap applies to a mortgage on your primary residence plus one other home.
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New mortgages will be capped at $750,000 for purposes of the home mortgage interest deduction.
For mortgages taken out before December 15, 2017, the limit will remain at $1,000,000.
The deduction for interest on home equity debt will be eliminated beginning in 2018, but it will return in 2026
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No deduction for amounts paid for College Athletic Seating rights
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Special rules applied for payments to college institutions which included the right to purchase tickets at an athletic event. The donation was typically considered 80% deductible.
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No charitable deduction would be allowed for any 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.
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Miscellaneous Itemized Deductions Subject to 2% AGI Floor
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Taxpayers were allowed to deduct certain miscellaneous itemized deductions which were not deductible unless they exceeded, in the aggregate, 2% of the taxpayer’s AGI.
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Repeal of all miscellaneous itemized deductions subject to 2% AGI floor, which includes deductions for tax preparation fees.
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Moving Expense Deduction
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Taxpayers could claim a deduction under Code Sec. 217 for moving expenses incurred in connection with starting a new job if the new workplace was at least 50 miles farther from a taxpayer’s former residence than the former place of work.
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No deduction for qualified moving expenses except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.
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Capital Gains
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Maximum rates of 0%, 15%, and 20%
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Same as current law with breakpoints indexed for inflation using Chained CPI-U
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Pass-thru Income Taxation
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Income effectively subject to ordinary and capital individual income tax rates
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Non-corporate taxpayer (including trusts and estates) with qualified business income (QBI) from a partnership, S-Corporation, or sole proprietorship may deduct:
The lesser of:
OR
QBI does not include certain investment items and W-2 wages/ guaranteed payments/payment for services
Limitations apply to specified service businesses with additional limitations based on W-2 wages with respect to the qualified trade or business as well as the unadjusted basis of qualified property
Limitations do not apply to individuals with income below certain thresholds ($315,000 for married filing joint taxpayers and $157,500 for all other filers)
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Child Tax Credit
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An individual may claim the child tax credit of up to $1,000 for each qualifying child he or she supports
Phase-out when MAGI exceeds:
$110,000 for Married filing jointly
$55,000 for Married filing separately
$75,000 for Single
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An individual may claim the child tax credit of up to $2,000 for each qualifying child he or she supports, with up to $1,400 as a refundable credit
A $500 non-refundable credit is available for certain non-child dependents
Phase-out when MAGI exceeds:
$400,000 for Married filing jointly
$200,000 for all other taxpayers
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Re-characterizing Contributions to Traditional/ROTH IRA
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An individual who makes contributions to a traditional IRA or Roth IRA may later decide to change the characterization of those contributions to the other type of IRA account. Generally, this re-characterization can be made prior to the due date of the taxpayer’s return, including extensions.
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Re-characterization provisions repealed
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Casualty and Theft Losses
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An individual may deduct a loss from fire, storm, shipwreck, or other casualty or from theft. Loss is subject to $100 floor and can only be deducted to the extent the loss exceeds 10% of the taxpayer’s AGI.
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Repeals deduction for personal casualty and theft losses other than in the case of a casualty loss suffered in a Presidentially-declared disaster area
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Kiddie Tax
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Net unearned income of child above $2,100 is taxed at parents’ tax rates if their rates were higher than child’s tax rate
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Taxable income of child attributable to earned income will be taxed under rates for single individuals.
Taxable income of child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates.
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Net Operating Losses
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Net operating losses are carried back two years and forward 20 years
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NOLs would be limited to 80% of taxable income.
Carryback option no longer available in most cases but an indefinite carryforward period is allowed, subject to percentage limitation
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Net Investment Income Tax
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3.8% net investment income tax enacted through the Affordable Care Act
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No change
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Obamacare Individual Mandate
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Individuals who are not covered by a health plan with at least minimum essential coverage were required to pay a shared responsibility payment (penalty)
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Beginning January 1, 2019, the individual shared responsibility payment is reduced to $0. The repeal is permanent.
