With the signing of the Tax Cuts and Jobs Act of 2017 on December 22, 2017, I was reminded of the Tax Reform Act of 1986 that was signed by Ronald Reagan on October 22, 1986. At that time my CPA certificate was barely framed, and I was eager to take on the world of income taxation. My superiors told me when I started in the business that it wouldn’t take long for me to catch up with their knowledge of the law. It wasn’t that I was so smart, it was the fact that they knew the laws would continually change. They were right then, and they are still right today. So here we are now, with many new rules that are making my head swim and new terms that we are
all getting to know.
As in 1986, the 2017 Act touts income tax simplification; and as things could be simpler for some, it will be more complicated for many others, especially those who own small businesses that pass income through to the owners’ personal tax returns. Keep in mind that most of these provisions will expire in 2025, so all could be new again soon.
The 2018 personal income tax brackets are slightly lower across the board for everyone, with the top bracket going from 39.6% to 37%. Keep an eye on taxes on for children; their investment income is now taxed at trust rates which reach 37% at only $12,500 in taxable income, which is a big change from using the parents’ rates in the past.
While the income tax brackets are always easy to put into sound bites, the real issue has always been the way taxable income is calculated. This time around many deductions have been slashed, while the standard deduction for those who do not itemize has been doubled to $24,000 for married couples and $12,000 for singles. There are no more personal exemptions, but there is an increased child tax credit that will offset that loss of deduction for some.
Itemized deductions look drastically different in 2018 and beyond.
• Home mortgage interest deductions are limited to new loans of only $750,000, contrasted to $1,000,000 in the past.
• Home equity loan interest is not deductible unless the proceeds were used to make substantial improvements to the home and don’t exceed the limits above.
• Property taxes, along with state and local income tax and sales tax are still deductible, but will be capped at $10,000 per year.
• Medical deductions, which are only deductible if they are over 10% of Adjusted Gross Income in 2017, only have to exceed the 7.5% threshold for 2018 and 2019. It will go back up to 10% in 2020.
• Charitable donations made to public charities are limited to 60% of Adjusted Gross Income beginning in 2018, as opposed to 50% in the past.
• Casualty losses are only deductible if related to a disaster that is declared by the president.
• Miscellaneous itemized deductions are gone after 2017. These include tax preparation fees, expenses related to employment, moving expenses, and investment fees paid to money managers.
• One bright spot regarding itemized deductions is the repeal of the limitation on total itemized deductions for high income taxpayers. For those who are prone to make large charitable contributions, this could be very beneficial beginning in 2018.
Pass-through entities — Partnerships, S-Corps, and SolemProprietorships — may receive a deduction of up to 20% of their Qualified Business Income. This phases out and becomes more difficult to calculate for married people with over $315,000, and others with over $157,500 in taxable income before the deduction, so I encourage those in this category to get professional help with this. It’s very beneficial, but it’s complicated!
The individual mandate that requires taxpayers to have health insurance by the Affordable Care Act was repealed beginning in 2019. It remains to be seen how this will affect the health care industry.
Alimony paid to an ex-spouse under divorce decrees signed after December 31, 2018 will not be deductible by the payor,
nor will it be income to the payee, but it doesn’t change the tax treatment regarding agreements signed prior to that date.
Estate tax thresholds have been doubled so that an individual can pass up to $11,200,000 in assets to heirs before the 40%
estate tax kicks in. This can be a game changer for some people.
Many businesses will receive tax relief in the form of increased depreciation deductions on purchases of new and used equipment. Beginning with purchases after September 27, 2017, the popular Sec. 179 immediate deduction limit for certain capital expenditures was increased from $500,000 to $1,000,000. Bonus depreciation was increased from 50% to 100% of the cost of new and used (formerly just new) qualified equipment purchases, and is set to phase out by 2027. This could be important to know for the 2017 returns that are being filed now.
Business entertainment expenses are no longer deductible, while business meals are still 50% deductible. Meals provided to employees which were 100% deductible in the past are only 50% deductible beginning in 2018, and will not be deductible at all after 2025. This requires businesses to break out these types of expenses now to be able to accurately calculate taxable income in 2018.
The corporate tax rates have changed from graduated rates that went from 15% to 35% for the first $100,000 of income to a flat rate of 21% for all income. Small corporations could be hurt by this change, although the large corporations should receive a benefit. With the change in these rates and the new deduction for pass-through income, some businesses are considering a change in their tax structure moving forward.
As you can see, there are many changes in this tax law, and these are just the highlights. It’s a safe bet that additional changes are imminent, so if you are interested, get in the game now while it’s new to all of us. If not, just stay tuned — more to come!
By Kim Ford, theKFORDgroup