Tax Cuts and Jobs Act

Dear Clients,

As many of you may have heard, The Tax Cuts and Jobs Act, H.R.1 has been passed by both the House and Senate.  President Trump is expected to sign the bill before Christmas.  Due to this being the biggest revision to the tax code since 1986, I wanted to touch base with you regarding some of the provisions that may affect you and possible action steps that could be beneficial to take by year end.In general the provisions of the bill affecting individuals go into effect for tax years beginning after December 31, 2017, and are set to expire on December 31, 2025, unless further action is taken prior to that time. 

TAX BRACKETS

Seven tax rates apply for individuals:  10%, 12%, 22%, 24%, 32%, 35% and 37%.  Refer to the end of this email for the specific application of these rates.  Net capital gain and qualified dividends continue to be taxed at the current 0%/15%/20% rates. 

STANDARD DEDUCTION / PERSONAL EXEMPTIONS

The standard deduction has been increased to $24,000 for married individuals filing a joint return, $18,000 for head of household files and $12,000 for all other taxpayers.  No changes are made to the current law additional standard deduction for the elderly and blind. 

The deduction for personal exemptions have been eliminated. 

CHILD TAX CREDIT

The child tax credit is increased to $2,000 and other changes are made to phase outs and refundability. 

Phase Out:  The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers. 

ITEMIZED DEDUCTIONS

The increased standard deduction will reduce the number of individuals who itemize in future years.  The following are the major changes to itemized deductions: 

STATE & LOCAL TAX DEDUCTION LIMITED

Taxpayers may claim a deduction up to $10,000 ($5,000 for a married taxpayer filing separate).  This includes state & local income tax, personal property and real estate tax. 

MORTGAGE & HOME EQUITY INTEREST

The deduction for interest on home equity indebtedness is suspended. 

The deduction for mortgage interest is limited to the first $750,000 of mortgage debt for new mortgages. 

MEDICAL EXPENSE DEDUCTION 

The threshold on medical expense deduction is reduced to 7.5% for all taxpayers for tax years beginning after December 31, 2016, and ending before January 1, 2019. 

CHARITABLE CONTRIBUTION DEDUCTION LIMIT

The income-based percentage limit for cash contribution to public charities increases to 60%.  No charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event. 

MISCELLANEOUS ITEMIZED DEDUCTIONS

All miscellaneous itemized deductions subject to the 2% floor will be disallowed. 

In addition to the above, the overall itemized deduction limitation for higher-income taxpayers will be eliminated. 

PASSTHROUGH INCOME

Individuals will be allowed to deduct 20% of qualified business income from a partnership, S Corporation or sole proprietorship.  This deduction will be limited for taxpayers above certain income thresholds and will also be disallowed for specified service trades including accounting, health, law, consulting, financial services, brokerage services or businesses where the principal asset is the reputation or skill of one or more of its employees. 

HEALTHCARE

The individual shared responsibility payment is reduced to zero and this repeal is permanent.  However, this repeal goes in effect for months beginning after December 31, 2018. Those without health insurance coverage during 2017 and 2018 will still be liable for this penalty. 

OTHER INDIVIDUAL CHANGES

For any divorce or separation agreement executed after December 31, 2018, or executed before that date but modified after, alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. 

The moving expense deduction is suspended, except for members of the Armed Forces on active duty (and their spouses and dependents), who move pursuant to a military order and incident to a permanent change of station. 

The Alternative Minimum Tax exemption amounts for individuals are increased to $109,400 for joint returns and surviving spouses, $70,300 for single taxpayers and $54,700 for marrieds filing separately.

The Estate and Gift Tax exemptions will double to roughly $11 million, and will be indexed for inflation occurring after 2011. 

OTHER CHANGES FOR BUSINESS TAXPAYERS

Entertainment expenses will be non-deductible.

Domestic Production activities deduction has been repealed. 

Like kind exchanges will be restricted to those involving real property that is not primarily held for sale. 

POTENTIAL ACTION STEPS FOR 2017

Taxpayers who make estimated tax payments to a state should consider making their 4th quarter estimated payment by 12/31/17 (as opposed to the due date of 1/15/18).  Taxpayers anticipating a balance due on their state tax return could also consider sending in a payment by 12/31/17 in order to be eligible to deduction those amounts in 2017.  Note that this only helps if you will itemize deductions on your 2017 tax return and are NOT subject to AMT. 

Be sure personal property and real estate tax payments are made by 12/31/2017.  Consider prepaying, if you are able, amounts due for these taxes in 2018.  Again, a good strategy for those itemizing in 2017 and NOT subject to AMT.

Converting IRA to ROTH IRA? Wait until 2018 to take advantage of lower tax rates.  Also consider the recharacterization of any conversions already made in 2017 in order to perform the conversion in 2018 instead of 2017.  This must be done by year end, however, as recharacterizations will no longer be allowed beginning in 2018. 

Make charitable contributions by the end of 2017 that you may have made in 2018. If you take a deduction for contributions giving you the right to athletic event seating consider making those early by year end as they will no longer be deductible in 2018. 

For businesses, the general school of thought I would recommend is to defer income and accelerate deductions if you are able.  Any entertainment expenses that can be made by December 31 will be deductible (at 50%), but will become non-deductible in 2018.


This is by no means all-inclusive of the bill passed, rather a snapshot of what I believe to be the most impactful to my clients.

Please reach out with any questions you might have related to these changes.  We plan to review what these means to each of you for 2018 during the preparation of your 2017 tax return to keep you as informed as possible. 

I will be out of the office beginning December 22nd and will return on January 3rd.  However, I will be checking email and responding to questions that arise as I know this may bring up many questions that are important to you and I want to be sure to address each of them timely. 

Merry Christmas to you and your family! 

Jen


FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES:

If taxable income is: The tax is:

Not over $19,050 10% of taxable income

Over $19,050 but not over $77,400 $1,905 plus 12% of the excess over $19,050

Over $77,400 but not over $165,000 $8,907 plus 22% of the excess over $77,400

Over $165,000 but not over $315,000 $28,179 plus 24% of the excess over $165,000

Over $315,000 but not over $400,000 $64,179 plus 32% of the excess over $315,000

Over $400,000 but not over $600,000 $91,379 plus 35% of the excess over $400,000

Over $600,000 $161,379 plus 37% of the excess over $600,000


FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES):

If taxable income is: The tax is:

Not over $9,525 10% of taxable income

Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525

Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700

Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500

Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,000

Over $200,000 but not over $500,000 $45,689.50 plus 35% of the excess over $200,000

Over $500,000 $150,689.50 plus 37% of the excess over $500,000


FOR HEADS OF HOUSEHOLDS:

If taxable income is: The tax is:

Not over $13,600 10% of taxable income

Over $13,600 but not over $51,800 $1,360 plus 12% of the excess over $13,600

Over $51,800 but not over $82,500 $5,944 plus 22% of the excess over $51,800

Over $82,500 but not over $157,500 $12,698 plus 24% of the excess over $82,500

Over $157,500 but not over $200,000 $30,698 plus 32% of the excess over $157,500

Over $200,000 but not over $500,000 $44,298 plus 35% of the excess over $200,000

Over $500,000 $149,298 plus 37% of the excess over $500,000


FOR MARRIEDS FILING SEPARATELY:

If taxable income is: The tax is:

Not over $9,525 10% of taxable income

Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525

Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700

Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500

Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500

Over $200,000 but not over $300,000 $45,689.50 plus 35% of the excess over $200,000

Over $300,000 $80,689.50 plus 37% of the excess over $300,000