The recently enacted Tax Cuts and Jobs Act (TCJA) includes provisions that will affect businesses and individuals. This is the biggest income tax change since 1986 and there are still a lot of unknowns on how it will apply in different situations and many clarifications are still needed.
You may be asking yourself, how will the provisions of this sweeping tax law affect my business or me personally? As usual when asking questions about taxes the answer of “it depends” definitely applies here. With that in mind, we’ve compiled a recap of some of the more important individual, business, and estate and gift tax elements on the new law, as well as some general observations we have made.
Individual Changes (Effective for tax years beginning in 2018 through 2025 unless otherwise noted):
- Many of the individual rates were reduced 2-4% compared to the rates in 2017 and the tax brackets were also expanded.
- The rates applicable to net capital gains and qualified dividends have not changed.
- The standard deduction amounts were increased to $24,000 for joint filers and $12,000 for single filers.
- Itemized deductions are more limited and coupled with the increase in the standard deduction, many taxpayers will no longer be itemizing. Changes to itemized deductions include the following:
- Itemized deduction for state and local income taxes and property taxes is limited to $10,000,
- Repeal of deductibility of home equity interest, and
- Repeal of 2% miscellaneous itemized deductions.
- Our take: Bunching itemized deductions into one tax year may be beneficial and those over 70 ½ may want to directly donate from their IRA to charity.
- Removal of personal exemptions (was about $4,000 per person).
- The child tax credit has been increased for qualifying children (i.e., children under 17) to $2,000. In addition, a new $500 credit for a taxpayer’s dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).
- Sec. 529 plans were expanded to include K-12 schools up to $10,000 per year.
- Our take: If you have cash available to pre-fund up to $75,000 per person immediately into a Sec. 529 plan, there are scenarios that could pay for K-12 private school tax free and still have the main amount available for college.
- Alternative Minimum Tax (AMT) has been retained, but less taxpayers should be subject to it since exemption amounts and phase-out amounts have been increased.
- Taxpayers are allowed a deduction equal to 20% of “qualified business income” from partnerships, S-corporations and sole proprietorships. If your individual taxable income is typically $315,000 or more ($157,500 for single filers), then this deduction will be phased out for specified service trades such as health, law, consulting, athletics, financial or brokerage services.
- Our take: There may be planning opportunities to maximize this 20% deduction in 2018.
- Business losses can offset no more than $500,000 for joint filers ($250,000 for single filers) of a taxpayer’s non-business income for that year.
- Some major items repealed were:
- Roth conversion recharacterizations
- Health insurance mandate penalty (not until 2019 though)
- For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
Business Changes (Effective for tax years beginning in 2018):
- C corporation tax rate reduced to a flat 21% rate.
- Our take: due to the C corporation tax rate reduction, along with the 20% “qualified business income” deduction noted above, now may be the time to review how your entity is structured.
- Accelerated depreciation options increased significantly with Section 179 increasing to $1 million and bonus depreciation to 100% through 2022.
- Taxpayers under $25 million average gross receipts (for the last three years) are no longer required to use the accrual basis method of accounting and may adopt to the cash basis method (including those with inventory), but planning is needed to optimize tax deductions on the conversion.
- Every business will be limited to a deduction for business interest equal to 30% of its adjusted taxable income unless their average gross receipts for the last three years is $25 million or less.
- Some major items repealed were:
- Domestic Production Activities Deduction
- C Corporation AMT
- Like-kind exchanges on personal property
- 50% deduction for business-related entertainment expenses
- For those C corporations that converted to S corporations within the last five years, trading fixed assets may not be used to avoid the built-in gains tax.
Estate and Gift Changes:
- Estate exemption temporarily doubled to $11.2 million per person, indexed for inflation.
- The annual gift exemption amount increased to $15,000 per person per year.
- Planning for step-up basis, lifetime tax effects, value growth, the expiration of the increased limits after 2025 and how to avoid probate are still good estate planning items to consider and shouldn’t be overlooked due to the new higher limits.
Overall, there are portions of this law that should make tax filing easier for individuals but at the expense of losing deductions previously available to reduce taxable income. For businesses, there are still many items needing further clarification but in some cases tax law got even more complicated and there may not be as much in tax savings as some are counting on.
Still wondering how this will impact you? Start here. If you wish to discuss any of these provisions or have other questions, please contact your BerganKDV advisor.
