The House and Senate have passed the Tax Cuts and Jobs Act and now we wait for President Trump to sign the bill. This bill brings with it the most significant changes to our nation's tax code in decades. So the question most people are asking is, "how will it impact my family or my business?" While it will be impossible to fully answer that question in a short post less than a week after the bill has been passed, here are some highlights that could affect a number of taxpayers.
There was an overall decrease in the individual tax rates. 2017 and before had the following tax brackets and rates: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Starting in 2018 there are seven tax brackets and rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Trusts and Estates tax brackets have changed. The tax rate starts at 10% instead of 15% and the highest rate is 37% instead of 39.6% but the rate will escalate to the 37% quicker now.
There will be numerous changes to Schedule A of the 1040, which is where taxpayers itemize their deductions for medical, state & local taxes, mortgage interest and charitable contributions.
The standard deduction will increase from $13,000 to $24,000 for married filing joint; $9,550 to $18,000 for heads of household; and from $6,500 to $12,000 for single filers. This means that married individuals who have historically had itemized deductions in the range to $13,001 to $24,000 will receive the standard deduction and not have schedule A.
For those taxpayers who may still qualify for itemized deductions many of those deductions have changed. For 2017 and 2018 medical deductions in excess of 7.5% of adjusted gross income (AGI) can be deducted. After 2018 it will be 10% of AGI.
Real estate taxes, state, local and sales tax, personal property taxes combined will be limited to $10,000. This will impact higher income individuals who pay significant state income tax or those with high property values that pay significant property taxes. To see if this might impact you look at line 9 of schedule A of your most recent tax return, if that amount is close to or over $10,000 and your other deductions in total exceed the amount to still itemize you will be subject to this limitation.
Beginning in 2018 home equity loan interest will not be deductible. There will be limits on mortgage interest if the loan amount exceeds $750,000 on acquisition debt and $1 million on refinancing debt.
Personal casualty losses will no longer be deductible (except Federally declared disasters).
All miscellaneous deductions subject to 2% of AGI will be suspended. So if you have unreimbursed business expenses those will no longer be deductible on your tax return.
With all of these changes there will likely be less taxpayers itemizing deductions on schedule A and will instead take the new higher standard deduction.
Pre-act law provided for personal exemptions of $4,150 each for the taxpayer, taxpayer's spouse and any dependents. These personal exemptions have been suspended. With these exemptions no longer available this will offset the increase in the standard deduction.
Pre-act law provided a child tax credit of $1,000 for each qualifying child under the age of 17. This credit was phased out starting at an AGI of $75,000 for single filers and $110,000 for married filers. The child tax credit has increased from $1,000 to $2,000 and the phase out limits are increased to $200,000 for single filers and $400,000 for married filers. More taxpayers will be able to utilize this credit. The refundable portion has also increased which means if your tax is less than the credit you get a refund of up to $1,400 per qualifying child.
Alimony for separation or divorce agreements executed after 2018 will not be income to the spouse receiving it and deductible to the spouse paying it.
Unearned income subject to the Kiddie Tax will be taxed at the trusts and estates tax rate and not the parent's tax rate.
Generally capital gains remain unchanged
While AMT was not repealed in the tax reform the limits at which taxpayers will be subject to AMT will increase.
Those taxpayers who have income from a pass-through business (sole proprietor, partnership, LLC or S corporation) pay the tax on the income (Qualified Business Income) from that business on their personal return and not on the business itself. So the income has always been taxed at an individual tax rate and not a corporate tax rate. On the business side of this tax reform there is a general reduction in the corporate tax rate from a range of 15% - 35% to a flat rate of 21%.
Beginning in 2018 there will be a Qualified Business Income Deduction. There are several limitations to the deduction based on AGI and W-2 wages of the business, but generally you will receive a 20% deduction of the Qualified Business Income deduction. This will be a deduction of taxable income and not AGI. As a business owner you should discuss this deduction and general business tax planning strategies with your CPA.
There are other changes to items like moving expenses, allowed 529 expenses, ABLE account changes, gambling losses, and college athletic seating rights to name a few.
If you are reading this and it is not the end of 2017 yet here are some strategies to consider before the end of the year.
If you anticipate owing state taxes for 2017 and you fall into that group that may lose the state tax deduction in the future, pay what you think you will owe before December 31, 2017. You can deduct the expense in 2017 and if you happened to pay too much you can get a refund when you file your 2017 state tax return. You could also prepay your 2018 property taxes before the end of the year. Indiana residents can use this link to make an estimated income tax payment online.
As stated above the AMT limits will be changing in 2018 so if you are typically subject to AMT unfortunately prepaying your property taxes for 2018 in 2017 will not benefit you due to AMT. Review your situation with your CPA to see if you can take advantage of this deduction in 2017. It is also possible by prepaying these taxes could make you subject to AMT in 2017 when otherwise you would not have been.
If you believe you will itemize on schedule A in 2017 but with the increase in the standard deduction not itemize in 2018 consider making charitable contributions in 2017 that you may already planning to make in 2018.
Most people don't have a lot of control over your income and whether you can take it at the end of 2017 or the beginning of 2018 but if you could defer the payment of a bonus into 2018 it would likely be taxed a reduced tax rate.
Once the calendar changes over to 2018 and more of the nuances of the tax changes are understood there will be additional strategies to consider for 2018 and beyond.
This tax reform is going to impact every taxpayer. Some will be impacted more than others. Hopefully you are impacted positively. As taxpreparers we are already anticipating juggling 2017 tax return preparation and helping our clients work through the impacts of tax reform in the upcoming months.