On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act. This is the first major tax reform since Ronald Reagan was president in 1986. The act replaces the graduated corporate tax rate structure with a flat 21 percent tax, repeals the corporate AMT, lowers the tax rates for six of the seven individual tax brackets, and eliminates personal exemptions while nearly doubling the standard deduction. It should be noted that, generally, the business tax cuts are permanent, while the majority of the individual cuts are scheduled to expire in 2025. These changes are effective for the 2018 tax year and will not affect your taxes for the year 2017.
|Income Tax Brackets|
|Corporate Tax Rates|
|35%||Permanent flat rate of 21%|
|Individual Alternative Minimum Tax|
|Applicable after an exemption level of $54,300 for singles and $84,500 for married and joint filers. The exemptions phase out at higher income levels.||Under the new bill, the Alternative Minimum Tax exemption is raised from $54,300 to $70,300 for singles, and from $84,500 to $109,400 for joint. The exemptions phase out at $500,000 for singles and $1 million for joint.|
|Corporate Alternative Minimum Tax|
|The corporate ATM previously allowed for a 20% tax rate that kicked in if tax credits pushed a company’s effective tax rate below.||Repeal.|
|Full and Immediate Expensing|
|Previously, businesses had to spread the cost of their equipment over several years.
|The new provision will allow businesses to immediately deduct the full cost of certain equipment purchased after Sept. 27, 2017 and before Jan. 1, 2023.|
|Repatriation of Foreign Tax and Income|
|Multinationals are taxed on their global earnings at the corporate rate of 35%, but can defer taxes on foreign earnings until they repatriate them.
|Companies will be taxed on overseas income held as cash at 15.5%, while non-cash holdings will be taxed at 8%. These payments can be made in 8 annual installments.|
|Pass-Through Business Income|
|Pass-through businesses pass their income to their owners, who pay tax at their individual rates.
|This provision will allow pass-through business owners to deduct 20% from their overall business income. A pass-through business is eligible to pay taxes at the individual income tax rate rather than the corporate tax rate. However, the deductions are limited once the income reaches $157,500 for singles and $315,000 for joint filers. For tax years beginning after December 31, 2017, and before January 1, 2026. Pass-through businesses may include sole proprietorships, partnerships, limited liability companies, and S corporations. But can also include hedge funds, and private equity funds.|
|Standard Deduction and Personal Exemptions|
|If desired, single taxpayers can take a standard deduction of $6,350, and joint filers can take a deduction of $12,700. Additionally, personal exemptions of $4,050 are allowed for each family member.||The standard deductions are nearly doubled to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers. This change means that the majority of households who previously would itemize their deductions using form Schedule A, will now instead take the standard deduction. Taxpayers lose the ability to deduct the majority of miscellaneous deductions including the cost of tax preparation, investment fees and moving expenses. However, the charitable contribution, student loan interest and retirement savings deduction is retained.|
|State and Local Tax Deductions|
|Individuals are able to deduct state and local taxes that they pay, however the value has limitations for high earners.||It will cap the deduction at $10,000, which could include a combination of property taxes and either sales or income taxes.|
|Mortgage Interest Deduction|
|Deductible mortgage interest is capped at loans of $1 million.||Beginning in 2018, for debt incurred after Dec. 15, 2017, it will limit deductible mortgage interest for newly purchased first or second homes to loans of $750,000 or less. The $1 million limitation remains for older debt. For tax years beginning after Dec. 31, 2025, the limitation reverts back to $1,000,000.|
|Medical Expense Deduction|
|Qualified medical expenses that exceed 10% of the taxpayer’s adjusted gross income are deductible.||The threshold is reduced to 7.5% of adjusted gross income for tax years 2017 and 2018.|
|Child Tax Credit|
|There is a $1,000 credit for each child under the age of 17. The credit begins phasing out for couples earning more than $110,000.||The child tax credit is expanded to $2,000, while increasing the phaseout to $400,000 for married couples. It also allows a $500 credit for each non-child dependent, helping families caring for elderly parents or relatives.|
|Heirs are required to pay 40% in tax on estates worth more than $5.49 million for individuals and $10.98 million for couples.
|The exemption is doubled to $11.2 million for singles and $22.4 million for couples. This means that generally if you were to perish with assets worth less than those amounts, you will not owe any estate tax. The top estate-tax rate will remain at 40%. The estate tax uses a bracketed system with increasing marginal rates, similar to the individual income tax rates.|
|Inflation Rate Measure|
|The IRS uses the Consumer Price Index for urban consumers to adjust tax bracket thresholds and other tax provisions for inflation.||The inflation rate measure is switch to an inflation index known as the chained CPI. Generally, the chained CPI is considered a more accurate measure, but rises slower than the traditional CPI.|
|Capital Gains Tax Rate|
|The profits on the sale of assets held for more than one year are eligible for a tax break.||No change.|
|Domestic Production Activities Deduction|
|Domestic producers are eligible for a deduction equal to 9% of their qualifying income.||Will be repealed after 2017.|
|Cash Method of Accounting|
|Mostly limited to business with less than $1 million, $5 million, or $10 million in receipts.||This is expanded to include businesses with less than $25 million in receipts, but implements specific rules for tracking inventory costs.|
|Generally deductible.||Generally limited to interest that exceeds 30% of income and unlimited carryover of excess. This is to be determined at entity level, but has spillover effects to the owner. Limitation not applicable if average annual gross receipts do not exceed $25 million.|
|Fixed assets are generally capitalized and depreciated. In certain cases immediate expensing of up to $500,000 is available.||Immediate expensing of most new and used property through 2022. Limit is increased to $1 million.|
|Individual Health Insurance Mandate|
|Individuals are penalized for failure to carry the minimum essential health insurance coverage.||Repealed.|
|Deductible to payor and taxable to recipient.||Alimony is not deductible to payor and not taxable to recipient for decrees executed after 2018.|
|Deductible to the extent they exceed 10% of AGI.||The deduction has been reduced from 10% to 7.5% AGI. This is retroactive to the 2017 tax year, which is unlike other provisions in the bill which do not begin until 2018.|
Overall, the new tax reform advocates for a territorial system of taxation as opposed to the current worldwide system. This means that U.S based companies will not owe federal taxes on income they make offshore. Currently, U.S. corporations pay U.S. taxes on all profits regardless of the country they were earned in. Often as a result the income is left invested overseas. Now that rates are lower, companies may allow for more income to be earned domestically and reinvested back in the United States.
It is important to consult with a knowledgeable tax attorney or CPA so you are informed regarding how these changes will affect you and your family. They will also be able to direct you as to how you can decrease your overall personal or business tax liability. If you have questions or would like to schedule a consultation, please contact Frost & Associates, LLC at 410-497-5947.