Tax Cut and Jobs Act of 2017
Planning for new lower tax rates effective in 2018 suggests deferring income and accelerating deductions into 2017. A 2018 increase in the standard deduction creates additional incentive to prepaying deductions in 2017. However, taxpayers subject to AMT tax may not yield a full benefit. Daily we are seeing summaries, analysis and opinions of the many provisions effective in 2018 and later years. We have been answering many questions with strategies as provisions have come to light. Generic advice has gone a long way for 2017 but your circumstances are as unique as your fingerprints. Please call with questions.
Below are some highlights:
We will see seven tax rates, five of which are lower, with more generous brackets providing every taxpayer with savings. Qualified dividends and long-term capital gains retain their lower rates. However, the net investment income tax and the additional Medicare tax remain.
The standard deduction almost doubles to $12,000 for single taxpayers, $18,000 head of household and $24,000 married filing jointly. The additional standard deduction for the elderly and blind remain; $1,600 single taxpayers and $1,300 for joint filers. Estimates suggest half of current taxpayers itemizing deductions will benefit from using the standard deduction simplifying tax filing. The change also raises the level at which taxpayers will no longer need to file.
Some sad news; personal exemptions are eliminated reducing the net benefit of higher standard deductions. Child credits double to $2,000 with significantly higher phaseouts and there will be a new $500 family credit for non-child qualifying dependents. The credits and higher phaseout will offset some loss of the dependency exemptions.
There are changes to popular deductions. The mortgage interest deduction will be limited to interest on $750,000 of acquisition indebtedness in 2018. However, the current $1,000,000 limit still applies to mortgages acquired before December 15, 2017. Second home mortgage interest will be allowed within those limits but the home equity loan/line of credit deduction goes away.
Changes to state and local taxes (SALT) are one of the most publicized. Complete repeal was replaced with an annual $10,000 limit on nonbusiness tax deductions including income and property taxes. The sales tax deduction remains an alternative to a state income tax deduction.
Medical expenses will be beneficial when exceeding 7.5% of adjusted gross income for 2017 and 2018. Prior to passage expenses had to exceed 10%.The act also repeals all miscellaneous itemized deductions.
The alimony deduction is repealed but only for new agreements executed after December 31, 2018. Divorces to be finalized in 2018 should retain alimony as deductible to the payor and includable by the recipient.
Business benefits include the 50% bonus depreciation rising to 100% for new and used assets in service after September 27, 2017. IRC Section 179 immediate expensing rises to $1,000,000 from $510,000. A popular change will include an almost triple increase in vehicle depreciation for 2018. The prior first year cap limited the benefit to $3,160 and will become $10,000. New will be a 20% reduction in tax rates applicable to pass through income from partnerships, S corporations and sole proprietorships. The 20% reduction includes limits applicable to professional service providers above adjusted gross income thresholds ($315,000 on joint returns). On the downside, the section 199 domestic production activities deduction and non-real property like kind exchanges are eliminated. NOL (net operating loss) deductions will be limited to 80% of taxable income from 100% with limits on carryback years.
The ability to undo Roth conversions (recharacterization) is repealed.
While the alternative minimum tax (AMT) remains, the exemption rises about 25% to $70,300 for single taxpayers and $109,400 joint filers. The phase out of the exemption also rises to reduce taxpayer’s exposure to AMT tax.
Penalties are effectively repealed after 2018 for the Affordable Care Act individual shared responsibility regime.
Some changes will need more clarification. Rules for deductible business meals are being revised. 529 plans and ABLE accounts are being modified.
The estate and gift tax exclusion doubles for 2018 through 2026. Effectively $11,000,000 will be exempt from federal estate tax in 2018. In addition, heirs will still enjoy a “stepped up, date of death” basis for inherited assets.
For corporate entities, the maximum income tax rate drops to 21% from 35% for 2018. The beneficial dividends received deduction is reduced slightly but the corporate AMT tax is repealed. Employers will get a temporary credit for paying employees on family or medical leave.