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22 Dec

Understanding the Tax Cuts & Jobs Act of 2017

This morning, President Trump signed the “Tax Cuts and Jobs Act of 2017”. This new Act will make the most significant changes to our tax laws in over thirty years. The following are the major highlights of the Bill, and how they may affect you. For a more thorough explanation of this Act, click here.

INDIVIDUAL TAXPAYERS

Income Tax Rates
The following are the new rates for taxpayers, as compared to the old tax rates:

 

Single Taxpayer   Married Filing Joint
Income Old Rate New Rate Income Old Rate New Rate
$0 – $9,525 10% 10% $0 – $19,050 10% 10%
$9,525 – $38,700 15% 12% $19,050 – $77,400 15% 12%
$38,700 – $82,500 25% 22% $77,400 – $156,150 25% 22%
$82,500 – $93,700 25% 24% $156,150 – $165,000 28% 22%
$93,700 – $157,500 28% 24% $165,000 – $237,950 28% 24%
$157,500 – $195,450 28% 32% $237,950 – $315,000 33% 24%
$195,450 – $200,000 33% 32% $315,000 – $400,000 33% 32%
$200,000 – $424,950 33% 35% $400,000 – $424,950 33% 35%
$424,950 – $426,700 35% 35% $424,950 – $480,050 35% 35%
$426,700 – $500,000 39.6% 35% $480,050 – $600,000 39.6% 35%
>$500,000 39.6% 37% >$600,000 39.6% 37%

 

Standard Deduction, Personal Exemptions, and Child Tax Credit
Under the new law, the standard deduction has almost doubled.  For single taxpayers, the deduction has risen from $6,350 to $12,000, and for married taxpayers filing jointly, the deduction has risen from $12,700 to $24,000.

However, under the new law, the personal exemptions have been eliminated.  The personal exemptions prior to the new law were $4,050 for the taxpayer, spouse, and any dependents (this exemption phased out for high income taxpayers).

The Child Tax Credit has been increased from $1,000 to $2,000 to help offset the elimination of the personal exemptions, and a new $500 credit will be allowed for non-child dependents.  The phase-out limits have also been increased for the two credits going from $75,000 to $200,000 for single taxpayers, and from $110,000 to $400,000 for married taxpayers filing jointly.

Itemized Deductions
The new law has some significant changes to the itemized deductions allowed on Schedule A. The following are the significant changes:

  • Medical expenses – the floor for the deduction of medical expenses has decreased for 2017 and 2018, from a floor of 10% of your AGI to a floor of 7.5% of your AGI.  In 2019 and thereafter, the floor will again increase back to the 10% of AGI.
  • Property taxes/State and Local income taxes (“SALT”) – under the old law, there were no limits on deductibility of either property taxes or SALT taxes.  Under the new law, you are allowed a maximum of $10,000 deduction for your combined property taxes and SALT taxes.  IMPORTANT NOTE – the bill has specifically disallowed any prepayment of 2018 SALT taxes paid in 2017.  The bill does not contain the same provision for property taxes, and taxpayers may be able to take advantage by pre-paying their 2018 property taxes.
  • Mortgage interest deduction – mortgage interest will be deductible up to $750,000 of new acquisition debt, and interest on home equity debt will no longer be deductible.
  • Other miscellaneous itemized deductions – these deductions which included deductions for income tax preparation, unreimbursed employee expenses, investment advisory fees, etc. have been eliminated.

Alimony Deductions
For divorce and separation agreements signed after December 31, 2018, alimony payments will be neither deductible by the payor, nor includable in income for the recipient.

Alternative Minimum Tax (“AMT”)
The AMT has been retained, however, the exemption amount has been increased from $54,300 to $70,300 for single taxpayers and from $84,500 to $109,400 for married taxpayers filing jointly.

Individual Insurance Mandate
Effective January 1, 2019, the individual mandate will be repealed. This mandate is associated with the $695 penalty taxpayers are charged for failing to maintain “minimum essential health care coverage.”

ESTATE TAXES

The estate tax exemption has doubled from $5.6 million per taxpayer to $11.2 million per taxpayer.

BUSINESS ENTITIES

Sole Proprietors, S Corporations, and Partnerships/LLCs
The income generated by these entities flows through directly to the individual who owns the entity. Historically, the income from these entities would be taxed at the taxpayer’s individual income tax rate. As a result, the income from these entities could be taxed at rates as high as 39.6% under the current rate structure.

Under the new law, a 20% deduction on qualified business income has been established. Specific services industries, including health, law, and professional services, are excluded from this deduction. However, married taxpayers filing jointly with income below $315,000 and other filers with income below $157,500 would be allowed to claim the deduction from these service industries. This provision is set to expire on December 31, 2025. Please note there are several rules that have been put into place when claiming this deduction, please consult your tax advisor for specifics.

Corporations
The corporate income tax rate has been permanently reduced to a maximum rate of 21% from 35% beginning in 2018. The corporate alternative minimum tax has been effectively eliminated.

Other Business Related Changes
The new law allows short lived capital investments to be fully expensed (through 2022), and has increased the Section 179 expensing cap from $510,000 to $1 million.

Net interest expense will be limited to 30% of the adjusted taxable income for entities with average gross receipts in excess of $25 million.

Net operating losses can no longer be carried back, and losses carried forward will be limited to 80% of taxable income.

The domestic production activities deduction (Section 199) has been eliminated.

The rules for allowing business entities to remain cash basis taxpayers have been changed, allowing for taxpayers to have higher average gross receipts and still maintain cash basis eligibility.

 

 

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About the Author

Spire Group Tax Committee Spire Group Tax Committee

The Tax Committee is comprised of a group of tax professionals that oversee tax procedures, guidelines and best practices at Spire Group, PC. They are continuously reviewing new tax laws, legislation, and tax planning strategies.

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