Tax Cuts and Jobs Act of 2017

Now that the Tax Cuts and Jobs Act has been approved and is now law, we can start summarizing the details of the legislation.  Below is a summary of the major highlights of this law. 

Individuals

Tax Rates

The prior tax rates ranging from 10% to 39.6% have been replaced by the following rates:

MFJ

Single

Rate

$0 to $19,050

$0 to $9,525

10%

$19,050 to $77,400

$9,525 to $38,700

12%

$77,400 to $165,000

$38,700 to $82,500

22%

$165,000 to $315,000

$82,500 to $157,500

24%

$315,000 to $400,000

$157,500 to $200,000

32%

$400,000 to $600,000

$200,000 to $500,000

35%

Over $600,000

Over $500,000

37%

The capital gains and qualified dividends tax rates are unchanged.

Alternative Minimum Tax

While the alternative minimum tax survived the bill and is still around, the exemption has been increased to $109,400 for joint filers, which will reduce the number of taxpayers subject to this tax.

Exemptions and Deductions

The new law eliminates the personal exemptions that taxpayers have grown accustomed to receiving.   Under prior tax law, taxpayers received a $4,150 deduction for every member of the household they were eligible to claim. 

However, with this change, the new law increases the standard deduction for all taxpayers. 

2018 Standard Deductions

$12,000

Single

$24,000

Married filing joint

$18,000

Head of Household

Itemized deductions had a few major changes.

·        Medical expenses deductions – The threshold to begin deducting medical expenses has been lowered back down to 7.5% of AGI for 2018 from the previous level of 10% of AGI.  This will allow more people to deduct qualified medical expenses.

·        Mortgage interest deduction – The amount of mortgage interest deductible has been lowered from interest on $1,000,000 of mortgage debt to $750,000 of mortgage debt on new mortgages.  Existing mortgages still are eligible for the $1,000,000 limit.  Home equity line of credit interest will no longer be deductible.

·        State and local taxes – Only the first $10,000 of state and local property and income taxes will be deductible in 2018.  Property taxes paid for business purposes will still be fully deductible for the business.

·        Miscellaneous itemized deductions – These are no long eligible to be deducted on itemized returns.

Individual Credits

Education credits – These credits were not changed by the tax law.

Child tax credits– These credits were raised to $2,000 per eligible child under 18.  There is also a $500 credit for non child dependents.  There are phase outs for these credits that begin for married filing joint taxpayers with income over $400,000.

Individual Shared Responsibility Payment

This has been eliminated. 

Businesses

Tax Rates

Corporate tax rate has been lowered for C-Corporations from 35% to 21%.  The corporate alternative minimum tax has also been repealed.

For passthrough businesses such as S-Corporations, LLCs, and sole propertierships, the tax is still paid at the individual rates, but the taxpayer receives a deduction of 20% of the business’s qualified business net income. 

Section 179

The limit on section 179 properties has been raised from $500,000 to $1,000,000 in qualifying property.

Bonus Depreciation

The limit on bonus depreciation has been raised on qualifying property from 40% to 100% in 2018.

Entertainment deductions

While qualifying business meals are still deductible at 50% of the cost, expenses incurred for entertainment or recreation no longer qualify.

Net operating losses

The amount of net operating loss that can be used is 90% of taxable income in 2018.  This is changed from 100% of taxable income in the old law.

Interest deductions

There is a new limit of 30% of the business adjusted taxable income to deduct interest expense.  However, this limit only applies to businesses with gross receipts over $25,000,000.

Vehicles

The limit on vehicle depreciation has been increased to $10,000 for year 1, $16,000 for year 2, $9,600 for year 3, and $5,760 for the following years.  This is increased from $3,160, $5,100, $3,050, and $1,875 for the same periods under prior law.

Domestic Production Activities Deduction

 The section 199 “Production Deduction” has been eliminated.

This is only a brief overview of some of the highlights of the new law.  Please contact me if you have any specific question about the law or any tip with the new law you may have been advised to do before you do it.  The new law is complex and individual circumstances vary.  This is for informational purposes only and should not be used as tax advice without directly consulting with me first about your individual circumstances.

I look forward to seeing everyone in the coming months. 

Have a Happy New Year!

Ryan Watson