MW Tax Cuts and Jobs Act 2017

Tax Cuts and Jobs Act of 2017

 

Summary

 

The President signed the Tax Cuts and Jobs Act into law on December 22, 2017.  The law makes sweeping changes that will affect all individuals and business.  There were 502 pages of new law, much of it written in something that resembles English.  This is a summary of some of the changes affecting most people but ignores many of changes that do not affect most of our clients.

There has been massive coverage on the new law, generally focusing on one aspect or another, depending on the political bent of the source.  The truth is that the only way to quantify the effect on you is to look at the provisions in total.  Most taxpayers will come out ahead.  Some estimates are as high as 91%.  But that means some taxpayers will be paying more.

Much has been made about many of the provisions sunsetting in 2026.  Given than the tax code has never gone seven years without changes should alleviate most fears.

 

Individuals

 

Changes for 2017

 

There were very few changes that affect last year.  The two with the most impact involve medical deductions and casualty losses. 

The law reduced the threshold for deducting medical expenses back to 7.5% of Adjusted Gross Income for 2017 and 2018.  The original 2017 threshold was 10% of AGI.  So if you have AGI of $100,000, you may deduct medical expense over the $7,500 ($100,000 x 7.5%).  The threshold returns to 10% in 2019.

As for casualty losses, the new law carves out a deduction for losses incurred in a Presidentially-declared disaster area in excess of a $500 threshold.  This change also includes 2016.  This threshold is far lower than the 10% of AGI threshold required by other personal casualty and theft losses.

Changes for 2018

Tax Rates:

The law reduced tax rates in all but the lowest bracket and changed the upper bracket levels.  The new tax tables are on Schedules 1, 2, and 3 at the end of this summary.  For illustration purposes, we have computed the savings (additional tax) for taxable income at various levels:

                                                                                   Savings Based on Filing Status

                                                                                                                    Head

                                Taxable income                    Married               Household                 Single

                           $     50,000        $     928.50      $   1,092.00   $   1,214.25

                                100,000             2,428.50           2,237.00        2,553.25

                                200,000             6,044.00           1,821.50        3,380.75

                                500,000          15,765.20          (2,594.80)         (200.55)

                             1,000,000          30,765.20         10,405.20      12,799.45

 

Itemized Deductions:

 

While Congress was giving with lower rates, it was taking away on itemized deductions.

 

Taxes – One of the most publicized changes was the new limitation on state income and property taxes.  In the past, all state income tax, real estate tax, and personal property tax was deductible.  You may have lost the deduction if you were paying Alternative Minimum Tax, but the messy calculation disguised the fact you lost the deduction.  Now, all state tax is limited to $10,000.  Most taxpayers are not affected by this change.  However, high income taxpayers and those that live in high income or property tax states stand to lose significant deductions, taking much of the tax rate savings.

 

Mortgage Interest:  New mortgage interest is deductible on the first $750,000 borrowed.  Mortgages financed before 2017 still have the $1,000,000 limit.  Also, the new law eliminates the deduction for interest on home equity loans.  Speculation is that home equity loans used to pay for home improvements would still be deductible, but the IRS will have to issue regulations.

 

Causality Losses. Before 2017, you could deduct any causality or theft loss that exceeded 10% of AGI, plus $100.  In 2018, only causality losses in Presidentially-declared disaster area will be allowed, but the threshold has been reduced to $500.  In addition, any such deduction will also increase the standard deduction available.  So that deduction will reduce income whether you itemized or not.

 

The Pease Limitation. Under the old law, your itemized deductions were reduced if your income exceeded certain levels.  The reduction served as a hidden tax on higher incomes.  This reduction has been eliminated.

 

Miscellaneous itemized deductions subject to the 2% of AGI threshold have been eliminated.  For most taxpayers, the 2% threshold wiped out these deductions anyway.  For those who used these deductions, the elimination of these deductions may be painful.  The common deductions are:

 

Investment Expenses.  The deduction for fees from brokerage firms base on a percentage of your account has be eliminated.

 

Employee Business Expense.  If you deducted expenses, like meals and entertainment, as a salesman, that deduction is gone.  If you deducted business mileage for driving on company business, that deduction is gone.  If you have significant out-of-pocket employee expenses, you will want to discuss revising your compensation package with your employer.

 

Tax Preparation.  Preparation of your personal return is no longer deductible.  Any fees allocable to business reporting, such as farm, proprietorship, or rental income, are still deductible on their reporting forms.

