The Tax Cuts and Jobs Act: The New Provisions and How to Prepare Your Individual and Business Income Taxes
The Tax Cuts and Jobs Act was signed into law on December 22, 2017 by President Donald Trump. Changes to individual income taxes include lowered tax brackets, increased Alternative Minimum Tax thresholds and higher estate, gift and generation skipping tax exemptions. For businesses, changes include a reduced corporate tax rate and the repeal of the Corporate Alternative Minimum Tax.
Here is a summary of provisions, year-end planning opportunities and tips for how to start planning ahead for 2018 and beyond.
What the Tax Bill Means for Individuals
- Tax Rates: The tax rates are lowered for all taxpayers. The brackets include a 10%, 12%, 22%, 24%, 32%, 35%, and 37% bracket. The 37% bracket for individuals is $500,000 and for married filing jointly will be $600,000.
- Alternative Minimum Tax (AMT): The AMT remains but the thresholds at which it becomes applicable increase to $109,400 for married filers and $70,300 for single filers. Phase out exemption amounts are $1,000,000 for married taxpayers and $500,000 for single taxpayers.
- Federal Estate, Gift and Generation Skipping Tax: The tax exemptions are increased to $10 million per person and will be adjusted for inflation. There is no mention of a total repeal of the estate, gift or generation skipping tax.
- Child Tax Credit: The Child Tax Credit will be $2,000 per child under age 17 with $1,400 being a refundable amount. The credit phases out at $400,000, not subject to inflation. There is also a $500 nonrefundable credit for non-qualifying dependents.
- Personal Exemption: The personal exemption is eliminated.
- Standard Deduction: The standard deduction is doubled to $12,000 for single filers and $24,000 for married couples, adjusted for inflation.
- Itemized Deductions: All miscellaneous itemized deductions subject to the 2% floor are eliminated. This includes tax preparation fees, investment interest, employee expenses (other than teacher’s expenses up to $500 – $250 per teacher).
- Mortgage Interest: The mortgage interest deduction is limited for interest on loans over $750,000 acquired after December 15, 2017. The $1,000,000 limitation remains for debt acquired before December 15, 2017. The interest on home equity indebtedness is eliminated.
- State, Income and Property Tax Deductions: State, local, and foreign income and property taxes deductions are limited to $10,000.
- Medical Expenses: For tax years 2017 and 2018, the medical expense deduction floor is reduced to 7.5% of adjusted gross income.
- Moving Expenses: Moving expense deductions are suspended.
- Cash Contributions: The AGI limitation on cash contributions increases to 60%.
- Tuition Expenses: Expenses up to $10,000 per year for tuition in connection with enrollment in elementary or secondary schools, whether they be public, private, or religious, can now be taken out of 529 accounts.
- Net Operating Loss: The Net Operating Loss deduction is limited to 80% of the taxpayer’s taxable income for tax years beginning in 2018.
How the Bill Impacts Businesses
- Tax Rate: The corporate tax rate is permanently reduced from 35% to 21%.
- Corporate Alternative Minimum Tax (AMT): The AMT is repealed starting in 2018.
- Business Income Deductions: Business taxpayers (other than C Corporations) are allowed a deduction of up to 20% qualified business income. This includes business income from a partnership, S corporation, and sole proprietorships. The provisions for this deduction are complicated and limited for many businesses.
- Accounting Methods: Companies with average gross receipts of up to $25 million may now use the cash method of accounting.
- Real Estate and Improvements: Deprecation recovery periods are accelerated on residential and non-residential real estate and improvements placed into service after December 31, 2017.
- Paid Family Leave: The Act contains benefits for employers that provide paid family leave to its employees. Certain eligible employers can claim a business credit for 12.5% of the benefits paid to qualifying employees, provided the plan meets certain thresholds.
- Entertainment: The deduction for business entertainment expenses has been eliminated.
Year-End Planning Opportunities
Before the end of the year, some individuals may still be able to take advantage of some last minute planning opportunities.
- Pay your fourth quarter state estimated taxes before December 31, 2017. The Act specifically prohibits taking a deduction for 2018 taxes paid in 2017; therefore, there is no advantage to making payments in excess of your 2017 tax liability.
- There is no such limitation on prepayment of 2018 real estate taxes. Consider prepaying your 2018 real estate taxes before December 31, 2017. If you pay your real estate taxes through your mortgage company make sure to call and let them know you already paid 2018.
- Consider paying other outstanding items, such as your tax preparer invoices or employee business expenses.
- Prepaying state taxes and expenses may not be a benefit to all taxpayers because of the alternative minimum tax.
Future Planning Opportunities
As more detail and regulations come out consider ongoing planning opportunities:
- With the change in income tax rates and the increased estate tax exemptions, closely held business owners should assess whether their company’s current structure and ownership is best from both an income and estate planning perspective.
- For business taxpayers allowed a deduction of up to 20% qualified business income, the provisions for this deduction are complicated and limited for many businesses. Business owners should consult with an attorney.
We will continue to monitor updates to the Tax Law and will provide a more detailed alert on the new business income tax provisions and future planning strategies for businesses.