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.)
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.
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.