The Tax Cuts and Jobs Act for Individuals
The passage of the act brings the biggest set of changes to the tax landscape for individuals and businesses since the 1986. The law fundamentally changes tax rates, deductions, exemptions and credit. While the new law will lower taxes for many individuals this will not be true for every individual.
New Tax Rates
The law lowers the tax rates for both single and married tax payers. The top rate drops from 39.6% to 37%. A savings of 2.6%. You will note from the table 1 that the greatest savings is for those in the highest tax brackets. These new rates like much of the act as it applies to individuals’ sunsets at the end of 2025. For a comparison of the new 2018 tax rates to the 2017 rates by tax bracket (see Table).
Capital Gains & Qualified Dividends
Long term capital gains and qualified dividends are subject to a reduced tax rate. To qualify for the long-term capital gains rate an asset must be held in excess of one year and not be a collectible. The long-term capital gains rate that applies depends on your AGI and can be as low as 0% and as high as 20%. See Table below for more information.
New Increased Standard Deduction
The law increases the standard deduction at all levels. For singles the deduction increases from $6,350 in 2017 to $12,000 for 2018 and for married couples filing jointly from $12,700 in 2017 to $24,000 for 2018. The standard deduction for those claiming head of households also increases from $9,350 in 2017 to $18,000. Qualifying Widows continue to use the same standard deduction as married filing jointly while the standard deduction for those married filing separately is the same as for those that are single.
Itemized Deduction Changes
Beginning in 2018 there is a limit on the amount that can be deducted for taxes paid to state, local and foreign governments. Taxpayers may not deduct more than $10,000 ($5,000 if married filing separately) combined. This limit applies to the total of all real estate tax, state and local income tax, tangible and intangible tax and sales tax if elected.
The mortgage interest deduction has also been reduced to interest on $750,000 of mortgage debt total for a principal residence and a second home for mortgages acquired after December 15, 2017. The deduction for interest paid on home equity indebtedness is eliminated.
Miscellaneous itemized deductions which in the past had to exceed 2% of Adjusted Gross Income (AGI) are also no longer deductible. This includes: unreimbursed employee business expenses, union dues, investment advisory expenses, tax advice, legal fees related to taxable income and certain hobby expenses under the hobby loss rules.
The law also restores the floor for deduction of medical expenses at 7.5% of AGI eliminating the planed increase to 10% of AGI.
The allowable amount of cash contributions to qualifying charities and tax-exempt organizations is increased from 50% of AGI to 60% of AGI.
The personal exemption has been repealed and is no longer available to taxpayers beginning in 2018. This effectively reduces or eliminates any gain in the amount of income not subject to tax due to the increase in standard deduction. In 2017 a taxpayer was entitled to a personal exemption of $4,050 each for themselves, their spouse and dependent they could claim on their return. The total of these exemptions was deducted from their Adjusted Gross Income (AGI) along with the standard or itemized deductions in determining the taxable amount of income. See Table below for a comparison.
Child and Dependent Tax Credit
The Child Tax Credit is increased from $1,000 to $2,000 per qualifying child. A new partial credit of $500 is also created for other qualifying dependents. The refundable portion of the Child Tax Credit is also increased to $1,400. The credits begin to phase out when Adjusted Gross Income (AGI) exceeds $400,000 for married tax payers filing a joint return when AGI exceeds $200,000 for all others.
Alternative Minimum Tax
Alternative minimum tax continues to exist but the exemption amounts have been increased to $109,400 from $78,750 for taxpayers filing as Married Filing Jointly or Qualifying Widow, and to $70,300 from $50,600 Singles and Heads of Household. Married Filing Separately reduces the Married Filing Joint amount by 50%. The exemption begins to phase out at AGI of $1,000.00 for married filing Jointly and at $500,000 for others.
Net Investment Income Tax
The new laws keeps the Net Investment Income Tax for high income taxpayers. The additional tax is 3.8% of income from certain investments gains, interest income, dividends and partnerships income for taxpayers whose modified adjusted gross income exceeded $250,000 for married couples filing joint returns and surviving spouses, $125,000 for those who file married filing separately, and $200,000 in all other cases. As well as an additional Medicare Tax of .9% on wages exceeding $250,000 for married couples filing joint returns and $200,000 for all others. These additional taxes were created under the ACA (Obamacare).
Obamacare & the ACA
While the new law eliminates the penalty for failure to have required insurance, this does not happen until 2019. Leaving the Shared Responsibility Penalty intact for 2018 and changing the maximum penalty to zero after December 31, 2018.
Excess business losses are limited to $500,000 on joint returns ($250,000 otherwise) for taxpayers other than corporations. Any excess business losses have to be carried forward and treated as part of the net operating loss (NOL) carryforward in subsequent taxable years. This limitation applies AFTER the application of the passive loss rules already in place.
