The final Tax Cuts and Jobs Act (TCJA) has over 1,000 pages. Below is a summary of a few, major items that will impact you in the near future, including:
- New tax rates
- Itemized deduction limitations
- Summary items discussed below
- Cut the final tax brackets to seven different categories and lowered the rates per bracket. Find your rate.
- Standard deduction was increased to $24,000 for married filing joint returns; $18,000 head of household and $12,000 for single.
- Capital gains rates stay intact from 2016. – 20% plus the 3.8% surtax.
- Alternative minimum tax is still in place, albeit modified and to adjust annually with inflation adjustments.
- Itemized deductions are receiving the greatest “buzz” of recent days. In particular:
- The deduction for non-business state and local income, sales and property taxes will be limited to $10,000 in aggregate ($5,000 for married taxpayers filing separately).
- The act repeals all miscellaneous itemized deductions that were previously subject to the 2% floor. Miscellaneous deductions included investment fees, tax preparation expenses and unreimbursed employee business expenses. However, the deduction for investment interest expense remains unchanged.
- The adjusted gross income limit on cash contributions is increased from 50% to 60%.
- 529 Savings Plans can be withdrawn tax-free if used for higher education expenses. The act now allows up to $10,000 per year to be used for elementary and high school tuition and funds to be used for private and religious schools.
- The deduction for mortgage interest is subject to the following rules:
- Interest on acquisition debt currently in existence can be deducted under current rules.
- The $1 million debt mortgage limit is reduced to $750,000 for debt incurred after December 15, 2017, and will only include mortgage interest deduction on a principal residence and second residence.
- Home equity interest will be nondeductible.
- The final act includes a repeal of the Shared Responsibility Payment (Individual Mandate) under the Affordable Care Act after 2018.
- While the above-the-line educator costs is not repealed, the act eliminates many tax credits and income exclusions, including:
- Moving expenses other than those in Armed Forces.
- Deduction or alimony payments effective for any divorce decree or separation agreement executed or modified after 2018.
- Exclusion for employee achievement awards.
- Elimination of the Deduction for Domestic Production Activities.
- Credit for clinical testing expenses for certain drugs for rare diseases or conditions is reduced to 25%.
- Rehabilitation credit is not completely repealed, but limited to 20% for certified historic structures and repealed for pre-1936 non-historic structures.
- Disabled Access Credit.
- Retain and simplified the Earned Income Tax Credit to improve efficiency.
- Reduced top corporate tax rate from 35% to 21%.
- Eliminates corporate alternative minimum tax.
- Allows immediate expensing of 100% of the cost of new investments in depreciable assets acquired after September 27, 2017, and before January 1, 2023. (The placed-in-service date will be extended for one year for property with a longer production period).
- Unlike the present bonus depreciation rules, the asset does not have to be new property; however, it must be the business taxpayer’s first use of such property.
- Qualified property does not include any property used in a real property trade or business.
- Section 179 expensing is increased to $1 million for years 2018 to 2022. A phase-out of the Section 179 benefit will begin when the purchases exceed $2.5 million. (Qualified energy efficient heating and air conditioning property will be included as Section 179 property).
- However, the recovery period for qualified improvement property is set at 15 years. The separate definitions of qualified leasehold improvement, qualified restaurant and qualified retail improvement property are eliminated.
- Caps will be $10,000 for the first year a vehicle is placed into service, (currently, $3,160).
- Every business, regardless of form, would be subject to disallowance of a deduction for net interest expense in excess of 30% of the business’ adjusted taxable interest. Net interest expense is determined at the tax filer level (e.g., the partnership versus the partner). Adjusted taxable income is business taxable income without regard to business interest expense, business interest income, net operating losses, depreciation, amortization and depletion. Disallowed interest under this rule becomes an indefinite carryover as an attribute of the business (not its owners). Businesses with average gross receipts of $25 million or less would be exempt from the interest limitation rules. (There is also an election for real estate trade or businesses to elect out of this limitation, but the cost is that use of the Alternative Depreciation System is required).
- Eliminate the deduction under Internal Revenue Code § 199 for domestic production (DPAD).
- Net Operating Losses (NOLs) would generally not be eligible for a carryback. However, any carryover can be used only to the extent of 80% of taxable income. This rule will apply to losses arising in tax years beginning after December 31, 2017. Additionally, the carryforward period will be indefinite.
- Research and Development (R&D) costs are subject to potential change. While the R&D credit is retained; for tax years 2022 and later, R&D expenses will not be subject to immediate write-off, but will be subject to mandatory five-year amortization (15 years for research outside of the US). On retirement, abandonment or disposition of property, the unamortized basis will continue to be written off over the balance of the amortization period.
- After 2017, like-kind exchanges will apply only to real property, not held for sale, subject to a transition rule allowing for an exchange for personal property if there is a disposition of relinquished property or acquisition of replacement property by December 31, 2017.
- No deduction will be allowed for entertainment, amusement or recreation activities facilities, or membership dues relating to such activities or other social purposes. However, the current deduction for business meals (subject to the 50% limitation) will be retained.
- Section 162(m) related to limitations on deductions for compensation to executives has been modified. The exception to the $1 million compensation limit for executives of publicly traded companies for commission and performance-based compensation, will be repealed effective for years beginning after December 31, 2017.
- Corporations and partnerships with corporate partners with average gross receipts of up to $25 million (indexed for inflation) are allowed to use the cash method of accounting. Existing corporation that meet this gross-receipts threshold can automatically change their accounting method.
Pass Through Entities
- An individual taxpayer may deduct 20% of domestic qualified business income from partnership, S corporation or sole proprietorship.
- The amount of the deduction will be limited to the greater of:
- 50% of W-2 wages paid by the business or;
- The sum of 25% of W-2 wages paid by the business and 2.5% of business capital.
- The wage limitation does not apply if taxable income is less than $157,500 (single) or $315,000 (joint) and applies fully if taxable income exceeds $207,000 (single) or $415,000 (joint).
- Trusts and estates will qualify for this deduction.
- The deduction is a post adjusted gross income item.
- The deduction is not affected by whether the owner is passive or active.
- For specific service businesses, such as those in accounting, law, consulting, and investing, but not engineering or architecture, the 20% deduction will apply only if the taxpayer’s taxable income is less than $157,500 (single) or $315,000 (joint). No deduction will be allowed if the taxable income exceeds $207,000 (single) or $415,000 (joint).
- The amount of the deduction will be limited to the greater of:
- The act changes the long-term capital gains holding period for certain assets held in partnerships engaged in investment and real estate activities (carried interest). After 2017, a three-year holding period is created for long-term capital gain treatment of gains for a carried interest (instead of the typical one year requirement).
This email was intended to be a summary of new tax changes as a result of the Tax Cuts and Jobs Act of 2017, and is not all inclusive. For a particular question or comment regarding your personal situation, please contact our office.