Well, they did it!
Congress has approved and the president has signed the largest tax bill in over 30 years. It impacts virtually every individual and business, lowering the income taxes of reportedly 95% of Americans. Yes, we all lost deductions, most notably the state and local income tax deduction. However, due to the law’s lowering of the individual and corporate tax rates, enhancing the child tax credit, and allowing full expensing of business acquisitions, we all should be able to benefit. And of course, Glass Jacobson will facilitate such benefits for you.
There are many changes to the tax law. Let’s look at some of the more important changes. If you want a more detailed analysis, see this summary of the final tax plan.
The Tax Law's Impact on Individuals
First, let’s take a look at the changes affecting individuals. Overall, tax rates are reduced at all income levels, with the maximum rate of 37% on taxable income over $500,000 for singles and $600,000 for married couples. We will still have alternative minimum tax (AMT) to compute; however, it will affect fewer people due to the increase in the exemption.
Congress attempted to simplify tax filing for individuals by eliminating the personal exemption and replacing it by increasing the standard deductions to $12,000 for single filers and $24,000 for married couples. To help growing families, they also increased the child tax credit to $2,000 from $1,000 for qualifying children. They also significantly raised the income levels at which this credit is phased out to $400,000 for married couples ($200,000 for other taxpayers). There is also a $500 credit for non-child dependents as well. These changes should reduce the tax burden on lower and moderate-income Americans.
As for itemized deductions, most are changed or eliminated. The biggest change is that state and local income taxes, combined with real property taxes, are limited to only $10,000 as an itemized deduction. The House and Senate compromised on the mortgage interest deduction to limit it based on mortgage debt of up to $750,000, but this amount covers only indebtedness incurred on or after December 15, 2017. The new lower limit doesn’t apply to any acquisition indebtedness incurred prior to December 15, 2017, which still is limited to $1,000,000. Therefore, much care should be given for anyone who wishes to refinance older loans or buy a new home. Also, the deduction for home equity indebtedness has been eliminated. More commentary on this will follow below.
All miscellaneous deductions subject to the 2% limitation have been eliminated in the new law. Those include employee business expenses, bank safety deposit fees, investment advisory fees, and tax preparation fees.
The medical expense deduction will be limited to the excess over 7.5% of adjusted gross income for 2017 and 2018. Starting in 2019, it reverts back to deductions in excess of 10% of your adjusted gross income. So, it may be a good idea to bunch your medical expenses during 2018, especially if they are significant.
Congress also eliminated the Obamacare individual mandate, which required individuals who were not covered by a health plan that provided at least minimum essential coverage to pay a penalty with their tax return. It is the Republicans’ first step toward their goal to totally eliminate Obamacare. However, the net investment income tax and related additional Medicare tax, both enacted with Obamacare, are still in place.
The new law expands the definition of Section 529 college savings account qualified distributions. Distributions up to $10,000 per year per child from 529 accounts can now be used to cover tuition for kindergarten through grade 12 schooling.
The Tax Law's Impact on Businesses
While the changes to individuals are numerous, businesses are the real winners in this tax bill. C-corporations will now be taxed a flat 21%, down from a top rate of 35%. This rate should make large corporations more competitive on a global scale.
Pass-through businesses, such as partnerships, limited liability companies (LLC), S-corporations and sole proprietorships, whose net income is taxed on the owners’ and shareholders’ individual tax returns, may receive a deduction from taxable income. This deduction may be up to 20% of “combined qualified business income,” however the amount of the deduction is dependent on a number of factors, including taxable income, wages of the business, acquisitions of “qualified property” and capital gains, among other things. Needless to say, this deduction is a worthwhile tax benefit that must be carefully computed. Much planning will be needed to maximize this deduction. Service businesses, such as law firms, accountants, medical practices, performing artists, financial advisors, and consultants may have further restrictions or be ineligible for this deduction if their taxable income is above $315,000 for a joint return and $157,500 for an individual taxpayer.
Businesses also will be allowed “full expensing” of qualifying property to promote business investment. Qualifying property includes tangible personal property, computer software, and qualified leasehold improvements, restaurant property, and retail improvement property. This could be a real boon to small and mid-size businesses who will be able to invest funds in their businesses currently with immediate tax benefits. Also, luxury auto depreciation limits were increased.
However, businesses lost some deductions. Deductions for entertainment expenses, which were previously 50% deductible, are now totally eliminated. (I guess Congress does not want to subsidize NFL football tickets purchases anymore!) Meal costs are still 50% deductible, but meals provided in-house by employers are now only 50% deductible (rather than the previous 100% deductibility). Also, the deductions for employee transportation fringe benefits (i.e., parking and mass transit) are denied.
Congress also voted to disallow businesses the deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. This disallowance only applies to businesses whose average gross sales for three years is over $25,000,000. This change, as well as the change to the mortgage interest deduction, is a clear sign the current Congress does not want to subsidize excessive debt financing by businesses and individuals. I predict they will follow suit for themselves, starting with the spending limit battle in the new year.
The last major change in the law is the doubling of the base estate and gift tax lifetime exemption amount. Therefore, for 2018, an individual will have a lifetime exemption of approximately $11.2 million and a married couple will have about $22.4 million.
Need More Help?
There are many other changes in the new tax law. This blog touches only on what we consider the most impactful to our client base. If you have specific questions about certain aspects of the new tax law, do not hesitate to contact our offices.
Check out our video for year end tax strategies to maximize tax savings in 2017. In 2018, Glass Jacobson will discuss prudent tax and financial strategies that will benefit you and your business in the wake of these significant changes in the law. We are committed to keeping you informed.
Until next year, enjoy the holidays and happy new year!
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