Landmark Tax Reform Bill Passes

Copyright 2017

The new tax reform law - commonly referred to as the "Tax Cuts and Jobs Act" (TCJA) - is the most significant tax legislation in decades. Now businesses and  individuals are trying to digest the details and evaluate how the changes will  impact their tax situation.

Fortunately,  your tax advisors can help you figure things out. Let's start with a basic  overview of what's covered in the new law. (Except where noted, these changes  are effective for tax years beginning after December 31, 2017.)

For Businesses

In  general, the law significantly reduces the income tax rate for corporations and  eliminates the corporate alternative minimum tax (AMT). It also provides a  large new tax deduction for owners of pass-through entities and makes major  changes related to the taxation of foreign income. But it also reduces or  eliminates many business tax breaks.

Some  of the key business-related changes include:

  • Replacement of  graduated corporate tax rates ranging from 15% to 35% with a flat corporate  rate of 21%
  • Repeal of the  20% corporate AMT
  • New 20%  qualified business income deduction for owners of flow-through entities (such  as partnerships, limited liability companies and S corporations) and sole  proprietorships -- only through 2025
  • Doubling of  bonus depreciation to 100% and expansion of qualified assets to include used  assets -- effective for assets acquired  and placed in service after September 27, 2017, and before January 1, 2023
  • Doubling of the  Section 179 expensing limit to $1 million and an increase of the expensing  phaseout threshold to $2.5 million
  • Other  enhancements to depreciation-related deductions
  • New disallowance  of deductions for net interest expense in excess of 30% of the business's  adjusted taxable income (exceptions apply)
  • New limits on  net operating loss deductions
  • Elimination of  the Section 199 deduction, also commonly referred to as the domestic production  activities deduction or manufacturers' deduction -- effective for tax years beginning after December 31, 2017, for  noncorporate taxpayers and for tax years beginning after December 31, 2018, for  C corporation taxpayers
  • New rule  limiting like-kind exchanges to real property that is not held primarily for sale
  • New tax credit  for employer-paid family and medical leave -- only through 2019
  • New limitations  on excessive employee compensation
  • New limitations  on deductions for employee fringe benefits, such as entertainment and, in  certain circumstances, meals and transportation

For Individuals and Estates

The  new law makes small reductions to income tax rates for most individual tax  brackets, and it significantly increases individual AMT and estate tax  exemptions. But there's also some bad news for individuals: The TCJA eliminates  or limits many tax breaks. In addition, much of the tax relief for individual  taxpayers will be available only temporarily.

Here  are some of the key changes; except where noted, these changes will sunset after  2025:

  • Reductions in  individual income tax rates ranging from 0 to 4 percentage points (depending on  the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
  • Near doubling of  the standard deduction to $24,000 (married couples filing jointly), $18,000  (heads of households), and $12,000 (singles and married couples filing  separately)
  • Elimination of  personal exemptions
  • Doubling of the  child tax credit to $2,000 and other modifications intended to help more  taxpayers benefit from the credit
  • Reduction of the  adjusted gross income (AGI) threshold for the medical expense deduction to 7.5%  for regular and AMT purposes -- for only 2017  and 2018
  • New $10,000  limit on the deduction for state and local taxes (on a combined basis for  property and income taxes; $5,000 for separate filers)
  • Reduction of the  mortgage debt limit for the home mortgage interest deduction, to $750,000  ($375,000 for separate filers), with certain exceptions
  • Elimination of  the deduction for interest on home equity debt
  • Elimination of  the personal casualty and theft loss deduction (with an exception for federally  declared disasters)
  • Elimination of  miscellaneous itemized deductions subject to the 2% floor (such as certain  investment expenses, professional fees and unreimbursed employee business  expenses)
  • Elimination of  the AGI-based reduction of certain itemized deductions
  • Elimination of  the moving expense deduction (with an exception for members of the military in  certain circumstances)
  • AMT exemption  increase, to $109,400 for joint filers, $70,300 for singles and heads of  households, and $54,700 for separate filers
  • Doubling of the  gift and estate tax exemptions, to $10 million (expected to be $11.2 million  for 2018 with inflation indexing)

In addition, the new law permanently eliminates the individual  mandate under the Affordable Care Act requiring taxpayers not covered by a  qualifying health plan to pay a penalty. The elimination of the individual  mandate is effective for months beginning  after December 31, 2018. Also  permanent is the expansion of tax-free Section 529 plan distributions to  include those used to pay qualifying elementary and secondary school expenses,  up to $10,000 per student per tax year.

Need Help?

The  new tax law is broad-reaching and complicated. And more tax reform may be  coming. Other proposals that Republican congressional leaders have discussed  would address retirement and education savings, reorganize the IRS, delay some  taxes funding the Affordable Care Act (such as the medical device tax and the  health insurance provider fee), prevent abuses of the earned income tax credit and  extend the benefits of some tax credits for renewable energy property, nuclear  energy production and biodiesel.

In  this time of change, your tax advisor can be a valuable resource, helping you stay  atop the latest developments.