The recent passage of the “Tax Cuts and Jobs Act” (TCJA) means substantial changes for everyone. With a few exceptions, the changes for individuals are effective for tax years beginning after December 31, 2017 and expiring on January 1, 2026. Many of the entity changes are permanent.
It was rumored at one time that the TCJA would enable taxpayers to file with a postcard; it does not. While using the standard deduction may make filing slightly easier for some individuals, there remains a complex list of deductions and credits to work through – and for some, this new process could be even more complicated.
Below is a brief overview of some of the most significant changes – and we’ve highlighted some of the ones that may impact your 2017 taxes, but if you have questions about your specific situation, please don’t hesitate to contact us.
- 2018 Individual Income Tax Rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%
- Standard Deductions: Will be increased to $12,000 for individuals and $24,000 for couples.
- Personal Exemptions: Eliminated.
- 2017 Opportunity. State, Local, and Property Taxes: State, local, and property tax deductions will remain in place for those who itemize their taxes, but the deductions will be capped at $10,000 (total, for all three). When related to a trade or business, these taxes are still deductible according to the current provisions.
- Alternative Minimum Tax (AMT): For individuals, the exemption will be increased to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers. The AMT for corporations will be eliminated.
- Child Tax Credit: The child tax credit will be doubled, to $2,000, for children under 17. The credit will be available for single parents who make up to $200,000 and married couples who make up to $400,000.
- 529 Savings Accounts: Existing provisions will be maintained and expanded to allow up to $10,000 (per student, per tax year) to be distributed annually to cover the cost of sending a child to a “public, private or religious elementary or secondary school.”
- 2017 Opportunity. Mortgage Interest: Home mortgage interest incurred before December 15, 2017 will be deductible, up to $1M of the total home mortgage interest indebtedness. Home mortgage interest incurred after December 15, 2017 will be deductible, but the underlying indebtedness will be limited to $750,000.
- 2017 Opportunity. Home Equity Loan Interest Deduction: Eliminated – except when proceeds of the home equity loan are used for a trade or business, or for investment.
- 2017 Opportunity. Medical Expenses: The adjusted gross income (AGI) threshold for the medical expense deduction will be reduced to 7.5% for regular and AMT purposes — for 2017 and 2018 only.
- Individual Mandate (in Affordable Care Act): Individuals will not be fined for not having a health insurance policy. This change is not immediate and will go into effect in 2019.
- Alimony Deduction: Eliminated – effective for individuals who enter into or amend alimony agreements after December 31, 2018 or are subject to alimony orders with the same date restrictions.
- Moving Expenses Deduction: Eliminated
- Miscellaneous Itemized Deductions: Those that were subject to the 2% floor (such as certain investment expenses, professional fees, unreimbursed employee business expenses, and tax preparation costs, among others) will be eliminated.
- Charitable Contributions: The AGI limitation on cash contributions will be increased to 60%.
- Gift and Estate Tax Exemptions: Will be increased to $11.2 million for 2018, with inflation indexing for future years.
- 2017 Opportunity. University Athletic Seating Rights: Eliminated for payments made after 2017. (Meaning the 80% deduction for contributions made for university athletic seating rights will be repealed.)
- Pass-Through Income Deduction: Owners of pass-through businesses will be allowed to deduct 20% of “qualified business income” – which is defined as non-wage income*. The “qualified business income” definition excludes income derived from health, law, accounting, actuarial science, performing arts, consulting, athletics, financial service, and brokerage services. The deduction will still be available for owners excluded from the definition of “qualified business income” whose taxable income is less than $315,000 for married taxpayers filing jointly or $157,500 for individuals. Higher earning owners of these business may lose the ability to take advantage of this deduction. (*This is calculated by a specific formula. There is an alternative deduction available based on W-2 wages paid by the business. Contact us for more details on this.)
- Corporate Tax Rate: Will be set at a 21% flat rate.
- Entertainment Expenses Deduction: Eliminated.
- Net-Operating Losses (NOLs): NOLs will not be able to be carried back, but will be allowed to be carried forward with a limit of 85% on their value.
- Assets Used in Trade or Business – Section 179: The limit on current-year expense treatment of assets placed in service in a trade or business will be increased to $1M and the phase-out limit will be increased to $2.5M.
- 2017 Task for Fiscal Year Taxpayers. Bonus Depreciation: Effective for tax years ending after September 27, 2017. Bonus depreciation will be increased to 100% (up from 50%) and will allow previously used assets to qualify. This provision has a phase out in 2024 and will be eliminated in 2027.
- Accounting Methods: The gross receipts thresholds that trigger the required use of the accrual method of accounting will be increased to $25M or less, generally. Qualified personal service businesses will be allowed to use the cash basis method of accounting without regard to the gross receipts test.
- Unrelated Business Income (UBIT): Will be taxed at a 21% flat rate for not-for-profit entities and its computations must be made on a line of business basis.
- Nonprofit Salaries: Nonprofit employers will be subjected to a 21% excise tax on salaries they pay-out above $1 million.
Remember, this is only a brief synopsis of the “Tax Cuts and Jobs Act” – there are many more provisions that may impact your tax liability. If you have questions and/or would like to discuss how you might be affected, please contact us.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this impacts you.