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Tax Cuts and Jobs Act Overview

BY IN Recent News On 14-02-2018

INDIVIDUAL TAX (TEMPORARY) PROVISIONS – most provisions expire after December 31, 2025

  • 7 tax brackets starting at 10%
  • Top bracket is 37% from 39.6% (after 2018, the 7 brackets will be adjusted for inflation)
    • 35% bracket
      • $200-$500K – $300K bracket; singles 37% starts at $500K compared to $418,400 for 2017
      • $400-$600K – $200K bracket; joint 37% starts at $600K compared to $470,700 for 2017
        • increase of $130K
  • Child tax credit
    • Nearly doubled to $2,000 but added a $500 non-refundable credit for qualifying dependents who are not qualifying children
    • Joint phaseout begins at $400K compared to $110K in 2017 AGI
  • Mortgage interest expense deduction
    • 1st and 2nd homes, RVs, and boats up to $750K of acquisition indebtedness in new mortgages under the new law
    • Mortgages taken out before December 15, 2017 – the limit will remain $1 million
      • If you had a binding written contract before December 15, 2017 and purchase the residence before April 1, 2018; would fall under the old law with $1 million limit
    • Unfortunately, home equity loan (HELOC; new or existing) interest that does not qualify for acquisition indebtedness (defined as debt incurred to purchase, construct, substantially improve 1st or 2nd residence and secured by that residence) is no longer deductible
    • Qualifying home equity loan interest, subject to $100K debt cap, is still deductible up to the overall cap for all acquisition debt of $750K
  • State and local taxes, aka the SALT deduction
    • Under the new law, individuals are allowed to deduct up to $10,000 in all state and local taxes (income taxes, real estate taxes, sales taxes, PP taxes)
      • Any taxes paid to carry on a trade or business or rental activity will be deductible (other than income tax on profit)
    • Pretty hot topic just prior to the end of the year was to prepay your 2018 real estate taxes
      • People lining up in local jurisdictions paying their 2018 real estate taxes
    • One of the biggest revenue raisers in the entire tax bill:        On December 28th, the IRS put out a notice stating you can’t get a 2017 deduction for prepaid r/e taxes if you do not have a bill or a 2018 property assessment
  • Alternative minimum tax
    • House bill eliminated the tax; would have been a big win
      • Senate bill left it in
        • We got a slight increase in the exemption amount: $84,000 to $109,400 and the phaseout starts at $1 million (up from $164K) for joint filer
  • Medical expenses – retroactive for 2017
    • We get back to the 7.5% of AGI threshold for 2017 and 2018 for all taxpayers
    • Goes back to 10% for 2019
      • Load up on medical this year
  • Contribution deduction
    • Cash contributions to public charities and certain private foundations limited to 50% of AGI is now 60%
    • BIG CHANGE: The contribution deduction of the amount paid for the right to purchase premium tickets to college sporting events has been eliminated
  • All miscellaneous itemized deductions subject to 2% of AGI have been eliminated (union dues, professional dues, investment fees, tax prep fees, home office expenses, and unreimbursed business expenses)
    • Gambling losses to the extent of gambling winnings will still be allowed
  • The phaseout of itemized deductions would be eliminated for 2017 – $261,500 for individuals and $313,800 for joint filers