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Tax Cuts and Jobs Act – Business
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Current Law
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New LawÂ
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For tax years beginningÂ
after December 31, 2017Â
(unless otherwise mentioned)
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Reduction inÂ
Corporate tax rate
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Graduated tax rates of:
(Tax rate: taxable income)
15%: $0 – $50,000
25%: $50,001 – $75,000
34%: $75,001 – $10,000,000
35%: over $10,000,000
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Flat tax rate of 21%
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Increase in expensingÂ
to $1 million
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Section 179 expense of $500,000 for the cost of qualifying property placed in service during the tax year.
Amount is reduced when qualifying property placed in service during the tax year exceeds $2 million.
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Maximum amount a taxpayer may expense under Code Section 179 increases to $1 million and phase-out threshold increases to $2.5 million.
These amounts are indexed for inflation.
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Qualified real property expanded underÂ
Code Section 179
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Section 179 property
means property
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Definition of Code Section 179 property is expanded to include certain depreciable tangible personal property used predominantly to furnish lodging and to include the following improvements to nonresidential real property (after date such property was first placed in service): roofs, heating, ventilation, air-conditioning property, fire protection, alarm systems, and security systems.
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Temporary 100% first year qualifying business asset deduction
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First-year bonus depreciation deduction of 50% of the adjusted basis of qualified property, placed in service before
January 1, 2020.
The 50% allowance was phased down for property placed in service after December 31, 2017.
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100% first-year deduction available for property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. The additional first-year depreciation deduction is available for new and used property.
First-year bonus depreciation deductions phase down as follows:
(Rate – placed in service date)
80% – btwn Dec. 31, 2022 – Jan. 1, 2024
60% – btwn Dec. 31, 2023 – Jan. 1, 2025
40% btwn Dec. 31, 2024 – Jan. 1, 2026
20% btwn Dec. 31, 2025 – Jan. 1, 2027
Dates above are increased by one year for certain longer production period property.
Special rules apply for television and live theatrical productions and certain plants bearing fruit or nuts.
Bonus depreciation allowed on assets used in real property trades (RE investors and developers).
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Limitation on the deduction for business interest expense
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Interest paid or accrued by a business is generally deductible in the computation of taxable income subject to a number of limitations.
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Every business, regardless of form, is generally subject to a limitation on a deduction for net interest expense that exceeds 30% of the business’s adjusted taxable income.
The net interest expense disallowance is determined at the tax filer level; however, a special rule applied to pass-through entities requiring determination at the entity level.
Adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization, or depletion.
Exemption applies for taxpayers with average annual gross receipts for the three-year tax period that do not exceed $25 million.
Exception also provided for floor plan financing.
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Elimination of domestic production activities deduction (DPAD)
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Taxpayers could claim a domestic production activities deduction equal to 9% of the lesser of the taxpayer’s qualified production activities income or the taxpayer’s taxable income for the year limited to 50% of W-2 wages paid by taxpayer
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DPAD is repealed for non-corporate taxpayers for tax years beginning after December 31, 2017.
DPAD is repealed for C corporations for tax years beginning after December 31, 2018.
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Alternative Minimum tax repealed
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Corporate Alternative Minimum tax rate is 20%, including an exemption amount of up to $40,000
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Corporate AMT is repealed.
Credit carryforwards partially refundable in years 2018, 2019, 2020, and 2021, fully refundable in 2022.
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Dividends-received deduction percentages reduced
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Corporations that receive dividends from other corporations are entitled to a deduction for dividends received.
