Archives for January 2018

Individual Summary of Tax Cuts and Jobs Act

Happy New Year – Below is summary of some of the key Individual Provisions of the Tax Cuts and Jobs Act that went into effect January 1, 2018.  Some of the provisions are made permanent, while others only apply to the next ten years.

Standard Deduction – The new tax law will increase the standard deduction to $12,000 for single filers and $24,000 for those married filing jointly.  The increased standard deduction, and limits placed on other deductions, discussed below, means that most taxpayers will no longer benefit from itemizing their deduction.

Prior to tax law changes, the standard deduction was $6,350 for single filers & $12,700 for individuals married filing jointly.

State and Property Taxes – Taxpayers’ state income tax and property tax deduction will be limited to $10,000 per year, combined.

Prior years did not put a limit on the amount of state & property taxes available for deduction.       

Mortgage Interest – The deduction for mortgage interest will be capped to the interest paid on $750,000 of acquisition debt; interest on home equity debt will be eliminated.  Taxpayers with mortgages above $750,000 will still be allowed to deduct the interest on up to $1 million if the debt was incurred prior to December 15, 2017.

Previous tax periods allowed interest expense on mortgage debt up to $1 million and $100,000 of home equity debt.

Charity – Charitable deductions will remain largely unchanged – deductions to qualifying charities are allowable as long as the taxpayer can substantiate all deductions over $250.

Miscellaneous Itemized Deductions – Many miscellaneous itemized deductions will be eliminated.   The deductions no longer allowed include tax preparation fees, investment advisory fees, unreimbursed employee expenses and casualty & theft losses.

Personal Exemptions – The personal exemption deduction will be eliminated.

Prior to the tax law, the taxpayer, spouse and each dependent qualified for a $4,050 deduction.   

Child Tax Credit – To replace the personal exemption elimination, the child tax credit will increase to $2,000 per qualifying child.  The credit is allowed for married taxpayers with income up to $400,000 & single filers with income up to $200,000.  In addition, up to $1,400 of the credit will be refundable for taxpayers with little or no tax liability.

Previously, the credit was limited to $1,000 per child, with the income phase-outs starting at $110,000 & $75,000 for married and single filers, respectively; with smaller amounts eligible to be refunded.   

Alternative Minimum Tax – The alternative minimum tax (AMT) is not repealed, but it has been revised to no longer affect as many taxpayers.  Most taxpayers with taxable income under $1 million, married, and $500,000, single, will no longer be subject to the AMT.

HealthCare Provisions – The penalty for those who do not have health insurance has been repealed.

Education Plans – Up to $10,000 per year from a qualified 529 can be used on elementary and high school education.  There is no cap on the amount that can be used for college expenses.

Prior tax law did not allow 529 plans to be used for elementary and high school expenses.

Tax Rates – The new tax law will maintain 7 tax brackets (10%, 12%, 22%, 24%, 32%, 35% & 37%). The top rate applies to taxable income for married individuals above $600,000 & $500,000 for single filers.

Prior to the tax law change, the 7 tax rates were 10%, 15%, 25%, 28%, 33%, 35% & 39.6%.  The top rate applied to income above $470,000 for married taxpayers and $418,500 for single filers.

As you can see from this overview, the new law affects many areas of taxation. If you wish to discuss the impact of the law on your particular situation, please contact our office.

Business Summary of Tax Cuts and Jobs Act

Below is a summary of some of the key Business Provisions of the Tax Cuts and Jobs Act that went into effect January 1, 2018.  Some of the provisions are made permanent, while others apply to the next 10 years.

Tax Rates – “C” Corporations will have a flat tax rate of 21%.

Prior to the new law, corporations had graduated tax rates from 10% – 35%.

Pass-Through Income Deduction – Individuals that receive income from an S-Corporation, LLC, Partnership or sole-proprietorship, will be allowed a deduction of up to 20% of the qualified business income.  The deduction will be taken at the individual level.

The deduction does not apply to high-income taxpayers receiving pass-through income from service businesses (doctors, dentists, attorneys, accountants, etc.) or other investment-type activities.

Prior to the change, all income from pass-through activities was taxed at the individual’s tax rate (10%-39.6%).  The law effectively lowers the tax rate on pass-through income to that of corporations. 

Domestic Production Activities Deduction (DPAD) – The domestic production activities deduction is repealed for tax years beginning after December 31, 2017.

The DPAD was a deduction of up to 9% of qualified income for domestic businesses that are involved in a wide range of production related industries.  

Depreciation Deductions   

Section 179 – For property placed into service after December 31, 2017, taxpayers may elect to expense up to $1 million.  The election begins to phase-out once a taxpayer places $2.5 million of assets into service during the year. The election applies to both new and used qualifying property.

Prior to the new law, Section 179 expensing was limited to $500,000 & phase-out began at $2 million.

Bonus Depreciation – Bonus depreciation has been retroactively increased to 100% for assets placed into service between September 27, 2017 and January 1, 2023.  Bonus depreciation applies to both new and used property and does not phase-out based on assets purchased during the year.

Prior to change, bonus depreciation was limited to 50% and applied only to new property.

Alternative Minimum Tax (AMT) – The AMT has been repealed for corporations for tax years starting after December 31, 2017.

Like-Kind Exchange – The ability to defer gains and losses on the exchange of similar property will be limited to exchanges of real property (real estate) that is not held for resale.

Prior to the new law, like-kind exchange treatment was applied to the exchange of real property and personal property (equipment, vehicles, etc.).

Meals and Entertainment – The deduction for meals will remain at 50%; while the deduction for entertainment has been eliminated.

Previously, both meals and entertainment were allowed as 50% deductions.

Cash Basis of Accounting – Taxpayers can use the cash basis of accounting if they satisfy the $25 million gross receipts test, regardless of industry.

Prior tax law required taxpayers with gross receipts over $10 million, or the need to account for inventory, were required to file their tax return using the accrual basis of accounting.