BHBM Tax Law Alert | Tax Bill
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FEDERAL TAX LAW UPDATE
Tax Bill Signed Into Law
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (H.R. 1) into law. Highlights of the bill are set forth below.
- Reduced income tax brackets: The bill retains seven tax brackets, but modifies the rates and widths as follows:
- 10% on income up to $9,525 for individuals and $19,050 for married couples
- 12% on income up to $38,700 for individuals and $77,400 for married couples
- 22% on income up to $82,500 for individuals and $165,000 for married couples
- 24% on income up to $157,500 for individuals and $315,000 for married couples
- 32% on income up to $200,000 for individuals and $400,000 for married couples
- 35% on income up to $500,000 for individuals and $600,000 for married couples
- 37% on income over $500,000 for individuals and $600,000 for married couples
- Increased standard deduction: The standard deduction is increased from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples. Single filers with at least one qualifying child could claim a standard deduction of $18,000 (up from $9,350). The standard deduction amounts will continue to be adjusted for inflation as under current law. However, the increased standard deduction amounts will expire after December 31, 2025.
- Increased child tax credit: The bill doubles the child tax credit from $1,000 to $2,000 and provides it for each child under 17 through 2025. Additionally, the bill raises the phase-out amount to $400,000 for joint returns and $200,000 in any other case, which is not indexed for inflation, and caps the refundable portion at $1,400, which is indexed for inflation.
- Suspended personal exemptions: The personal exemptions for the taxpayer, his/her spouse and any dependents are suspended for tax years beginning after December 31, 2017 and before January 1, 2026.
- Eliminated deductions: For tax years beginning after December 31, 2017 and before January 1, 2026, the bill eliminates all miscellaneous itemized deductions, including the tax preparation expense deduction, the deductions for unreimbursed employee expenses, and the deduction for attorney’s fees. In addition, the bill eliminates the deduction for alimony payments, the deduction for moving expenses, and the deduction for entertainment expenses.
- Decreased state and local tax deduction: For tax years beginning after December 31, 2017 and before January 1, 2026, the bill permits individuals to deduct up to $10,000 of state and local taxes, which could include a combination of property taxes and either sales or income taxes. Also, the bill precludes any deduction for the prepayment of 2018 state and local taxes in 2017.
- Decreased mortgage interest deduction: For tax years beginning after December 31, 2017 and before January 1, 2026, the bill caps the mortgage interest deduction for homes purchased after December 14, 2017 at $750,000 for married couples, down from $1,000,000 under current law. For mortgages existing on December 14, 2017, the deduction is preserved, and homeowners may refinance this debt and deduct the interest if the new loan does not exceed the amount refinanced. The bill also permits taxpayers to continue to include mortgage interest on second homes, but subject to the lower cap. However, interest on home equity indebtedness is no longer deductible.
- Changes to charitable contribution rules: The bill makes several changes to the rules applicable to charitable contributions, including increasing the AGI limitation for cash contributions to public charities from 50% to 60% for tax years beginning after 2017 and before 2026.
- Increased alternative minimum tax (AMT) exemptions for individuals: The bill increases the AMT exemption amounts for individuals from $54,300 to $70,300 for single filers and $84,500 to $109,400 for joint filers, and increases the starting point of their phase out from $120,700 to $500,000 for single filers and $160,900 to $1,000,000 for joint filers.
- Increased estate and gift tax exclusion: The bill temporarily doubles the basic estate and gift tax exclusion amount from $5.49 million (as of 2017) to $10 million, which is indexed for inflation ($11.2 million for 2018). Commencing on January 1, 2026, the bill reduces the thresholds to current limits.
- Modification of rehabilitation credit: The bill retains the 20% credit for qualified expenditures with respect to historic structures, but requires the credit to be claimed ratably over a 5-year period beginning when the structure is placed in service. The bill provides a transition rule for expenditures incurred with respect to any building owned or leased by the taxpayer at all times on and after January 1, 2018, through the end of a 24-month period, which must begin within 180 days after January 1, 2018. In addition, the bill eliminates the 10% credit for non-historic structures pre-dating 1936.
- Changes to like-kind exchanges: The bill permanently limits the non-recognition of gain for like-kind exchanges to real property not held primarily for sale. The bill generally applies to exchanges completed after December 31, 2017.
- Repeal of individual mandate: The bill permanently eliminates the individual mandate to buy health insurance by reducing the penalty to $0 effective 2019.
- Modifications to medical expense deductions: The bill reduces the threshold for the deduction of medical expenses from 10% to 7.5% of AGI for the tax years 2017 and 2018.
- Changes to net operating losses (NOLs): Excluding property and casualty insurance companies, the bill limits the deduction for NOLs to 80% of taxable income (determined without regard to the deduction). Further, taxpayers are permitted to carry NOLs forward indefinitely. However, the bill repeals the two-year carryback and special NOL carryback provisions.
Business Tax Changes:
- Reduced corporate rate: The bill permanently cuts the corporate tax rate from 35% to a flat 21% rate beginning in 2018. Also, the bill reduces the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50%.
- Reduced pass-through entities rate: For tax years beginning after December 31, 2017 and before January 1, 2026, the bill provides a 20% deduction for taxpayers who have qualified business income from a partnership, S corporation, or sole proprietorship. For high-earning pass-through owners paying the top 37% rate, that comes to a 29.6% tax rate after accounting for the deduction. The deduction is limited to the greater of (i) 50% of the taxpayer’s allocable or pro rata share of W-2 wages paid by the pass-through entity or (ii) the sum of 25% of the W-2 wages and 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property. For specified professional service businesses, e.g., attorneys, accountants and doctors, the deduction is phased out when taxable income exceeds $315,000 for married individuals filing jointly or $157,500 for other individuals (indexed for inflation). Special income phase-out rules apply. Further, trusts and estates are eligible for this deduction. Currently, income earned by pass-through entities is passed through and subject to tax at the individual owner level.
- Repeal of corporate AMT: The bill repeals the corporate AMT. Any AMT credits will be refunded during years 2018 through 2021.
- Business expensing: The bill initially allows full expensing for property placed in service from September 27, 2017 through December 31, 2022. However, the amount that may be expensed for property placed in service after January 1, 2023, is phased down over the following 5-year period. Taxpayers could elect 50% in lieu of 100% expensing for qualified property placed in service during the first tax year ending after September 27, 2017.
- Multinationals: The bill creates a territorial tax system. Currently, companies are taxed on their worldwide income. The bill taxes a portion of deferred foreign earnings and profits of subsidiaries at a reduced rate of 15.5% for cash assets and 8% for illiquid assets.
Below are some year-end planning ideas which may be beneficial for many, but not all, taxpayers, which involve accelerating deductions and deferring income:
1. Make charitable contributions in 2017
2. Pay 2017 state income taxes in 2017
3. Make retirement plan contributions in 2017 instead of 2018
4. Place assets in service in 2017
5. Recognize losses in 2017