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80% deduction is reduced to 65%
70% deduction is reduced to 50%
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Luxury automobile depreciation limits increased
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Passenger autos placed in service in 2017, for which additional first-year deprecation under Code Sec. 168(k) is not claimed, maximum amount of allowable depreciation deduction is:
$3,160 for the year placed in service,
$5,100 for the second year,
$3,050 for the third year,
$1,875 for the fourth and later years
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Passenger autos placed in service after December 31, 2017, for which additional first-year depreciation under Code Sec. 168(k) is not claimed, maximum amount of allowable depreciation deduction is:
$10,000 for the year placed in service,
$16,000 for the second year,
$9,600 for the third year,
$5,760 for the fourth and later years
Dollar limits indexed for inflation after 2018.
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Recovery period for Real property shortened
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Qualified leasehold improvement property: interior building improvement to nonresidential real property by a landlord, tenant or subtenant that was placed in service more than three years after the building.
Qualified restaurant property: a) building improvement in a building in which more than 50% of the buildings square footage was devoted to preparation of, seating for, on-premises consumption of prepared meals or b) a building that passed the more-than-50% test.
Qualified retail improvement property: interior improvement to retail space that was placed in service more than three years after the date the building was first placed in service.
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Separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated.
Qualified improvement property placed in service after December 31, 2017, is generally depreciable over 15 years using the straight-line method and half-year convention without regard to whether the improvement are property subject to a lease, placed in service more than three years after the date of the building, or made to a restaurant building.
20 year ADS recovery period is provided for such qualified improvement property.
30 year ADS recovery period for residential real property.
40 year ADS recovery period for non-residential real property
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Modification to Net Operating Loss DeductionÂ
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Generally, a net operating loss may be carried back two years and forward 20 years.
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Two year carryback is repealed. The NOL deduction is limited to 80% of taxable income and can be carried forward indefinitely.
Special rules apply for farming and property and casualty insurance companies.
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Like-kind exchange
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Applied to wide range of property from real estate to tangible personal property – held for productive use in trade or business or held for investment
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Effective for transfers after December 31, 2017, like-kind exchange rules only apply with respect to real property that is not held primarily for sale.
Transition rules apply for exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before December 31, 2017.
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Fringe benefit expenses limited
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Taxpayer may deduct up to 50% of expenses relating to meals and entertainment.
Housing and meals provided for the convenience of the employer on the business premises of the employer are excluded from employee’s gross income.
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Deductions for entertainment expenses are disallowed. 50% deduction for meals is expanded to include meals provided through an in-house cafeteria.
Deductions for employee transportation fringe benefits (parking, mass transit, and commuting) are denied but exclusion from employee’s income retained.
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Credit for Employer-Paid Family and Medical Leave
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No credit provided to employers for compensation paid to employees while on family or medical leave.
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For 2018 and 2019, general business credit equal to 12.5% of amount of wages paid to qualifying employees during period in which such employees are on family or medical leave if the rate of payment is 50% of wages normally paid to such employees.
Credit is increased by 0.25 percentage points (not to exceed 25%) for each percentage point which rate of payment exceeds 50%.
All full-time employees must be given at least 2 weeks of annual FMLA.
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Below are a few reminders we suggested for 2017 year-end tax planning to maximize your deductions and minimize your tax liability.
INDIVIDUAL
1. Rates
With the lowering of tax rates and expansion of certain tax brackets, you should consider deferring income into 2018 and accelerating deductions into 2017. Everyone’s situation can be different so close analysis should be made to evaluate the proper action.
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2. State and Local Income Taxes
If you itemize deductions, pay combined property and state and local income or sales taxes in excess of $10,000, and you are not subject to the Alternative Minimum Tax, you should make all payments for your 2017 anticipated state and local income tax liability by December 31, 2017 in order to maximize your state and local income tax deduction before the limitations take place beginning January 1, 2018. We also suggest making all property tax payments by December 31, 2017. The TCJA will allow a combined deduction up to $10,000 for state and local sales, income and property taxes. In addition, the TJCA will consider pre-payment of 2018 state and local income taxes by December 31, 2017 as payment in 2018 and therefore, subject to the $10,000 limit discussed above.
