Not surprisingly, The Tax Cuts and Jobs Act is far from a quick and easy read; it’s quite the opposite, actually – comprised of nearly 1,097 pages. Unfortunately, the length alone can act as a deterrent, so we’ve taken some time to break it down into more concise terms. But, the intricacies of this bill apply to everyone and are important for everyone to understand.
Tax Bracket Rates
While taxpayers still fall into 1 of 7 tax brackets based on their income, the new rates from lowest to highest income are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The standard deduction for single filers has increased from $6,350 dollars to $12,000 dollars; for married couples filing jointly, it has increased from $12,700 to $24,000 dollars.
Under the new tax code, the personal exemption has been eliminated; the state & local tax deduction has been capped at $10,000; while the child tax credit has been expanded. Doubling to $2,000 for children under 17, single parents who make up to $200,000 and married couples who make up to $400,000 can claim the entire credit in full. There is a new temporary $500 tax credit available for non-child dependents, such as children over 17, elderly parents or adult children with a disability.
Fewer taxpayers will be affected by the alternative minimum tax as the exemption rises from $54,300 to $70,300 for singles and from $84,000 to $109,400 for married couples. Previously phasing out for joint filers at $160,900, and $120,700 for individuals. the new tax legislation’s phaseout would kick in at $1 million for married filers and $500,000 for those who are single. Over the threshold, filers lose 25 percent of their exemption, or to phrase it another way -a quarter out of every dollar of income.
Homes, Healthcare & Education? Moving forward, anyone purchasing a home will only be able to take a mortgage interest tax deduction of the first $750,000. Down from $1 million, this will likely impact people buying homes in more expensive regions.
The capital gains tax exemption for home sellers remains unchanged. The amount of money exempt from estate taxes has been doubled.
The individual Obamacare mandate penalizing people without health care coverage has been eliminated.
Funds in untaxed 529 Savings Accounts, which previously could only be applied toward college expenses, will now also be allowed to cover the cost of sending a child to a public, private or religious elementary or secondary school.
Tax Reform Affecting Business Deductions
Some major changes include a cut in the corporate tax rate from 35% to 21%; and the elimination of alternative minimum tax (AMT) for corporations. There is a new deduction for owners of “pass-through” entities (S-corporations, partnerships and sole proprietorships). Business owners are able to take a deduction of up to 20% of the business’s income on their personal tax return. Certain professions, such as lawyers and physicians, may only take this deduction if their taxable income is under $315,000 for married couples or $157,000 for individuals.
The itemized deduction for individuals for state and local taxes, previously unlimited, is now capped at $10,000. The taxes paid by businesses are still fully deductible.
While the Business-related meals deduction remains unchanged at 50%, meals for employer convenience has been reduced from 100% to 50%, meal expenses while traveling on business remains at 50%; but business-related entertainment expenses are no longer eligible for any deduction – down from 50% to 0%. The deduction for emergency meals for doctors has been reduced from 100% to 50%
The Bonus Depreciation Deduction for eligible property has been increased from 50% to 100%. The Section 179 limit has been increased from $500,000 to $1,000,000; and the limit on equipment purchases has been raised from $2,000,000 to $2,500,000. The Domestic Production Activity Deduction has been repealed for taxable years beginning December 31, 2017.
Non-profits have a new 21% excise tax on nonprofit employees for salaries they pay out above $1 million.
Unchanged Tax Laws
While we’ve already mentioned several changes, we would also like to highlight a few things that will remain the same: The Medical Expenses Deduction exceeding 7.5% of a patient’s adjusted gross income; the Student Loan Interest Tax Deduction up to $2500; Tax Free Tuition Waivers (typically awarded to teaching & research assistants); the Teacher’s Deduction of up to $250 for money spent on classroom resources; the Electric Car Credit up to $7500, and as mentioned previously, the home-sellers “capital gains” deduction; as well as the charitable tax deduction. According to the IRS, you may deduct up to 60% of your adjusted gross income in most cases. Some filers can be limited to 20% and 30%. Cost Segregation allowing commercial and residential property owners to benefit by accelerating depreciation remains in play; as well as the Conservation Easement Deduction of up to 50% for taxpayers preserving land, minerals or historic buildings and/or sites. There have been no changes to the rules & regulations for captive insurance; which provides business owners the ability to self-insure for risks general insurance does not cover OR are too expensive to cover.
Overall, the Joint Committee on Taxation estimates tax reform will increase the deficit by $1 trillion over the next decade. Tax cuts alone will amount to about $1.47 billion. However, eliminating the Affordable Care Act mandate accounts for $700 billion in savings and growth. Also, the Act will boost GDP by about 1.7% each year.
While tax reform does offer “tax relief” in a variety of areas, given the intricacies of the legislation, a financial expert, well-versed in The Tax Cuts and Jobs Act, can offer additional insight to help you make the most of this latest incarnation of U.S Tax Code for your clients.