 

Standard Deduction and Exemptions

 

The standard deduction for all filing statuses has been increased, but all exemptions have been eliminated.  The table below summarizes the standard deductions under the old law and the new law.

 

                        Status                                      Old Law             New Law

                        Single                                         $ 6,500                $12,000

                        Head Household                          9,550                  18,000

                        Joint                                             13,000                  24,000

                        Dependent                                    1,050                    1,050

                       

                        Additional amount for blind or over 65:

                        Single                                             1,600                    1,600

                        Married each                                 1,300                    1,300

 

                        Exemption                                     4,150                         -0-

 

This change is not clearly positive or negative.  A single taxpayer who does not itemize with no dependents will be better off, taking $12,000 from income instead of $10,650 ($6,500+$4,150).  A taxpayer who files head of household with 3 children loses, now taking $18,000 from income instead of $26,150.  Someone who itemizes will have several changes to consider.  Every taxpayer will have to calculate their own position.

 

Child Tax Credit

 

To make up for taking away the dependency exemption, the child tax credit was increased from $1,000 to $2,000.  Only $1,400 of the credit is refundable.  In addition, the phase out which eliminated the credit on a joint return with AGI over $110,000 will now only eliminate the credit when AGI is over $400,000.  This will offset the additional tax from the loss of the exemption for children under the age of 17.  However, children who are 17 or older will have no exemption and no child tax credit.

 

New Family Tax Credit

 

There is a new nonrefundable tax credit of $500 for a dependent that is not a child.

 

Adjustments to Income:

 

Continuing the philosophy of taking away some of the benefits, several adjustments to income have been eliminated.  Adjustments are deductions from income that are deductible whether or not you itemize.

 

Moving Expenses.  Unless you are in the military, moving expenses for employment purposes are no longer deductible.  Employer payments to move will now be taxable.

 

AlimonyAfter 2018, alimony will not be deductible by the payor and will not be income to the recipient.  This will fundamentally change alimony negotiations.  Alimony agreements in place prior to 12/31/2018 will grandfathered.

 

Domestic Production Activities Deduction.  DPAD was repealed and replaced with a separate 20% deduction for pass-through entities, which is discussed later.

 

Other Key Provisions:

 

Obamacare Mandate.  The penalty for not having minimum essential health insurance coverage has been repealed after 2018.

 

Expansion of 529 Plans.  In 2018, you will now be able to use a 529 plan to pay for up to $10,000 per year for elementary or secondary education tuition.  While contributions to a 529 plan are not deductible, any earnings of the plan are not taxable. Plus, some states allow a deduction.  Missouri allows a deduction up to $16,000 on a joint return.

 

Kiddie Tax.  The old law imposed a complicated, cumbersome taxation system on investment income of dependents called the kiddie tax.  The good news is that the system is simplified.  The bad news is that the tax will likely increase.  Now any income subject to the kiddie tax will be computed on the estate and trust income tax schedule rather than the parent’s rates.  This table is shown on Schedule 4 at the end of this summary.

 

Alternative Minimum Tax (AMT).  Individual AMT was not repealed.  However, the exemption amounts were increased and the phase out levels were increased.  Combined with the elimination of miscellaneous deductions and the limitation of the state tax deduction, most taxpayers will be excluded from AMT.

 

20% Pass-through Deduction.  This is a new deduction which will come after Adjustments to Income and before Itemized Deductions.  It is the first structural change in the taxable income computation in over 70 years.  If you are reporting business income from your proprietorship, rental property, an S corporation, or a partnership, you will be eligible for a deduction up to 20% of that income.  The calculation is very complex, depending on the type of business, reported wages, and total fixed assets.  This is definitely not a simplification; however, there are definitely some tax savings involved.

 

Limitation on Business Losses.  Business losses are now limited to $500,000 on a joint return.  Excess losses will carry forward.

 

Net Operating Losses.  Carryback on NOLs is no longer allowed.  Carryovers will be limited to 80% of income.

 

 

Estates

 

The Estate Tax was not repealed.  However, the lifetime credit against estate taxes was doubled.  There will be no tax on estate of $11.6 million.  If you are married, the effective limit on taxable estate in $23.2 million. 

 

As important, the rules that step-up basis on the date of date were not changed.  These are the rules that allow an heir to avoid capital gains tax on inherited assets.

 

 

 

C Corporations Changes

 

The tax rate on C Corporation earnings was reduced to 21%.  In addition, a lower rate on repatriated foreign earnings was included, as well as a 5-year payment schedule.  Plus, a new tax on foreign earnings that are not brought into the country was imposed.