OTHER PROVISIONS FOR INDIVIDUALS

  • Alimony payments are not deductible and not picked up as income
    • For any divorce or separation agreement executed after December 31, 2018
      • Divorce attorneys are going to have a big 2018
    • Moving expenses are no longer deductible starting in 2018
      • There is an exception for members of the armed forces
  • 529 plans will now be eligible to pay tuition up to $10,000 per year per student (for private, religious; for elementary and high school)
    • Homeschooling was deleted from the bill, but new legislation has been proposed in late Jan 2018 to reinstate as eligible education expense
  • There are no changes for dividend or capital gain tax treatment, including the FIFO sales rules (20% rate begins at $479,000 – joint)
  • Unfortunately, there are no changes to the Medicare surtax or the net investment tax
  • There are no changes to the gain on sale of your personal residence
  • The college tax credits will not change
  • The itemized deduction for theft and casualty losses is eliminated
    • Exception is for losses attributable to a presidentially-declared disaster
  • The individual health insurance penalty (mandate) was repealed, but not until 2019
  • Kiddie tax
    • The net unearned income of a child will now be taxed at rates applicable to trusts and estates (more compressed brackets), but generally will yield tax savings as the higher tax rates for the parent is disregarded
  • The annual gift exemption is $15K for 2018 and adjusted for inflation
  • Side note: The new law eliminates the deduction for members of Congress for living expenses while away from their home state
  • Lifetime estate and gift exemption is roughly $11.2 million ($22.4M for married couples)

CORPORATE TAX CUT

  • Unlike the individual tax changes that have a sunset date of 12/31/25, nearly all of the corporate tax revisions are permanent
  • Congress seemed committed to reducing the corporate tax rate well below the top individual rate
  • Facts and circumstances may be different
    • For tax years beginning after 12/31/17, there is now a flat tax at 21%
      • Repeals the maximum corporate tax rate on net cap. gains
      • Does not require a special rate for personal service corp.
      • Eliminates the corporate alternative minimum tax
  • The dividends received deduction changes
    • Corporations that receive dividends from other taxable corporations – the 80% dividends received deduction is now 65% and the 70% dividends received deduction is now 50%
  • Depreciation changes

*Effective for property placed in service 9/27/17*

  • The act extended and modified bonus depreciation to immediately deduct 100% of eligible property in the year placed in service through 2022 – phases down through 2026
  • The act removed the requirement that it is only available for new property
  • The luxury auto depreciation limits have also increased if bonus depreciation is not claimed
    • Indexed for inflation
  • Section 179 expensing increased the maximum deduction to $1 million and increased the phaseout threshold to $2.5 million
    • These amounts will be indexed for inflation
    • *The act expanded the definition of qualified real property eligible for 179 including roofs, HVAC equipment, fire protection, and alarm and security systems for nonresidential property
  • Entertainment expenses
    • The act disallows a deduction for an activity generally considered to be entertainment, amusement, or recreation; membership dues for any club organized for business, pleasure, recreation, or other social purposes; or a facility or portion thereof used in connection with any of the above items
    • 50% deductible of food and beverage expenses associated with operating their trade or business – employees on work travel and for the convenience of employer
  • Like-Kind exchanges
    • 1031 exchanges will be limited to exchanges of real property that is not primarily held for sale
    • The act applies to exchanges completed after 12/31/17
  • Interest deduction limitation
    • The deduction for business interest is limited to business interest income (not investment income), 30% of taxpayer’s adjusted taxable income for the year, and the taxpayer’s floor plan financing interest for the tax year
    • With rising interest rates, this may be an issue for some companies
    • Generally not applicable to small companies ($25 million/revenue) and most real estate business
  • Business pass through companies – very complicated area and little guidance
    • Partnerships, S Corps, or Sole Proprietorships who have domestic qualified business income are entitled to a deduction of 20% of taxable income of the business
    • The deduction reduces taxable income, not adjusted gross income, and eligible taxpayers are entitled to the deduction whether or not they itemize
    • The 20% deduction is also allowed for qualified REIT dividends and qualified publicly traded partnership income
    • Trusts and estates are eligible for the 20% deduction
    • Specified service business in the fields of health, law, accounting, performing arts, consulting, athletics, financial services, and brokerage services are not eligible for the deduction (phases out after certain taxable income levels)
    • Deduction may be limited based on business’ W-2 wages paid, or unadjusted basis of property
    • So many questions as to convert to a different entity
      • Facts and circumstances issue – consult with your tax advisor
  • Net operating losses
    • Net operating loss carrybacks are eliminated
    • Net operating loss carryforwards are limited to 80% of taxable income

If you have questions about how these changes may affect you please give us a call.


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