The H.R. 1, known as the Tax Cuts and Jobs Act, which makes widespread changes to the Internal Revenue Code, has been signed into law on December 22nd, 2017. Most of its provisions, including a lower corporate tax rate of 21% and lower individual income tax rates, go into effect January 1, 2018.
As we enter the final week of the year, it’s the perfect time to start your year-end tax planning. Several tax-planning tactics/strategies are available to individuals and businesses throughout the year. These strategies are particularly relevant near the end of the year, which often require some year-end reaction, either to capitalize on targeted tax rules or mitigate against their application.
INDIVIDUALS
Tax Rate:
Tax rates were settled on a seven-rate structure, the same as exists now, with lower rates and revised bracket amounts. Ultimately, the top rate was cut from its current level of 39.6% to 37%.
Standard Deduction:
The act increased the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers was not changed by the act.
Effect: For tax payer who would not otherwise itemize deductions, this net increase ($11,300 and $5,650) would translate into about a $2,825 and $1,412 tax savings for those in the 25% marginal tax rate
Personal Exemption:
Personal exemptions are eliminated until 2025. Currently at $8,100 and $4,050 for married and single filers respectively.
Effect: Elimination of the personal exemption would reduce the benefit of the higher standard deduction by another $2,025 and $1,012.50 respectively for those in the 25% marginal tax bracket
Deduction and Credit:
Mortgage interest deduction: The new law limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), in the case of tax years beginning after December 31, 2017, and beginning before January 1, 2026.
For acquisition indebtedness incurred before December 15, 2017, the new law allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately).
The new law also allows taxpayers to continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.
Medical deductions: The new law temporarily enhances the medical expense deduction. It lowers the threshold for the deduction to 7.5 from 10% percent of adjusted gross income (AGI) for tax years 2017 and 2018.
State and local taxes: The new law limits annual itemized deductions for all nonbusiness state and local taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayer filing a separate return). Sales taxes may be included as an alternative to claiming state and local income taxes.
Miscellaneous itemized deductions: The new law temporarily repeats all miscellaneous itemized deductions that are subject to the two-percent floor under current law.
Health insurance mandate:
The insurance requirement under the Affordable Care Act (ACA), the law known as Obamacare, is abolished. In other words, the bill would reduce to zero the amount of the penalty under Sec. 5000A, imposed on taxpayers who do not obtain insurance that provides at least minimum essential coverage.
Family:
The new law temporarily increases the current child tax credit from $7.000 to $2,000 per qualifying child. Up to $1,400 of that amount would be refundable. It also raises the adjusted gross income phase-out thresholds, starting at adjusted gross income of $400,000 for joint filers ($200,000 for all others)
The child tax credit is further modified to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children.
Effect: As a credit, in contrast to a deduction, the enhanced child credit has been highlighted as one of the provisions that will lower overall tax liability for middle-class families.
Education:
The new law retains the student loan interest deduction. It also modifies section 529 plans and ABLE accounts. It does not overhaul the American Opportunity Tax Credit as proposed in the original House bill.
The new law also does not repeal the exclusion for interest on U.S. savings bonds used for higher education, as proposed in the House bill.
Federal Estate Taxes:
The new law follows the original Senate bill in not repealing the estate tax. but rather doubling the estate and gift tax exclusion amount for estates of decedents dying and gilts made after December 31. 2017, and before January 1, 2026. The generation-skipping transfer (GST) tax exemption is also doubled.
Retirement:
The new law generally retains the current rules for 401(k) and other retirement plans. However, it repeals the rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions to unwind a Roth conversion. Rules for hardship distributions are modified, among other changes.
Alternative Minimum Tax:
The new Law temporarily increases (through 2025) the exemption amount to $109,400 for joint filers ($70,300 for others, except trusts and estates).
The new law also raises the exemption phase-out levels so that the AMT will apply to an income level of $1 million for joint filers ($500.000 for others). These amounts are all subject to annual inflation adjustment.
Carried Interest:
Under the new law, the holding period for long-term capital gains is increased to three years with respect to certain partnership interests transferred in connection with the performance of services.
Vehicle Depreciation:
The new law raises the cap placed on depreciation write-offs of business-use vehicles. The new caps will be $10,000 for the first year a vehicle is placed in service (up from a current level of $3,160); $16,000 for the second year (up from $5,700); $9,600 for the third year (up from $3,050); and $5,760 for each subsequent year (up from $1,875) until costs are fully recovered. The provision is effective for property placed in service after December 31, 2017, in taxable years ending after such date.
BUSINESSES
Corporate Taxes:
The top tax rate for corporations drops from 35% to 21%. The new law makes the new rate permanent
Corporate AMT: Under the new law, the 80-percent and 70-percent dividends received deductions under current law are reduced to 65-percent and SO-percent, respectively It also repeals the AMT on corporations.
Bonus Depreciation:
The new Law increases the “bonus depreciation” allowance to 100 percent for property placed in service after September 27, 2017, and before January 1. 2023.
Section 179 Expensing:
The new law enhances Code Sec. 179 expensing. The Conference bill sets the Code Sec. 179 dollar limitation at $1 million and the investment limitation at $2.5 million.
Business Deduction and Credits:
Numerous business tax preferences are eliminated. These include the Code Sec. 199 domestic production activities deduction, non-real property like-kind exchanges, and more. Additionally, the rules for business meals are revised, as are the rules for the rehabilitation credit.
It also creates a temporary credit for employers paying employees who are on family and medical leave.
Pass-through Entities:
Currently, owners of partnerships, S corporations, and sole proprietorship – as “pass-through” entities – pay tax at the individual rates, with the highest rate at 39.6 percent. The new Law reduces the percentage of the deduction allowable under the provision to 20 percent.
Net Operating Loss:
The new law modifies current rules for net operating losses (NOLs). Generally, NOLs will be limited to 80 percent of taxable income for losses arising in tax years beginning after December 31, 2017. It also denies the carryback for NOLs in most cases while providing for an indefinite carryforward, subject to the percentage limitation.