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Tax Cuts and Jobs Act: Selected Highlights

The vote has gone through for the “Tax Cuts and Jobs Act” tax reform bill and the president is expected to sign these sweeping tax changes into law before the end of the year. Taxpayers and business owners alike are wondering how this impacts them and their future. While there is a lot of information in this bill, the tax partners here at Whittlesey have broken down the most relevant changes.

Here are some of the major changes for individual income tax reform:
  • Reduces the tax rates to: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • Retains lower rates on capital gain income and qualified dividends.
  • Roughly doubles the standard deduction to $12,000 and $24,000 for individuals and married, filed jointly taxpayers, respectively. 
  • State and local income tax, sales tax, and property tax deduction limited to a $10,000 maximum deduction ($5,000 for married taxpayers filing separately).
  • Increases the child tax credit to $2,000 (partially refundable) per qualifying child and $500 nonrefundable credit for qualifying dependents other than qualifying children. The credit phases out as income level increases.
  • Limits the current deductibility of business losses to $250,000 ($500,000 for married filing jointly). Excess business losses over the limit are carried forward to future years. Business losses are still subject to the passive activity loss rules.
  • Preserves pretax 401(k) plans and deductions to health savings accounts.
  • Effectively eliminates the Alternative Minimum Tax (AMT) for most taxpayers by increasing the exemption to $1 million. 
  • Removes the dependency deductions for personal exemptions.
  • Retains the deduction for mortgage interest, but you can only deduct the interest on $750,000 of acquisition indebtedness (Previous debt limit was $1,000,000)
  • Removes the deduction for interest on home equity loans. 
  • Retains the charitable contribution deduction and increases the limitation for cash donations to public charities to 60% of your income (previously was 50%). 
  • Retains the college tax credits.
  • Keeps the medical deduction and temporarily reduces the threshold for deducting medical expenses to 7.5% of income for all taxpayers for 2017 and 2018.
  • Eliminates the deduction for miscellaneous itemized deductions. 
  • Eliminates the moving expense deduction.
  • Repeals the high-income threshold that reduces itemized deductions.
  • Repeals the special rule allowing recharacterization to unwind a ROTH IRA conversion but retains the ability to contribute to an IRA and convert to a ROTH.
  • Eliminates the "Obamacare" individual insurance mandate effective January 1, 2019.
  • Eliminates the deduction for alimony payments under divorce or separation agreements entered into or modified after December 31, 2018. Payments will conversely not be treated as income for the recipient spouse.
  • Although it was previously considered, there is no requirement to determine the basis of stock shares sold on a first in, first out basis.
  • Repeals charity tax deduction related to college athletic event seating rights. 
Here are some of the big changes for estate tax reform:
  • Doubles the estate and gift tax exclusion amounts to about $11,000,000 of assets upon death and keeps the $15,000 per year for tax-free gifts. 
Here are some of the big changes for business tax reform:
  • Creates a flat corporate income tax rate of 21% - including for personal service corporations.
  • Full fixed asset expensing. 100% expensing is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The “new property” requirement is removed and replaced with a taxpayer’s first-use rule.
  • Increases Section 179 expensing to $1 million. The phase-out amount would be increased to $2.5 million and indexed for inflation for tax years beginning after 2018.
  • Repeals the corporate Alternative Minimum Tax (AMT).
  • Introduces a new 20% deduction relating to “qualified business income” of individuals (sole proprietor or owner of a pass-through entity). The deduction is limited by income levels and applies to businesses engaged in performing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.
  • Limits interest expense to 30% of the business’s adjusted taxable income, business interest income. Small business interest expense exception: businesses with average gross receipts of $25 million or less would be exempt from the interest limitation rules.
  • A net operating loss (NOL) deduction carryover or carryback will be limited to 80% of the taxpayer’s taxable income for losses arising in taxable years beginning in 2018. Losses arising in taxable years beginning after December 31, 2017, will carry over indefinitely (previous rule was a 20 year limit). 
  • Eliminates the Section 199 (DPAD) manufacturing deduction.
  • Retains (with modifications) the Rehabilitation tax credit.
  • Retains the Research and Development Tax Credit, Work Opportunity Tax Credit, Low Income Housing Tax Credit, and the New Market Tax Credit.
  • Section 1031 deferral of gain on like-kind exchanges will be available only for real property.
  • No deduction (50% currently allowed) will be allowed for entertainment, amusement, or recreation activities, facilities, or membership dues relating to such activities. The 50% deduction for meal expenses associated with operating the trade or business is still allowed. 
  • Increases threshold for certain businesses to use the cash method of accounting. Available to businesses with $25 million in revenue. 
  • Also allows businesses with average gross receipts of $25 million or less to use the cash method of accounting even if the business has inventories as long as it treats inventory as non-incidental materials and supplies or the method of accounting conforms to the taxpayer’s applicable financial statements.
  • Real estate depreciation recovery periods of 39 years (commercial) and 27.5 years (residential) remain unchanged and a "Qualified Improvement Property" category has been created with a 15* year recovery period to consolidate several previously separate categories.
Here are some of the big changes for tax-exempt organizations:
  • Tax-exempt organizations are subject to a 21% excise tax on remuneration paid in excess of $ 1 million to any of its five highest-paid employees. 
  • Unrelated business income must be computed separately for each trade or business. 
Here are some of the big changes for international income tax reform:
  • Creates a new exemption for foreign-sourced dividends. 100% of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder who owns 10% or more of the foreign corporation would be exempt from U.S. taxation. A holding period applies.
  • Modifies taxation of deferred foreign profits. Accumulated foreign earnings held in cash or cash equivalents and in illiquid assets are deemed repatriated and taxed at 15.5% and 8%, respectively. 

 

Here at Whittlesey, we pride ourselves on helping others navigate change, especially during these complex times. We will be monitoring these issues over the next couple of weeks and keeping our clients and business partners updated. To learn more about what we can do for you, click here. 

Please reach out to your Whittlesey team member or contact us if you want to discuss this important topic in greater detail.

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