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3. Miscellaneous Itemized Deductions
If you itemize your deductions in 2017, you should consider making payments prior to Dec. 31, 2017 for employee business expenses, investment fees and other expenses related to the production or collection of income, and tax preparation services in order to ensure these payments are deductible. Under TCJA, all miscellaneous itemized deductions subject to the two-percent of Adjusted Gross Income floor will be repealed beginning January 1, 2018.
4. Charitable ContributionsÂ
If you are anticipating your marginal tax rate to be lower in 2018 or that you will not be itemizing as a result of the increased standard deduction, you may consider accelerating charitable contributions in 2017 to offset your income that will be taxed at the higher tax rate. Taxpayers with unrealized gains from stocks and bonds should continue contributing those assets with low basis to a charity by December 31, 2017. In addition, if you are making charitable contributions to universities in exchange for the option to purchase seating rights, you should make those donations by December 31, 2017 in order to receive an 80 percent donation deduction. Beginning January 1, 2018, the charitable donation deduction for priority seating will be repealed.
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5. Conversion of IRA Contributions
If you have converted a traditional IRA to a Roth IRA and would like to re-characterize the conversion back to a traditional IRA, to avoid the tax, you must do so by December 31, 2017. This re-characterization mechanism will not be available beginning January 1, 2018. If you are wanting to convert a regular IRA to a Roth IRA, you should consider postponing this move until 2018 so the taxable income from conversion will be taxed at lower rates.
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6. Home Mortgage Interest
For all homeowners with existing mortgages that were taken out to buy a home prior to the enactment of this bill, there is not a change to your deduction. For homeowners with new mortgages on first or second homes, the interest deduction will be only available up to $750,000 in debt. In addition, the deduction for interest paid on home equity debt will be eliminated beginning January 1, 2018.
BUSINESS
1. C-Corporation Tax Planning
With the 21 percent tax rate for C-corporations beginning January 1, 2018, C-corporations should accelerate expenses as much as possible by December 31, 2017. This will reduce the amount of 2017 income taxed at the current, higher rates and maximize the income taxed and the lower rates beginning in 2018. For C-corporations with income less than $75,000, the new rate will actually be a tax increase as the C-corporation will lose the current 15% bracket it is in at that income level. If the C-corporation will have less than $75,000 in taxable income in 2017, it may consider accelerating income into 2017 up to the $75,000 income threshold so that it can receive the 15% tax rate as opposed to 21% in 2018.
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2. Deferral of Income
If your business is service-oriented and operates on the cash basis method of accounting, the income you earn is not taxed until it is paid to you. Therefore, it may be wise to hold off on billings until 2018 so your income can be taxed at the lower rates. You will need to weigh the benefits vs. costs of this to your business and to your customers.
3. Like-Kind Exchanges
Like-kind exchanges involving personal property should be completed by December 31, 2017 so that the gain on the like-kind exchange can be deferred. As of January 1, 2018, the favorable deferral of gains on like-kind exchanges will only apply to exchanges of real property. Therefore, like-kind exchange treatment would not be allowed for the trade-in of a vehicle after December 31, 2017. The trade-in will be treated as if you sold the vehicle and invested the proceeds in a new vehicle, which may cause you to recognize a gain from the trade-in. While the new vehicle may receive bonus depreciation in 2018, the vehicle may be subject to limits imposed that would only allow you to deduct up to $25,000 of depreciation.
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4. Bonus depreciation Â
Businesses will be allowed to immediately deduct the full cost of purchased equipment beginning with assets placed in service after September 27, 2017. Bonus depreciation will also now be allowed for both new and used equipment that is purchased. This is one of the few provisions in the Act that begins prior to January 1, 2018. In many cases it may make sense to accelerate the purchase of assets to receive the deduction in 2017.
As mentioned previously, there is an array of planning opportunities to be had with the enactment of the TCJA. We would suggest reaching out to your CPA to discuss what strategies you can implement for both your personal tax situation and your business entities in a timely matter. A full assessment of the bill in relation to your tax position may be required.
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