Tax Cuts and Jobs Act Signed Into Law
In a significant victory for the White House and Congressional Republicans, the Tax Cuts and Jobs Act has passed in both houses of Congress and was signed into law by President Trump on December 22, 2017. The majority of the provisions contained in the sweeping reform legislation go into effect as of January 1, 2018.
Items Impacting Individuals (set to expire in 2025):
Tax Rates – The act keeps the seven tax brackets but reduces the rates for five of them. The new bracket rates are 10, 12, 22, 24, 32, 35, and 37. The maximum rate is for income above $600,000 married filing jointly and $500,000 for singles. Under current law, individual income tax rates are 10, 15, 25, 28, 33, 35 and 39.6 percent.
Standard Deduction and Personal Exemptions – The standard deduction is increased to $24,000 for married filing jointly and $12,000 for singles. Personal exemptions are repealed.
Mortgage Interest – The mortgage interest deduction is capped at interest on $750,000 of mortgage debt each for a principal residence and a second home. The deduction for interest on home equity lines of credit is repealed.
Taxes – The act puts a $10,000 cap on deductions in connection with state and local income, property, and sales taxes. It also provides that no deduction will be allowed in 2017 for prepayment of tax for years beginning after December 31, 2017.
Medical Expenses – The act enhances the medical expense deduction. It temporarily lowers the current 10 percent threshold for deducting medical expenses to 7.5 percent of adjusted gross income (AGI) for the 2017 and 2018 tax years only.
Miscellaneous itemized deductions – The act repeals all miscellaneous itemized deductions that are subject to the 2 percent AGI floor under current law. This includes items such as unreimbursed employee business expenses, tax-related expenses, and investment-related expenses.
Child Tax Credit – The per-child tax credit is doubled, rising from $1,000 to $2,000 per qualifying child. Up to $1,400 of the credit is refundable. The phase-out threshold is increased to $400,000 for married filing jointly and $200,000 for all others.
Credit for Non-Child Dependents – The act temporarily allows parents to take a $500 nonrefundable credit for each non-child dependent whom they support, such as a child 17 or older, an ailing elderly parent, or an adult child with a disability.
529 Plans – The act expands the definition of qualified higher education expense to include expenses for elementary or secondary public, private or religious schools, outside tutoring, and homeschools.
Pass-Through Income – The act includes a 20 percent deduction on “non-service” Qualified Business Income from sole proprietors, S-Corporations, LLCs, and partnerships. Examples of service businesses include services such as health, law, accounting, financial services, consulting, athletics, and performing arts. Service businesses are phased out of the deduction beginning with taxable income exceeding $315,000 on a joint return and $157,500 for all others.
Alternative Minimum Tax – The act reduces the number of filers who would be hit by this tax by raising the income exemption levels to $70,300 for singles and $109,400 for married filing jointly.
Affordable Care Act Individual Mandate – The individual mandate is repealed as of 2019.
College Athletic Fund Contributions – These contributions, made in exchange for preferential seating, are no longer deductible.
Alimony Deduction – The act repeals the deduction for alimony payments and their inclusion in income by the recipient. The new rules will apply to agreements executed after December 31, 2018.
Estate Tax – This tax remains at 40 percent but the exemption is doubled to $10.98 million per individual. Heirs will continue to receive a “stepped-up, date of death” basis for inherited assets.
Miscellaneous Tax Breaks – The act preserves some smaller, but popular tax breaks, including deductions for student loan interest and classroom supplies, bought with a teacher’s own money. It also keeps the tax-free status of tuition waivers for graduate students.
Items Impacting Businesses:
Corporate Tax Rate – The corporate tax rate is reduced from a top graduated rate of 35 percent to a flat 21 percent.
Corporate Alternative Minimum Tax – The act repeals this tax.
Full Expensing for Certain Business Assets – The act increases the 50 percent “bonus depreciation” to 100 percent for property placed in service after September 27, 2017 and before January 1, 2023. It also allows bonus depreciation on the purchase of used property. It increases the Sec. 179 expensing limit to $1 million and sets the investment limitation at $2.5 million.
Like-kind Exchanges – The act limits like-kind exchanges to “real property” only, removing the availability of like-kind exchanges on personal property.
Interest Expense – The act generally caps the deduction for net interest expenses at 30 percent of adjusted taxable income. Exceptions exist for small businesses with average gross receipts of $25 million or less. Farming businesses can elect out of these rules.
Net Operating Losses (NOL) – For NOLs arising in tax years ending after December 31, 2017, the two-year carryback and the special carryback provisions are repealed. NOLs are limited to 80 percent of taxable income and are only carried forward. A two-year carryback applies in the case of certain losses incurred in the trade or business of farming.
Foreign Provisions – The act includes several international tax changes including a repatriation provision—US shareholders owning at least 10 percent of a foreign subsidiary will include in income the share of the post-1986 historical earnings and profits (E&P) of the foreign subsidiary, to the extent that E&P have not been previously subject to US tax. The portion of E&P attributable to cash or cash equivalents would be taxed at a 12 percent rate and the remainder would be taxed at a 5 percent rate.
Farm Property – For property placed in service after December 31, 2017, the cost recovery period is shortened from seven years to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer.
Cash Method of Accounting – The act expands the ability to use the cash accounting method for most business with up to $25 million in revenue, including businesses with inventory.
Percentage of Completion Requirements – The act increases the percentage-of-completion method applicability threshold to businesses with average revenue of $25 million or more.
Deduction for Entertainment – This deduction is repealed; previously entertainment was 50 percent deductible.
Research and Development Expenses – Must be capitalized and amortized over five years.
What do these changes mean for you? Contact your Adams Brown advisor with questions. The Adams Brown team is here for you!