The Tax Cuts and Jobs Act was signed into law on December 22, 2017. This law means significant changes for both individuals and businesses. While all changes are not listed below, it does include a good summary of the legislation that could impact you or your business. Most changes will take effect for 2018 – those with an effective date other than 2018 have been noted:
- Individual Tax Rates – the new law modifies the existing tax rate structure. The lowest rate of 10% remains and the top rate was reduced from 39.6% to 37% with all rates in between being reduced. The new rates will be 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Capital gain rates remain unchanged.
- Standard Deduction – the standard deduction has been increased to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for single and married filing separate taxpayers – approximately twice as much as the 2017 standard deduction. As a result, many taxpayers will no longer itemize their deductions. The additional standard deduction for the aged or blind will continue.
- Exemptions – have been eliminated. Taxpayers will no longer claim personal or dependent exemptions.
- Child and Family Tax Credit – the child tax credit for children under age 17 has been increased from $1,000 to $2,000. There is also a new $500 credit for dependents who are not qualifying children (i.e. parent, etc.).
- State and Local Taxes – deductions for state and local income and property taxes are limited to a combined total of $10,000. Property taxes incurred in a trade or business would continue to be fully deductible on Schedule C, Schedule E or Schedule F.
- Mortgage Interest – principal residence/second home mortgage interest is still deductible on debt up to $750,000 ($1,000,000 previously), beginning with loans taken out in 2018. Interest on home equity loans are no longer deductible.
- Miscellaneous Itemized Deductions – this deduction for items exceeding 2% of adjusted gross income has been eliminated. Items no longer deductible include unreimbursed employee expenses, tax preparer fees, investment expenses, union dues and hobby expenses.
- Medical Expenses – for 2017 and 2018, medical expenses are deductible once they exceed 7.5% of adjusted gross income, a reduction from the previous 10% limitation.
- Limitation on Itemized Deductions – for higher income earners, itemized deductions were previously reduced (up to 20%) depending on filing status and income level. This phaseout limitation has been eliminated.
- Moving Expenses – the deduction for job-related moving expenses has been eliminated, with the exception of moving and storage expenses by members of the military.
- Alimony – for divorce agreements signed after December 31, 2018, alimony will no longer be deductible by the paying spouse and will not be reportable income to the receiving spouse.
- Health Care Individual Mandate – for 2019 and beyond, there is no longer a penalty for taxpayers who do not have health insurance.
- Estate/Gift Tax Exemption – the estate and gift tax exemption has increased to $11.2 million per individual beginning in 2018.
- Alternative Minimum Tax – the individual AMT has been retained under the new law but the exemption amounts have increased, subjecting fewer taxpayers to the AMT. Corporate AMT has been repealed.
- 529 Plans – distributions from a 529 plan can now be used for the cost to attend public, private or religious elementary and secondary schools, limited to $10,000 per student.
- C Corporation Tax Rate – the corporate tax rate is now a flat 21%, versus the old rates ranging from 15%-35%.
- New 20% Passthrough Deduction – applies to sole proprietors, partnerships, LLC’s and S corporations. Income earned from these entities may be reduced by up to 20% depending on the taxable income of the individual taxpayer. Additional limitations apply to those taxpayers with joint taxable income above $315,000 ($157,500 for single taxpayers) or for those with income from the following trades or businesses: health, law, accounting, actuarial services, performing arts, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees/owners.
- Increased Section 179 Expensing – the maximum depreciation amount a taxpayer may expense has been increased to $1,000,000 ($510,000 previously) with a phase-out limitation beginning at $2.5 million ($2,030,000 previously).
- Bonus Depreciation – for qualifying property purchased after September 27, 2017, the 50% bonus deduction on new assets has been increased to 100% and will now include both new and used.
- Like-Kind Exchanges – this tax-saving strategy can now only be used only for real property, not on equipment.
- Farm Depreciation Changes – for new equipment used in a farming business, the cost recovery period is reduced from seven to five years. Additionally, farmers can now use the 200% declining balance method (150% declining balance previously required) on assets with a 3-10 year class life.
- Net Operating Loss Carrybacks – have been eliminated, with the exception of farmers who receive a two-year carryback provision. Carryforwards are limited to 80% of taxable income.
- Domestic Production Activities Deduction – has been repealed.
- Meals and Entertainment – deductions for entertainment are now disallowed. The current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or on the premises of the employer.
As you can see, there have been major changes to the tax code under the Tax Cuts and Jobs Act. If you have any questions on how this new law impacts you or your business, please feel free to contact one of our CPAs at (616) 642-9467 or request a complimentary accounting consultation.
By: Joe Turnes