By Solomon Ojudoh, CPA, CGMA, MBA
On December 22, President Trump signed into law H.R. 1, the “Tax Cuts and Jobs Act,” This new tax law entirely changes the landscape for what tax practitioners called Section 26 of the US Code (IRS Code). No time to waste anymore. Please reach out to us for strategic tax savings planning.
I hope the below information helps you understand these changes. Please call me at 215.343.7730 or email at firstname.lastname@example.org if you wish to discuss how any of the many other changes in the Act could affect your particular tax situation, and the possible planning steps you might consider in response to them.
Highlights of the Tax Cuts and Jobs for Individual
New income tax rates and brackets: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The Act also provides four tax rates for estates and trusts: 10%, 24%, 35%, and 37%.
Alimony Deduction Suspended: No more deduction for payor of alimony
Alternative Minimum Tax (AMT): Alternative Minimum Taxable Income now increased to $1M for married filing joint and $500K other taxpayers.
Child Tax Credit: New law increased Child tax credit to $2,000 ($1,400 is a refundable credit). Credit begins to phase-out when adjusted gross income is $400,000.
State and Local Tax Deduction Limited: Taxpayer can claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return)
Charitable Donations in 2018: Charitable deduction is now limited to 60% of Adjusted Gross Income
Mortgage & home equity indebtedness interest deduction limited: The deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). Interest on home equity loans or lines of credit not deductible effective 1/1/2018.
Capital Gain: Based on the new law, for 2018, the 15% tax rate breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, and $425,800 for any other individual (other than an estate or trust).
New limitations on excess business loss: Under the new rule, excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer’s net operating loss (NOL) carryforward in subsequent tax years. This limitation applies after the application of the passive loss rules
Estate and gift tax retained, with increased exemption amount: For estates of decedents dying and gifts made in 2018, the exemption for estate and gift tax amount has now doubled to $11.2 million per person. Although tax rate remain at 40%.
Miscellaneous Itemized Deductions are not deductible effective 1/1/2018 through 12/31/2025
Highlights of the Tax Cuts and Jobs for Business
Lower Corporate Tax Rates for Business. For businesses, the legislation permanently reduces the corporate tax rate to 21%
Corporate Alternative Minimum Tax Repealed. The new tax law repeals the corporate alternative minimum tax
Increased Section 179 and Bonus Depreciation Deductions: S.179 increased to $1 million, and the phase-out threshold amount is increased to $2.5 million. 100% of bonus depreciation expense now allowed for assets placed in service on 01/01/2018 to 12/31/2021.
Research and Development Expenditures: Effectively, 1/1/2022 R&D Expenditures must be capitalized.
Interest Expense: Interest expense is now limited to business interest income, plus 30% of business adjusted taxable income.
New Deduction for Pass-Through Income: A Partnership, S corporation, or sole proprietorship is allowed to deduct 20% of combined qualified business income amount” of the taxpayer. The 20% qualified business income deduction is only applicable to “Non-Service Businesses”. Please note that the amount of the deduction cannot exceed greater of: 50% of employees W-2 wages or 25% of W-2 wages plus 2.5% of unadjusted basis of all qualified property as defined in S.199a of the IRS Code. However, the W-2 wage limit begins phasing out in the case of a taxpayer with taxable income exceeding $315,000 for married individuals filing jointly ($157,500 for other individuals).
Bottom Line. While the above changes will lower rates at many income levels, determining the overall impact on any particular individual or family will depend on a variety of other changes made by the Tax Cuts and Jobs Act, including increases in the standard deduction, loss of personal and dependency exemptions, a dollar limit on itemized deductions for state and local taxes, and changes to the child tax credit and the taxation of a child’s unearned income, known as the Kiddie Tax. Please do not hesitate to call us at 215.343.7730 or email at email@example.com, so we can review your situation and advice you on the best tax savings strategies available to you.