We have combed through and summarized the significant changes that may impact you. Below are two sections, one pertaining to individual tax changes the other businesses.
Please know that anything with taxes is never as cut and dry as the media makes it sound, ESPECIALLY the changes in corporate tax rates. What appears simple actually has potential pitfalls later down the road. Please check with us before making significant corporate tax changes.
Based on these changes, the general rule is to defer income into tax year 2018 and accelerate deductions into 2017.
**Before embarking on any major decisions based on these changes, please be sure to discuss any moves with your tax preparer.
All of the changes in this Act that pertains to individual taxation are for tax years beginning after December 31, 2017 and before January 1, 2026. This means, unless Congress changes this, that the tax rules in effect as of December 31, 2017 will be back in place for tax year 2026 and forward.
Individual Tax Brackets:
The tax rates for each bracket have been lowered by 2%-5%. Each tax bracket has been expanded so that it takes higher income levels before you move into the next bracket.
The Tax Act increases the standard deduction. With this increase it is expected that there will be a lot fewer taxpayers needing to itemize their deductions. Recall you get the higher of the standard deduction vs itemized deductions. New standard deductions are:
Head of Household - $18,000
Married taxpayers - $24,000
All other taxpayers - $12,000
The deduction of $4,150 for each taxpayer, spouse and dependent is being eliminated. This deduction for dependents is being replaced with an enhanced child tax credit.
Enhanced Child Tax Credit:
For dependent children under the age of 18, the credit is increased from $1,000 to $2,000. The refundable portion is increased to $1,400. This credit is phased out when gross income is greater than $400,000 for married filing joint taxpayers and $200,000 for all other taxpayers.
There is also a non-refundable credit of $500 for non-child dependents
Kiddie Tax Modified:
For children that can be claimed as a dependent, their earned income will be taxed at their own single taxpayer rate. Unearned income, such as interest, dividends, capital gains and rent income, will be taxed using the trust and estate tax rates. These rates are very narrow and the maximum tax rate of 37% is reached when the unearned income is greater than $12,500.
Changes to Itemized Deductions:
For expenses incurred after December 31, 2016 and before January 1, 2019 are allowable to the extent they exceed 7.5% of adjusted gross income. After December 31, 2018 the limit is increase to 10%.
Real Estate, State and Local Income Taxes (this is a significant change)
This deduction will be limited to $10,000.
You should consider paying the third and fourth quarter real estate taxes that are due in 2018; the fourth quarter estimated state income tax and the estimated balance due for state taxes by December 31, 2017 if you will not be subject to the alternative minimum tax.
For mortgages acquired after December 15, 2017 the interest will be limited to the amount paid on $750,000 of debt, (formerly $1,000,000).
There will be no deduction allowed for home equity interest. (another significant change)
Personal Casualty Losses
No deduction allowed unless due to a federally declared disaster.
Miscellaneous Itemized Deductions subject to the 2% limitations
No deduction is allowed. This includes employee business expenses, tax preparation fees and investment expenses.
Adjustments to Income:
For agreements executed after December 31, 2018 there will no longer be allowed a deduction for the payments made by the payer and the recipient of the alimony will no longer have taxable income.
No deduction allowed unless in the military
Reimbursements of moving expenses are now taxable income
New Maximum Tax Rate on Business Income of Individuals:
In order to pass on the benefit of the 21% C Corporation tax rate to individual business owners, partnerships and S Corporations, there will be allowed a deduction against taxable income. This deduction is equal to 20% of Qualified Business Income.
Subject to various limitations, Qualified Business Income is equal to the taxable income of the business entity. It does not include certain investment income or reasonable compensation paid to the taxpayer.
See the business section below for more details on corporate changes.
Business Loss Limitations:
The amount of business losses for any given year will be limited to $500,000 for married filing joint taxpayers and $250,000 for all other taxpayers. Any amount in excess of this threshold will become part of the net operating loss carryforward to the following tax year.
IRA Recharacterization Rules:
This procedure is being repealed for IRA to Roth conversions.
Previously if you converted an IRA into a Roth, which is a taxable event, and the value of the securities decrease in value before the filing of your tax return, you were able to undo the transaction by way of recharacterizing the amount back into your IRA. With the new law, once you make the conversion, you will not be able to undo it.
Estate and Gift Tax:
The exemption amount before any taxes are imposed has been increased to approximately $11.2 million.
C Corporation Changes:
There will now only be one tax bracket, all taxable income will be taxed at 21%. Personal service corporations are also included.
The exclusion for dividends received has been reduced to 65% of dividends received if owned more than 20% of the other corporation; else the exclusion is 50%.
Alternative minimum tax has been repealed.
Increased Section 179 Depreciation:
The maximum amount that can be written off in the year the asset is placed into service has been increased to $1 million.
The definition of qualified property has been expanded to include -
Certain depreciable tangible personal property used in furnishing lodging
For non-residential property: roofs, heating, ventilation and air conditioning property
Qualified Improvement Property:
Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if such improvement is placed in service after the date the building was first placed in service. Depreciation is computed using the straight line method over 15 years.
The previous definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated.
Limits on Deducting Business Interest:
Net business interest expense deduction will be limited to 30% of adjusted taxable income. This limitation applies to taxpayer's in which the average gross receipts for the past three tax years were greater than $25 million.
Net Operating Loss:
No carryback of the loss is allowed.
The amount allowed to be used in the carryforward year is limited to 80% of that year's taxable income.
The net operating loss can be carried forward indefinitely.
Domestic Production Activities Deduction:
This deduction is being eliminated.
Like Kind Exchanges:
Now only applies to real property.
Therefore the trade in of a motor vehicle for another vehicle will be a taxable event. The taxable amount is the difference between the fair market value of the vehicle and the adjusted tax basis of the vehicle being traded.
Entertainment Expense: (major change)
No deduction allowed for -
Any activity considered to constitute entertainment, amusement or recreation
Membership dues in any club organized for business, pleasure, recreation or other social purposes
Facility used in connection with any of the above