On Wednesday, December 20th the House passed the tax reform bill with President Trump’s desk as its next and final stop. This is the biggest overhaul to the tax code in decades. Once signed, the planned effective date of the bill will be January 1, 2018. The bill reduces individual and corporate tax rates, provides tax deductions for taxpayers who own pass-through entities, increases business fixed asset expensing, repeals corporate AMT, makes significant changes to individual credits and itemized deductions, and makes changes to the taxation of foreign income.
Here are the highlights of the key changes affecting individuals, businesses, estate and trusts:
Individuals: Most of the Individual provisions are temporary until the end of 2025 in contrast to the corporate provisions, most of which are permanent.
- There will be seven individual tax brackets with a top individual tax rate of 37% (down from 39.6%). This top tax rate applies to married couples filing jointly with income over $600,000; $500,000 for single filers. Click here to see a complete table of the tax rate changes.
- The AMT exemption increased to $109,400 for married filing jointly and $70,300 for single taxpayers. The exemptions start to phase out at $1,000,000 ($500,000 for singles).
- The standard deduction is doubled to $24,000 for married filing joint and $12,000 for single taxpayers.
- There are several significant changes to itemized deductions:
- The medical expense deduction floor is lowered to 7.5% of AGI (from 10%) in 2017 and 2018.
- State and local tax deduction for real estate, sales, and income taxes is limited to $10,000
- Mortgage interest deduction is limited to $750,000 of acquisition debt. The pre-2018 limitation of $1 million is retained for loans existing prior to December 15, 2017. This still includes your primary and one additional residence.
- Home equity debt deduction is eliminated.
- Miscellaneous itemized deductions subject to the 2% floor are eliminated. This includes certain investment expenses, professional fees and unreimbursed employee business expenses.
- The itemized deduction phase-out is eliminated.
- The personal exemptions are eliminated.
- The moving expense deduction is eliminated.
- The penalty associated with failure to purchase health insurance is eliminated for the months after December 31, 2018.
- The child tax credit is increased to $2,000 (up from $1,000) and the phase out is increased to $400,000 of AGI for married filing jointly (up from $110,000).
- The deduction for alimony (and corresponding inclusion in the income of the receiving spouse) is permanently repealed for any divorce or separation instrument executed after December 31, 2018.
- Excess business losses are limited to $500,000 for married filing jointly taxpayers or $250,000 for single taxpayers other than corporations. Such losses are carried forward and treated as net operating loss carry forwards.
Business Tax:
- The tax rate for taxable corporations is reduced to a flat 21% for tax years beginning after December 31, 2017.
- The corporate Alternative Minimum Tax is eliminated.
- There is a 20% deduction from taxable income for certain pass-through entities, however the deduction is limited to:
- 50% of W-2 wages paid, or
- 25% of wages paid plus 2.5% of the cost of tangible depreciable assets in the business
- Bonus depreciation is increased 100% for qualified depreciable assets purchased after September 27, 2017 and through January 1, 2023 (5 years)
- Net operating losses (NOL) are limited to 80% of taxable income for losses arising in taxable years beginning after December 31, 2017.
- NOLs can be carried forward indefinitely
- NOLs can no longer be carried back to previous years
- Section 179 expensing limit is doubled to $1 million and the expensing phase out threshold is increased to $2.5 million.
- Section 1031 like-kind exchanges are limited to real property not held for sale in the ordinary course of business.
- Domestic Production Activities Deduction (DPAD) is eliminated for tax years beginning after December 31, 2017 for non-corporate tax payers and December 31, 2018 for C corporation taxpayers.
- Repeals use of like-kind exchanges for personal property; Real property is still eligible
- The research and development credit is retained but research expenses must now be capitalized and amortized ratably over a five-year period for amounts incurred beginning in 2022.
- The 50% deduction for entertainment expense is eliminated.
- The capability to deduct some meal expenses has been reduced.
Estates and Trusts:
- Doubles the estate and gift tax exemption amount from $5.5 million to $11 million for individuals through December 31, 2025. (WA state exclusion for 2018 is $2,193,000 per person)
- Increases the federal Generation Skipping Tax exemption amount to $10 million. Effective for generation-skipping transfers made after 2017 and before 2026.
- Four tax rates with a maximum rate of 37%. Click here to see a complete table of the tax rate changes.
International: We will have more detailed analysis in the coming weeks on the new international provisions.
There may be an opportunity for year-end tax planning depending on your specific tax situation. Please contact your Sweeney Conrad professional for help navigating the new laws and year end planning opportunities.