Highlights of the Tax Cuts and Jobs Act
© 2017, 2018 by Michael Gray, CPA
January 4, 2018
Congress passed the Tax Cuts and Jobs Act on December 20, 2017 and President Trump has approved the legislation.
My printout of the Act and Committee Reports is 1097 pages. I can't tell you all of the details. It's going to take some time to sort them out. There were a lot of changes to the legislation in Congressional bargaining, so there will be a lot of confusion about what the changes are. What wasn't included is almost as important as what was included.
The impact of the changes for taxpayers will have to be determined on a case by case basis.
Mostly effective after 2017 and expiring after 2025, key changes for individuals include:
- Reduction of the maximum income tax rate from 39.6% to 37%. Head of household continues to have a separate rate schedule. Maximum long-term capital gains rates are unchanged at 20%. The net investment income tax of 3.8% wasn't repealed and still applies.
- The standard deduction for married couples filing joint returns is increased to $24,000, $18,000 for head of household and $12,000 for singles. Together with the other changes, most individuals will now use the standard deduction (eliminating the current tax benefits of home ownership).
- As a point of clarification, the tax rules for rental real estate are basically unchanged.
- Deductions for personal exemptions are repealed.
- The deduction for alimony is repealed. To reduce the hardship of the change, it will only apply to divorce or separation instruments executed after December 31, 2018, or for any divorce or separation instrument executed on or before December 31, 2018, and modified after that date, if the modification expressly provides that these changes apply to the modification.
- The deduction for moving expenses is repealed.
- The limitation for tax deductions for charitable contributions is increased from 50% to 60% of adjusted gross income.
- Miscellaneous itemized deductions that are currently subject to the 2% of adjusted gross income floor are repealed, including asset management fees, employee business expenses, and tax return preparation fees and others.
- The deduction for non-business income taxes including real estate taxes, personal property taxes (including vehicle registration in some states), state income taxes and state sales taxes, is limited to $10,000, $5,000 for married persons filing separate returns.
- The phase-out of itemized deductions for high income taxpayers has been repealed.
- The maximum acquisition indebtedness for a principal residence and a second residence for which mortgage interest may be deducted is limited to $750,000. The limit remains $1 million for mortgages incurred before 2018.
- The deduction for interest paid for up to $100,000 of "equity line" indebtedness secured by a residence has been repealed.
- The medical deduction was NOT repealed, but actually enhanced by reducing the "floor" from 10% to 7.5% of adjusted gross income for both the regular tax and the alternative minimum tax.
- Casualty losses and theft losses, except for Presidentially declared disaster areas, are repealed. (This is kicking people when they are down!)
- The change in holding period for the sale of a principal residence was NOT passed!
- The child credit is increased to $2,000 per child, $1,400 of which is a refundable credit. There will be a $500 nonrefundable credit available for qualifying dependents other than qualifying children. The child credit will be phased out at adjusted gross income of $400,000 for married taxpayers filing joint tax returns and $200,000 for other taxpayers. (The increased credit helps compensate for eliminating personal exemption deductions.)
- The repeal of the tuition exemption for graduate students was NOT passed.
- The repeal of deductions for student loan interest was NOT passed.
- The American Opportunity Credit for education expenses was NOT changed.
- Taxpayers will no longer be able to recharacterize (reverse) a conversion from a regular IRA to a Roth after the initial due date of an individual income tax return (usually April 15).
- The change eliminating the ability to change a current year contribution to a Roth IRA or regular IRA contribution up to the extended due date of an individual income tax return (usually October 15) was NOT adopted.
- The alternative minimum tax was NOT repealed, but the exemptions and phaseouts were increased so fewer people will be subject to the AMT. (The ceiling for state and local income and real estate taxes and the elimination of 2% miscellaneous itemized deductions will also contribute to eliminating the AMT for many taxpayers.)
- The exclusion for certain employer-provided housing was NOT repealed.
- The shared responsibility payment for failure to maintain minimal essential coverage under the Affordable Care Act was repealed by giving it a rate of 0%.
Mostly effective after 2017, some of the "permanent" changes relating to businesses include:
- The maximum tax rate regular "C" corporations is a flat rate of 21%.
- "Pass through" income of most businesses, including sole proprietorships, S corporations, partnerships and LLCs taxed as partnerships, will be eligible for a tax deduction of 20% of business income. This is a separate deduction category after adjusted gross income and before itemized deductions and the standard deduction. Most employee (W-2) income and income from personal service businesses such as consulting, medical, accounting, and legal services, won't be eligible for this tax break. A complex limitation applies that is beyond the scope of this summary.
- "Bonus" depreciation for business property will increase from 50% to 100%, effective for property placed in service after September 27, 2017 and before January 1, 2023. The percentage will phase down after 2022. Bonus depreciation is expanded so that used property will qualify.
- The Section 179 limitation for expensing business property is increased to $1,000,000, phasing out when qualifying property exceeds $2,500,000.
- The deduction for domestic production activities is repealed.
- Like kind exchanges for property other than real estate are repealed.
- Net operating loss carryovers will be subject to a limitation of 80% of taxable income before the net operating loss carryover deduction.
- Net operating loss carryovers generally won't expire.
- Net operating loss carrybacks are generally repealed.
- Business losses for taxpayers other than corporations are limited to business income. Excess business losses are added to net operating loss carryovers.
- The depreciation for certain "luxury" automobiles is increased to $10,000 for the year the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year and $5,760 for later years.
- The recovery period for farming equipment is reduced from 7 to 5 years for any machinery or equipment (other than a grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business. Regular MACS depreciation (200% converting to straight-line) will apply for 3, 5, 7 and 10 year farming property.
- "Carried interests" (partnership profits interests for services) generally must be held more than three years to be eligible to be taxed as long-term capital gains.
- Research and experimental expenses (including software development) must be capitalized and amortized ratably over a five-year period, beginning with the midpoint of the taxable year in which the specified research or experimental expenditures were incurred or paid. Expenditures for research and experimentation conducted outside the United States must be amortized over 15 years. The amortization must continue even if the research is abandoned or sold. Expenditures for mineral exploration aren't subject to these rules.
- The corporate alternative minimum tax is repealed.
- Taxpayers may still deduct 50% of food and beverage expenses associated with operating their trade or business. For amounts incurred and paid after December 31, 2017 and before 2026, the 50% limitation is expanded to expenses of an employer associated with providing food and beverages to employees through an eating facility that meets the requirements to be for the convenience of the employer. After 2025, deductions for these employee meals will no longer be deductible.
- No deduction will be allowed for (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion used in connection with any of the above items.
Tax changes relating to tax exempt entities and foreign subsidiaries are beyond the scope of this summary. See your tax advisor for details.
The estate tax was NOT repealed. The lifetime exclusion amount is increased from $5 million, indexed for inflation, to $10 million, indexed for inflation after 2011, for estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026.
Remember, this list isn't complete. See your tax advisor for more details.
Again, this list isn't complete.
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