This week, the House and Senate are on the verge of passing the new tax bill. The next step is for the President to sign it into law. Both are expected within days.
Winners and Losers
Here’s our view of who benefits, and who doesn’t, under the new bill. It’s always a bit more complicated than this, but it should give you an idea who is impacted.
- Taxpayers who either do not itemize their deductions such as mortgage interest and state and local taxes (and take the current standard deduction), or taxpayers who do itemize but have less total itemized deductions and personal exemptions than the new, higher standard deduction.
- Families with children under the age of 18 which will see a higher child tax credit and higher income limits before the credit is phased out.
- Those with children enrolled in private schools can begin to benefit from utilizing Section 529 plans, currently only allowed for qualified higher education expenses.
- Those without healthcare will no longer be subject to the penalty of the shared responsibility payment due with the filing of their tax returns.
- Single taxpayers earning more than $500,000 ($600,000 for married filing jointly) will have a lower top rate of 37% vs. the previous top rate of 39.6%.
- Taxpayers with business income from a sole proprietorship, partnership or S corporation will be able to deduct 20% of their business income, subject to certain limits.
- Many taxpayers will lose due to the elimination of the $4,050 personal exemption for themselves and dependents if they do not benefit from the higher standard deduction and/or higher child tax credit.
- Taxpayers who have more than $10,000 in state income tax and local property taxes, and who do not benefit by the higher standard deduction.
- Families with children, generally older than 17 years of age, due to the loss of personal exemptions.
- Taxpayers who currently pay interest on a home equity line of credit, as this deduction has been eliminated.
- Taxpayers who had considered buying a new home with a mortgage in excess of $750,000, as the deductible interest is limited to mortgage indebtedness below $750,000.
- Taxpayers who itemized deductions and also had “Miscellaneous Itemized Deductions” (typically investment management fees, unreimbursed employee expenses, union dues and tax preparation fees). This deduction has been eliminated under the current law.
What can you Do Before December 31, 2017?
Much of what can be done before year-end is standard tax planning advice. We caution that these are standard items taxpayers can do, but may not benefit you in your specific tax situation. Many of these may result in Alternative Minimum Tax. Consult with us before acting upon these suggestions to ensure a benefit.
- Make bigger charitable contributions in 2017. This is particularly true if your tax bracket will be lower next year due to the tax law changes, and if you will not itemize your deductions in 2018 because of the larger standard deduction available in 2018.
- Defer income into 2018. Since tax rates will generally be lower in 2018, deferring income into 2018 makes sense as you will see less tax on that same income next year.
- If you take advantage of the “miscellaneous itemized deductions” every year, such as investment expenses, tax preparation fees, union dues and unreimbursed employee expenses, try and pay as much as you can in 2017. This deduction will be completely eliminated beginning in 2018. If you do not itemize in 2017, there is no benefit to making this move in 2017.
- If, by chance, you are moving in the next month or so and your moving expenses would qualify for the moving expense deduction, prepay any expenses you can in 2017. The moving expense deduction is being eliminated beginning in 2018.
- If you have significant medical expenses, and they will exceed 7.5% of your adjusted gross income in 2017, pay those expenses before year-end. This is particularly true if you may find yourself taking the larger standard deduction and not itemizing your expenses in 2018.
- Prepay 2018 property taxes in 2017 if your local taxing agency allows prepayments. But note, that if you will pay alternative minimum taxes in 2017, this move will not benefit you since property taxes are a “preference item” and not deductible under the AMT calculation.
- If possible, pay down home equity loans before the end of 2017. The interest on them will no longer be deductible in 2018.
- If you have a home equity loan, be sure to pay as much interest as has been charged before year end.
- If you anticipate owing state taxes for 2017, it may benefit you to pay them before year-end.
Here are the key changes:
New Income Tax Rates and Brackets
We will still have 7 tax brackets, but the sizes of the brackets are changing slightly and the rates are lower than they were in 2017. Click here for a link to the proposed brackets.
Standard Deduction Increased
If you do not itemize your deductions (mortgage interest, state and local taxes, charitable contributions, etc.), the standard deduction will increase from $13,000 to $24,000 for married individuals filing a joint return, from $9,550 to $18,000 for heads of household, and from $6,500 to $12,000 for all other taxpayers.
Personal Exemptions Suspended
Under the old rules, starting in 2018, taxpayers were allowed a personal exemption of $4,150 for themselves and each dependent they claimed on their tax return. Under the new law, this deduction from your taxable income is eliminated.
Mortgage Interest Deduction
For new mortgages, deductible interest will be limited to the first $750,000 of a mortgage (currently the limit is $1,000,000 of a mortgage). For transition purposes, there is a “Binding contract” exception. A taxpayer who has entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before Apr. 1, 2018, shall be considered to incur acquisition indebtedness prior to Dec. 15, 2017. As a result, the old limit of interest on a mortgage up to $1,000,000 will still be in effect for that taxpayer.
