The Tax Cuts and Jobs Act will likely be implemented by the time you're reading this. With a large number of provisions affecting individual and business taxpayers, here is a recap of the most significant.
Unless indicated, the effective date for these changes is Jan. 1.
The individual tax rate decreased 2.5 percent to 10 percent, depending on the marginal income tax bracket of the taxpayer. Let's look at three provisions:
1. Standard deduction: The bill would increase the standard deduction for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of households and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers is retained.
2. Personal exemptions: The bill eliminates all personal exemptions.
3. Pass-through income deduction: Individuals are allowed to deduct 20 percent of “qualified business income” from a partnership, S corporation or sole proprietorship, as well as 20 percent of qualified real estate investment trust dividends, qualified cooperative dividends and qualified publicly traded partnership income.
The rule does not apply to “specified service trades or businesses” with high income. That includes any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services or any business where its principal asset is the reputation or skill of one or more of its employees.
The exclusion from the definition of a qualified business for specified service trades or businesses phases in for a taxpayer with taxable income in excess of $157,500 for individuals and $315,000 in joint returns.
The bill allows a $2,000 credit per qualifying child. The maximum refundable amount of the credit would be $1,400. The threshold at which the credit begins to phase out would be increased to $400,000 for married taxpayers filing a joint return and $200,000 for other single filers.
We'll cover another three provisions specifically for businesses:
1. Bonus depreciation: The deduction increases to 100 percent for assets placed in service between Sept. 27, 2017, and Dec. 31, 2017. The bill expands the eligibility of property to include used property. This remains in effect until 2022.
2. Section 179: The bill increases Section 179 to $1 million after 2017. The phaseout threshold is increased to $2.5 million.
3. C-corporations: For tax years beginning after Dec. 31, 2017, it's a 21 percent flat corporate tax rate for C-corporations. The alternative minimum tax for C-corporations is repealed.
Also, the bill increases the first-year deduction to $10,000 for passenger automobiles placed in service after Dec. 31, 2017, $16,000 for the second year, and $9,600 for the third year. For the fourth year and later, it's $5,760.
The bill eliminates the separate definitions for qualified leasehold improvements, qualified restaurant property and qualified retail improvement property, and replaces it with one category, qualified improvement property. Qualified improvement property would have a recovery period of 15 years.
The domestic productions activity credit is repealed for tax years after Dec. 31, 2017. In some cases, the business interest deduction is limited. Lastly, like-kind exchange rules will only apply to real estate.
The bill would repeal the overall limitation on itemized deductions, through 2025.
On mortgage interest, existing mortgages are grandfathered. New mortgage interest will be limited if the balance exceeds $750,000.
For state and local taxes, deductions will be limited to $10,000 ($5,000 for married taxpayers filing separately). No deduction will be allowed for prepayment of 2018 taxes.
Also, the bill increases the limit for donations to public charities from 50 percent of income to 60 percent, and it allows medical expense deductions on more than 7.5 percent of adjusted gross income for 2017 and 2018. All miscellaneous itemized deductions subject to the 2 percent floor are repealed through 2025.
The alternative minimum tax for individuals is still in place, but the thresholds are increased. The AMT exemption amount increases to $109,400 for married taxpayers filing a joint return and $70,300 for all single filers. The phaseout thresholds also increase to $1 million for married taxpayers and $500,000 for single filers. Nonmilitary moving expenses are disallowed as deductions.
For any divorce or separation after Dec. 31, 2018, alimony is not deductible or taxable to the receiving spouse. Also, the penalty for not having insurance is reduced to zero, and the estate and gift tax exemption is doubled.
You'll want to continue to monitor any changes and updates.
Jennifer Cochran is a certified professional accountant and tax manager for The Whitlock Co. in Springfield. With 20 years of experience in taxation, she works primarily on business tax, cost segregation studies and not-for-profit organization taxes. She can be reached at firstname.lastname@example.org.
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