Estate and Gift Taxes
The basic estate and gift tax exclusion is increased from $5.5 million to $11 million dollars per person. It’s important to remember that this expansion in the exclusion sunsets at the end of 2025 and the exemption returns to $5.5 Million as adjusted for inflation.
Education & the Disabled
The new law allows up to $10,000 per year of funds from a 529 plan to be used for elementary or secondary school tuition.
There are also three helpful changes in the rules affecting ABLE accounts. ABLE accounts are a tax-advantaged savings vehicle that can be established for a designated beneficiary who is disabled or blind. The balance in an ABLE account and distributions used to pay qualified disability expenses are generally disregarded in determining eligibility for federal means-tested programs. This allows the beneficiary to save for the future without sacrificing current benefits.
The changes are;
- Additional ABLE contributions are allowed. Contributions to an ABLE account can be made by the designated beneficiary or any other person. But until now, the total annual contributions by all persons couldn’t exceed the amount of the gift tax exclusion for that year. For 2018, that figure is $15,000.
The Act allows the designated beneficiary (but no other person) to make additional contributions in excess of this limit. To be eligible to make these contributions, the designated beneficiary must be employed or self-employed and must not be covered by an employer’s retirement saving plan.
The additional contributions are limited to the lesser of (1) the previous year’s poverty line for a one-person household or (2) the designated beneficiary’s taxable compensation for the current year.
- Contributions are now eligible for qualified individuals to claim a Saver’s Credit of up to $2,000.
- Accounts are also eligible for tax-free rollovers from 529 plans.
Tax Cuts and Jobs Act for Small Business & Pass-Throughs Entities
The act includes a number of provisions that reduce the taxes and allow business of all kinds to save and reinvest profits. The tax savings included for business are permanent unless otherwise noted, unlike many of the provisions for individuals.
Corporate Tax Rate Reduced
The income tax rate paid by corporations that have not chosen to be taxed under Sub Chapter S has been reduced to a flat rate of 21% beginning in 2018. A substantial reduction from the top rate that was 38%. This change does not reduce the corporate income tax when taxable income is less than $90,389 and the amount of savings increases as taxable income exceeds this amount. See Table below for more information.
Corporate Alternative Minimum Tax
Has been eliminated.
Interest Expense Deduction
Net interest expense deduction is limited to 30% of the business’s adjusted taxable income and is determined at tax filer level; for pass-through entities determination is at the entity level (i.e. partnership level). These rules do not apply for taxpayers with average annual receipts for the prior 3 years that are less than $25 million.
Pass-through entities (Partnerships, S-corporations, LLC, Sole Proprietorship) with qualified business income can potentially deduct up to a maximum of 20% of the taxable income for the tax year. The 20% deduction is not allowed in computing adjusted gross income, but rather is allowed as a deduction reducing taxable income. Qualified business income does not include guaranteed payments to partners or reasonable compensation to shareholders. This deduction does not apply to specified service businesses, whose taxpayers’ taxable income is greater than $315,000 MFJ or $157,500 single, in the fields of: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees. Additional caveats and limitations regarding payroll and business property also exist for this deduction.
Net Operating Losses
For any NOL’s arising after 12/31/17, the two-year carryback is repealed and the net operating loss deduction allowed is limited to 80% of taxable income. NOL’s can be carried forward indefinitely.
Expensing & Depreciation
The maximum amount a taxpayer may expense under Sec. 179 is increased to $1 million (was $500,000), and the phase-out threshold amount is increased to $2.5 million.
A 100% first-year deduction is allowed for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. (the phase-down of 50% allowance is repealed). The additional first year depreciation deduction is allowed for new and used property.
Deduction Loss & Reduction
Deductions for all entertainment expenses are disallowed.
The 50% limit on the deductibility of business meals is expanded to include in-house cafeteria costs.
Deductions for employee transportation fringe benefits (e.g., parking, mass transit) are denied, but exclusion from income of those by an employee is retained. No deduction is allowed for transportation expenses of employees that are the equivalent of commuting (i.e. between home and the workplace).
This publication was produced by RMS Accounting a division of Royale Management Services, Inc. The legislation is a major overhaul of the current tax code so this is only a brief update on some of the new rules. It is intended to provide general information on the changes in the tax laws created by The Tax Cuts and Jobs Act signed into law in 2017. Because the law contains so many new provisions and sections which there is not yet guidance for from the Treasure, Internal Revenue Service or the courts, this publication should not be considered to provide definitive tax or legal information. Before making any decisions based on the new law one should seek advice from a competent tax professional such as an Enrolled Agent.
Please contact our office for more personal recommendations based on your specific tax circumstances and to schedule an appointment with one of our Enrolled Agents.