The deduction for interest on home equity debt will be eliminated beginning in 2018.
State and Local Tax Deductions
The deduction for state income taxes and property taxes will be limited to $10,000 per year ($5,000 for a married taxpayer filing a separate return). There is language in the bill that states amounts paid in 2017 for state or local income taxes imposed for the 2018 tax year will be treated as paid in 2018. In other words, you can’t pre-pay your state and local income taxes in 2017 to avoid the limits in 2018.
The prepayment of real estate tax bills is a subject of a great deal of debate in the CPA profession right now. We are currently taking the position that if you have the ability to prepay through your taxing agency (not through escrow), you most likely will be able to take the deduction for 2017. There is the possibility that congress may issue a correction and disallow this deduction. And if you are in a situation of paying alternative minimum taxes in 2017, the prepayment of real estate taxes may not make a difference.
Miscellaneous Itemized Deductions
Currently, if you have certain expenses such as investment management fees, union dues, unreimbursed employee expenses, home office expenses for W-2 employees and tax preparation expenses, you are allowed a deduction for the amount that exceeds 2% of your adjusted gross income. Beginning in 2018, this deduction is eliminated.
Taxability of Alimony Paid and Received
Beginning in 2019, for divorces occurring after January 1, 2019, alimony will no longer be deductible by the payee or taxable to the recipient. Note that this is for divorces occurring after 2018. Therefore, if you are divorcing late in 2018 or in 2019, you need to be aware of this significant change.
Child Tax Credit
Beginning in the 2018 tax year, the child tax credit will double from $1,000 to $2,000 per child. The bill also includes a temporary $500 nonrefundable credit for other qualifying dependents (such as older adults). In addition, the income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers).
College Savings (529) Plans
Currently, 529 plan distributions are allowed only for college costs. The new law expands the use of these funds to include up to $10,000 of nontaxable distributions per student for public, private and religious elementary and secondary schools, as well as home school students. However, we are hearing indications that this could be removed in last-minute changes to the bill. Please stay tuned.
Moving Expense Deduction Suspended
Beginning in 2018, the moving expense deduction for moves connected with a new job if the new workplace was at least 50 miles farther from your former residence has been suspended until 2026. There is an exception for members of the Armed Forces on active duty who move pursuant to a military order.
Medical Expense Deduction
The 10% of AGI limit for deducting medical expenses, has been reduced to 7.5% of AGI beginning in 2017. This lower rate currently only applies for 2017 and 2018 tax years.
Alternative Minimum Tax (AMT)
While the AMT will not be abolished for individual taxpayers, the exemption amounts used to calculate this have been increased slightly. This would mean that fewer taxpayers will be exposed to this tax, or less income will be included in the calculation. It is not a significant increase in the exemption, so many taxpayers will still feel the sting of AMT on their personal returns.
New Deduction for Pass-Through Business Income
Beginning the 2018 tax year, sole proprietorships, partnerships, LLCs and S corporations will be able to deduct 20% of their business income, subject to certain wage limits and exceptions. The deduction will be disallowed for business offering “professional services” above a threshold amount. Phase-outs begins at $157,500 for individual taxpayers and $315,000 for married taxpayers filing jointly.
Obamacare Individual Mandate
The penalty associated with not maintaining minimum health care coverage will be eliminated.
KEY CHANGES FOR BUSINESSES
These are just some of the highlights. There are other changes that affect much larger businesses or businesses with issues our clients simply don’t experience.
Corporate Tax Relief
Beginning in 2018, the corporate tax rate will be lowered to a flat rate of 21%. Previously, the tax rates ranged from 15% to 35% depending on income of the corporation. This applies to C corporations and not to pass through entities such as partnerships and S corporations which do not have a corporate level tax.
Increased Code 179 Expensing of Equipment Purchases
The maximum amount a taxpayer may expense under the “Section 179 provisions” is increased from $500,000 to $1 million, and phase-out amounts that lower the deduction have increased.
Employer’s Deduction for Fringe Benefit Expenses Limited
Beginning in 2018, the 50% deduction for entertainment expenses are disallowed. In addition, the business deduction for employee transportation fringe benefits (e.g. parking and mass transit) are denied, the 50% limitation on meals is expanded to included meals provided through an in-house cafeteria or otherwise on the premises of the employer, and there is no deduction for transportation expenses that are the equivalent of commuting for employees.
Domestic Production Activities Deduction Repealed
Beginning in 2018 for non-corporate taxpayers, and beginning in 2019 for C corporations, the Domestic Production Activities Deduction has been repealed and eliminated.
Limitations on Deduction of Business Interest
Beginning in 2018, every business is subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. However, these limits apply only to businesses with average annual gross receipts of less than $25,000,000.
New Credit for Employer-Paid Family and Medical Leave
For wages paid in tax years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, the Act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave (FMLA) if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.