 

Business

 

Several changes to business deductions were made in the new law:

 

Bonus Depreciation.  For assets acquired after 9/27/2017 and before 1/1/2023, 100% bonus depreciation is available.  Bonus depreciation has been expanded to include used property.  Vehicles have separate limits.

 

Vehicle Depreciation.  Under 2017 law, a “luxury” automobile cost $16,935.  This was the allowable limit on depreciation in the first six years.  This is increased to $52,880 in 2018.  If nothing else, you can now say luxury car with a straight face.

 

Section 179.  After 2017, the Section 179 expensing limit is increased to $1,000,000.  For those looking for the difference in 100% bonus depreciation and Section 179, there are 2 differences:  1) 100% bonus depreciation phases out between 2023 and 2026 and 2) bonus depreciation can create a loss.  Section 179 is limited to income at the entity level.

 

Section 1031 Exchanges.  Like-kind exchange rules now only apply to real property used in a trade or business or for the production of income.  Prior to 2018, IRS regulations effectively eliminated the application of the like-kind rules to personal property, except for trade-ins of cars for cars or trucks for trucks.

 

Small Business Changes

 

The law raises the threshold on the required use of certain accounting methods to annual revenue of $25 million, up from $10 million.

 

Expanded Cash Basis of Accounting.  Small businesses can use the cash basis of accounting, allowing it to pay tax based on sales collections and bills paid.  Companies with large accounts receivable balances should consider electing the cash basis.

Exemption from Uniform Capitalization Rules.  Small businesses are not required to use the onerous UNICAP inventory rules.

Completed Contract for Long-term Contracts.  Small construction contractors can use completed contract accounting, instead of percentage of completion.

 

Client Entertainment.  Client entertainment expenses are no longer deductible.  Business meals are still 50% deductible.

 

Employee meals and refreshments. Meals provided for the convenience of the employer (pizza in tax season for the overworked staff) is only 50% deduction in 2018.  Refreshments provided to employees, like coffee and soda are only 50% deductible.

 

Business Interest Cap.  Business interest expense is limited to 30% of income before interest, depreciation, amortization with revenue over $25 million.  Farms, inventory floor plan, public utilities, and real estate companies are exempt.  Unused interest is carried forward.

 

Summary

 

There are many more provisions affection everything from insurance companies to FDIC premiums to tax-exempt entities to technical terminations.  This was a summary of the highlights.  If you have any questions, call us at 314-646-1040.

 

 

 

 

 

 

Schedule 1

Joint Returns and Surviving Spouse

Prior Law

New Law

Taxable Income

Rate

Taxable Income

Rate

0-19,050

10%

0-19,050

10%

19,050-77,400

15%

19,050-77,400

12%

77,400-156,150

25%

77,400-165,000

22%

156,150-237,950

28%

165,000-315,000

24%

237,950-424,950

33%

315,000-400,000

32%

424,950-480,050

35%

400,000-600,000

35%

Over 480,050

39.6%

Over 600,000

37%

 

 

 

 

 

 

Schedule 2

Head of House Hold

Prior Law

New Law

Taxable Income

Rate

Taxable Income

Rate

0-13,600

10%

0-13,600

10%

13,600-51,850

15%

13,600-51,800

12%

51,850-133,850

25%

51,800-82,500

22%

133,850-216,700

28%

82,500-157,500

24%

216,700-424,950

33%

157,500-200,000

32%

424,950-480,050

35%

200,000-500,000

35%

Over 480,050

39.6%

Over 500,000

37%

 

Schedule 3

Single

Prior Law

New Law

Taxable Income

Rate

Taxable Income

Rate

0-9,525

10%

0-9,525

10%

9,525-38,700

15%

9,525-38,700

12%

38,700-93,700

25%

38,700-82,500

22%

93,700-195,450

28%

82,500-157,500

24%

195,450-424,950

33%

157,500-200,000

32%

424,950-480,050

35%

200,000-500,000

35%

Over 480,050

39.6%

Over 500,000

37%

 

Schedule 4

Estates and Trusts

Prior Law

New Law

Taxable Income

Rate

Taxable Income

Rate

0-2,550

15%

0-2,550

10%

2,550-6,000

25%

2,550-9,150

24%

6,000-9,150

28%

9,150-12,500

35%

9,150-12,500

33%

Over 12,500

37%

Over 12,500

39.6%

 

 

 

 

 

 

 

 

 

 

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Please visit our website for the latest tax information and articles, tax calendars, financial tools and tax forms.  www.mwstlcpa.com

 

 

 

 

 

Martz & Wilson, LLP,

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314-646-1040