The Tax Cuts and Jobs Act represents the most significant changes to the tax code in more than three decades. This new law categorically alters the basic frameworks of individual and corporate taxation. Practicing professionals simply must get informed on the new law to remain competent and relevant to paying clients. Let’s look at some of the major provisions.
These provisions begin in 2018 unless noted. Many of the individual provisions are temporary, with some set to expire as of January 1, 2026.
- There are seven individual tax brackets. The top rate is 37%, kicking in at $500,000 for singles and $600,000 for MFJ.
- The standard deduction is increased to $12,000 for singles and $24,000 for MFJ.
- The child tax credit is increased to $2,000 per child, with $1,400 as a refundable credit – such $1,400 payable to taxpayers even with no tax liability.
- The dreaded individual AMT remains, though ostensibly applying to fewer taxpayers since it applies at higher income levels.
- Schedule A deductions for mortgage interest will be limited to mortgage debt up to $750,000. The current $1M limit will apply to properties purchased before December 15, 2017. Home equity interest is no longer deductible. As a concession to the real estate industry, the deduction is available for both new mortgages on first and second homes on debt up to $750,000.
- Schedule A deductions for the much debated and popular SALT will be limited to $10,000, including any combination of state and local taxes (or sales taxes) and property taxes. Paying these 2018 taxes now to gain the deduction in 2017 is specifically outlawed.
- The individual health insurance mandate penalty is reduced to $0. Reduced sign-ups of healthy people could potentially lead to soaring premiums.
- Medical expenses exceeding 7.5% of AGI can be deducted in 2017 and 2018.
- Alimony would no longer be deductible by the payor, and the recipient would not include the alimony as income. This change takes effect for divorce and separation agreements executed in 2019.
- $10,000 yearly can be withdrawn from §529 plans per child for private schooling even at the elementary and high school levels.
- The estate tax was not repealed. The exemption doubles to $10M indexed to inflation after 2011 ($10.98M in 2017).
- Individuals are generally able to deduct 20% of qualified business income from pass-through entities. There are limitations. A phaseout starts at $157,500 for singles and $315,000 for MFJ.
- The hallmark of this bill reduces the top corporate tax rate from 35% to 21%.
- The one-time repatriation rate for overseas funds is 8% (15.5% for cash). Income earned abroad will generally not be taxed; only domestic profits would be subject to American taxation.
- There is a deduction for qualified business income (QBI) of 20% for Partnerships, S-Corps, and Sole Proprietorships who operate within the US.
A couple of noteworthy items did not make the final law. Both House and Senate bills initially restricted the §121 ability of a married couple to exclude $500,000 in capital gains ($250,000 single) on the sale of a home. The rule remains unchanged that the exclusion is available if the home was used as a primary residence for at least two of the last five years.
For anyone with stocks in taxable investment accounts, the Senate previously sought to mandate the use of FIFO (first in first out) where the first shares purchased would automatically be those identified upon sale. A taxpayer is still able to specifically identify which shares are sold and is not limited to those first purchased as the FIFO rule did not make it into final legislation.
Want to learn more about how the major changes will impact both individual and business clients? Attend a free one-hour CPE webinar, “Top 10 Things You Need to Know About Tax Reform.” Click here to register or visit www.accountingcred.org to learn more.
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