Both Houses of Congress have now passed the “Tax Cuts and Jobs Act.” This legislation has been signed by President Trump and has become a law.
Following are some provisions of this bill that will affect many of our clients. This is a massive bill and many provisions are not mentioned here. Obviously, every tax situation is different and these are general observations, so please contact us to review your specific situation. When exemptions and thresholds are mentioned below they reflect a married couple filing jointly, unless otherwise noted.
Tax Rates: Generally, the rate at which your income is taxed will decrease two to three percentage points (e.g. from 25 percent to 22 percent).
Standard Deduction and Personal Exemption: Although the standard deduction has doubled in this bill, the personal exemption has been repealed. This will allow many more people to file using the standard deduction. The IRS estimates that approximately 70 percent of filers use the standard deduction today.
- Planning Note: If you will not be itemizing in 2018 due to the increased standard deduction, prepay any charitable gifts or state taxes in 2017. The acceleration of taxes (income and real estate) will not help you if the alternative minimum tax (AMT) already applies to you.
- Future Planning: Remember that you are able to make charitable contributions directly from your IRA and these count towards your required minimum distribution. The net effect is that even if you are not itemizing, you get the benefit of the charitable contribution.
Itemized Deductions: As has been much publicized, we will be losing some itemized deductions – which will push more people into the standard deduction.
- State and Local Taxes: The state and local tax deduction will be limited to $10,000 (aggregate of income and real estate taxes). In a high tax jurisdiction like Long Island, $10,000 is a laughable figure. That being said, the best kept secret about this deduction is that it puts a large part of our population into the AMT, so you may not have been getting the benefits of this deduction.
- Miscellaneous Itemized Deductions: This bill also repeals miscellaneous itemized deductions. This includes such things as unreimbursed employee business expenses, investment fees and the all-important tax preparation fee. Again as a caveat, miscellaneous itemized deductions are an addition for the AMT, so many people were not actually benefitting from this deduction.
- Mortgage Interest: Under current (pre-2018) law, you are able to deduct mortgage interest on $1 million of principal, plus $100,000 of a home equity loan. The new law caps the principal at $750,000 and eliminates the deduction for home equity interest (pre-December 15, 2017 mortgages are grandfathered in at $1 million).
Child Tax Credit: The child tax credit has been increased to $2,000, with $1,400 of this amount being refundable. The credit begins to phase out, or reduce, for taxpayers with adjusted gross income in excess of $400,000. This is a significant increase from the previous phase out of $110,000.
Alternative Minimum Tax: In 1970, Congress passed a bill that enacted the AMT. This tax was designed to make sure that a small handful of the super wealthy, who were not paying any taxes, paid some “minimum” tax. Unfortunately, as time has gone on, this tax scheme has caused more and more Americans to pay this tax. The current bill raises the exemption against AMT income to $109,400 (from $78,500). Under the current law, this exemption begins to phase out once your income reaches $150,000. The new law increases the income limitation to $1 million. This brings the law back to what it was originally intended to be.
Qualified Business Income: This section of the bill has gotten the most air time (after the loss/reduction in state and local taxes). This provision allows for a deduction against an individual’s income of 20 percent of a pass-through business’ net income. In other words, if you own an S-Corporation that makes $100,000, under the current law you would pay tax on $100,000 on your personal return. The new law allows for a deduction of 20 percent, or in this case $20,000, against your income, which lowers your taxable income. There are limitations to this deduction. The deduction is limited to 50 percent of the wages paid by the business (or 25 percent of wages plus 2.5 percent of unadjusted assets). There are further criteria if the business is a personal service (accountant, attorney, broker, etc.). This is one of the most hotly contested areas of the bill which made it through, so expect technical corrections and regulations to further limit this deduction.
Estate and Gift Taxes:
The estate and gift exclusion amount is scheduled to increase from a projected $5.6 million in 2018 to $11.2 million per person. This will exempt most people from the estate tax, even if you have property on Eastern Long Island. Stay tuned for New York’s answer to this. Right now, the New York exemption is $5.25 million and is scheduled to equal the federal exemption in 2019. I am sure they did not intend to exempt $11 million per person. Remember that New York has a “cliff,” whereby if you are over the exemption amount by a certain amount, your entire taxable estate can be subject to N.Y. estate tax.
Another highly touted part of the bill was the reduction in corporate tax rates. Under the new bill, corporations are taxed at a flat 21 percent, instead of graduated rates from 15 to 39 percent.
- Section 179 Expensing election: Under the new bill, you will be able to write-off $1 million of qualified equipment placed in service (subject to phase-outs), which increased from $500,000 in 2017.
- Bonus Depreciation election: Under the new bill, you will be able to take “bonus depreciation” on up to 100 percent of qualified equipment. Note: New York state does not recognize this deduction so, for New York purposes, you will still need to depreciate these assets.
Contact us if you have questions about the “Tax Cuts and Jobs Act” or your specific situation.
About the Author: Tom Terry, CPA, joined MFB in 1993 and became partner in 2003. His area of expertise at the firm is in Estate and Trust Planning and Administration. Tom educates his clients on the steps they need to take to fulfill their fiduciary duties allowing them to get through the difficult time the passing of a loved one can present. Contact Tom at firstname.lastname@example.org.