Today, America gets a raise. Or should get a raise- at least that was the intent. Regardless of your political position, it is nice to see our administration actually agree and accomplish something.
This tax reform is complicated. To say it simplified our tax code would be an understatement. Below is a list of notes regarding the bill as presented by my friends at WSW CPA’s (http://wswcpasnashville.com):
The complete tax brackets for individual and MFJ filers in ( ) are as follows:
10%: $0 to $9,525 ($0 to $19,050)
12%: $9,525 to $38,700 ($19,050 to $77,040)
22%: $38,700 to $82,500 ($77,040 to $165,000)
24%: $82,500 to $157,500 ($165,000 to $315,000)
32%: $157,500 to $200,000 ($315,000 to $400,000)
35%: $200,000 to $500,000 ($400,000 to $600,000)
37%: $500,000 and above ($600,000 and above)
Other details for individuals are as follows:
- As in previous versions, the standard deduction moves from $6,350 to $12,000 for single filers and $12,700 to $24,000 for married couples. Also, as in the previous versions, there are no longer any personal exemptions. This would fall in the category of simplification as projections are now that 90% of individual tax returns will no longer itemize deductions. Previous estimates were in the 63% range.
- The final bill expanded the SALT (state and local tax) deduction to include property, income and sales tax. The previous version limited the deduction to property taxes. Now, a taxpayer will be able to deduct $10,000 and use a combination of all three taxes up to the limit.
- An itemized deduction will be allowed if unreimbursed medical expenses are above 7.5% of your adjusted gross income.
- Mortgage interest is now limited to mortgage balances up to $750,000. The old law limited deductions for mortgages over $1,000,000, and the previous House bill limited the deduction for mortgages over $500,000. This is another compromise.
- There are no longer any miscellaneous itemized deductions. From a planning perspective, if you have a lot of unreimbursed business expenses, it may benefit you to negotiate a lower salary in exchange for a reimbursable expense arrangement.
- There is no longer a phase out of itemized deductions for high income earners so all remaining deductions will be allowed.
- The individual AMT is still with us, but for single taxpayers with income under $500,000 and MFJ taxpayers under $1,000,000, the AMT does not apply.
- Teachers will still get to deduct up to $250 of supplies, just as they have in the past.
- Alimony will no longer be deductible or included in income for divorce or separation agreements executed after December 31, 2018.
- The child tax credit has been increased from $1,000 to $2,000 and phases out after joint income of $500,000. The refundable portion of the credit is now $1,400.
- The child and dependent care credit and the adoption credit survived the bill as well as the student loan interest deduction.
- And last but not least on the individual side, the individual mandate of the Affordable Care Act has been rescinded.
These are not all of the changes, but these are the biggest items that affect many taxpayers.
- The new corporate rate is down to 21% from 35%. This is a flat tax instead of the previous graduated brackets. Also, the tax on personal service companies remains at 35%.
- Election to expense 100% of eligible property placed in service (also known as bonus depreciation). The big change here other than moving from 50% back to 100% is it applies to both new and used purchases. Previously, bonus depreciation only applied to new equipment.
- Section 179 increases from $500,000 to $1,000,000.
- Complete repeal of the Corporate AMT.
- There is now a limitation on business interest deductions for companies with gross receipts in excess of $25,000,000 over the prior three years. However, it does exclude floor-plan financing.
- There is no longer a net operating loss (NOL) carryback. All losses must be carried forward and can be carried forward indefinitely. The NOL deduction is limited to 90% of taxable income.
- The Domestic Production Deduction has been rescinded.
- The technical termination of partnerships when 50% or more of the partnership interests are sold has been rescinded and no longer applies.
- Like-kind exchanges only apply to real estate.
- You can no longer deduct 50% of the cost of any activity generally considered to be entertainment, amusement or recreation. This is a big change, and we will be looking for more detail on this and will advise in the next memo in January.
Just as in the individual section, these are the major, most talked about business changes.
FLOW-THRU ENTITY TAX CHANGES
Most of you have heard about the attempt to lower the taxes on flow-thru entities like partnerships, LLCs and S-Corporations. This will be accomplished by allowing a 20% deduction from qualified income from each entity. This deduction will be taken at the partner, shareholder or owner level and not at the entity level.
There is a phase in and limitation for income above $50,000 ($100,000 for MFJ). The deduction for qualified businesses is the lesser of (a) 20% of the taxpayer’s qualified business income or (b) the greater of 50% of wages paid in the trade or business or the sum of 25% of wages paid and 2.5% of the unadjusted basis of all qualified property. There are also limitations if you are a service business, like a lawyer, doctor, accountant, consultant, entertainer or athlete. The deduction above will be allowed if your income is less than $157,500 if you are single or $315,000 if you are MFJ.