The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. TCJA is broad in nature and represents the most sweeping tax reform in over 30 years. Most changes begin 1/1/2018, directly affecting your US 2018 tax return, and will sunset on 12/31/2025 if not extended. The bill is vast and contains too many complicated provisions to cover in one letter. A brief outline of TCJA's key changes is provided below.
Tax Rates and Brackets - TCJA kept seven tax brackets with most rates being reduced. Pre- TCJA rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% are replaced with tax rates of 10%,
12%, 22%, 24%, 32%, 35%, and 37%. Income ranges which apply to each bracket have also changed and are too numerous for this letter. Upper-middle class taxpayers may actually see higher taxes with the bracket changes. The new individual rates will affect the amount of your 2018 wage withholding, and estimated taxes.
Capital Gain Rates and Net Investment Income Tax (NIIT) - Capital gain rates and NIIT remain unchanged by TCJA. The maximum capital gain rates are 0%, 15%, and 20%. NIIT is 3.8%
Personal Exemptions and Standard Deduction - TCJA almost doubles standard deduction amounts to $24,000 (MFJ), $18,000 (HOH) and $12,000 (Single/MFS). Additional amounts for elderly/blind are retained. Many taxpayers will no longer itemize deductions. Personal exemptions have been repealed by TCJA. For taxpayers that take the standard deduction, the increase is reduced by the repeal of the personal exemptions. The repeal of the personal exemptions affects all taxpayers.
Dependents - Exemptions and Child Tax Credit. While TCJA repealed personal exemptions for dependents, the child tax credit increases from $1,000 (fully refundable) to $2,000 ($1,400 refundable) for each qualifying child. Phase out threshold for the credit increases from $115,000 ($230,000 MFJ) to $200,000 ($400,000 MFJ). Age eligibility remains at 16 at year end.
TCJA also provides for a $500 nonrefundable tax credit for dependents that do not qualify for the child tax credit (i.e. children over 16 and other dependents who meet all requirements). While the nonrefundable credit is less than the pre-TCJA exemption deduction of $4,150, the credit does reduce tax dollar-for-dollar unlike the exemption.
Sec. 529 Plans - TCJA expands the uses for Sec. Plan 529 distributions. Distributions are now allowed to be used for public, private, and religious elementary and secondary education expenses. Prior to TCJA, 529 distributions could only be used for higher education expenses.
ABLE Account - TCJA increases the contribution limitation to ABLE accounts, allows the beneficiary to claim the saver's credit and sets out recordkeeping requirements to ensure compliance. Distributions after December 22, 2017, from qualified tuition plans (QTPs, 529) can be rolled over to the ABLE account without penalty by the designated beneficiary of the 529 account, or a member of such beneficiary's family.
Roth Conversion Recharacterization - Under TCJA a trustee to trustee transfer of Roth IRA conversion back to a traditional IRA is no longer allowed.
Kiddie tax - Good news "kiddie tax" rules are simplified under TCJA. The child's net unearned income will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. The parent's tax situation and unearned income of siblings no longer affect the child's tax. Parents will no longer be able to include the child's unearned income on their return. Those children will have to file their own returns.
Moving expenses - Under TCJA only certain military personnel will be allowed to deduct job- related moving expenses. The exclusion for moving expense reimbursements is also suspended.
Alimony - For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse. Pre-2019 decrees and agreements will continue to follow pre-TCJA law by including alimony received in taxable income and allowing a deduction for alimony paid. The law does allow pre-2019 agreements to be legally modified to expressly apply the act rules.
Health care "individual mandate" - Starting in 2019, there will no longer be a penalty for individuals who fail to obtain minimum essential health coverage.
Alternative minimum tax (AMT) exemption - TCJA retains AMT for individuals. AMT exemptions have been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.
Itemized Deductions (Schedule A) - The following TCJA changes will only affect taxpayers that itemize deductions on Schedule A. As noted above, with the increase in the standard deduction, the number of taxpayers filing Schedule A will probably decrease under TCJA.
State and Local Taxes (SALT) - TCJA imposes a $10,000 limit ($5,000 for married taxpayers filing separately) on state and local taxes and repeals the deduction for foreign property taxes. SALT includes real & personal property taxes, income taxes and sales taxes. Prior to TCJA there was no SALT limitation.
Mortgage Interest Deduction - TCJA repeals the deduction for interest on home equity loans regardless of when the debt was incurred. In addition, mortgage interest on loans used to acquire a principal and second home is only deductible on debt up to $750,000 (MFJ)/$375,000 (MFS) beginning with loans taken out in 2018. Previously, the limits were $1 million (MFJ)/$500,000 (MFS). Existing loans are grandfathered, thus not subject to the revised limits.
Medical Expenses Deduction - TCJA retains the deduction for medical & dental expenses. The 2018 adjusted gross income (AGI) floor remains at 7.5% for all taxpayers.
Charitable Contribution Deduction - TCJA increased the maximum contribution percentage limit to 60% (up from 50%) for cash contributions to public charities.
Certain Miscellaneous Itemized Deduction - The deduction for miscellaneous itemized deductions subject to 2-percent of the AGI floor will no longer be available.
Miscellaneous itemized deductions include tax preparation fees, investment expenses, union dues, and unreimbursed employee expenses such as auto and travel expenses.
Casualty and theft losses - TCJA suspends casualty and theft losses except for those
losses incurred in a federally declared disaster area.
Limitation on itemized deductions - TCJA suspends the overall limitation on itemized deductions. The limitation was previously applied to taxpayers with adjusted gross income that exceeded specified thresholds.
TCJA Changes affecting business:
Qualified Business Income Deduction - A new deduction equal to 20 percent of "qualified business income". Qualified business income is also known as "pass-through" income and includes income from partnerships, S corporations, LLCs, and sole proprietorships. The deduction is available to both itemizers and nonitemizers. The restrictions and limitation rules are complicated. The rules for taxpayers with taxable income at or below $157,500 ($315,000/MFJ) are less restrictive and simpler than those above the thresholds.
Bonus Depreciation Deduction - Bonus depreciation allows businesses to deduct 100% of the cost of qualifying property in the year placed in service. Used property qualifies for bonus depreciation with some restrictions. Bonus depreciation will be reduced after 2022.
Section 179 Expensing - TCJA increased Section 179 deduction to $1,000,000 and the phase-out threshold is increased to $2.5 million.
Luxury Automobiles and Personal Use Property - For automobiles placed in service after December 31, 2017, the maximum amount of allowable depreciation is increased to:
$10,000 for the year placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years. The maximum first-year depreciation allowance remains at $8,000.
In addition, computer or peripheral equipment is removed from the definition of listed property, and so isn't subject to the heightened substantiation requirements that apply to listed property.
Like-Kind Exchange - TCJA modifies like-kind exchange rules to only allow exchanges of real property not held primarily for sale.
Domestic Production Activities Deduction - The deduction for domestic production activities is repealed under TCJA.
Excess business loss - Excess farm loss limitations do not apply under TCJA. Under the act noncorporate taxpayers "excess business loss" will be disallowed and will instead be carried forward and treated as part of the taxpayer's net operating loss carryforward.
Excess business loss is defined in the act.
Estate and Gift Tax Exclusion - The estate tax remains in effect. TCJA permanently doubles the basic exclusion for estate and gift tax purpose from $5.6 to $11.2 million.
Given the broad nature of the tax reform, this letter barely scratches the surface of TCJA. Effective tax planning requires a year-round effort each year as your overall financial position changes and especially within the uncertain tax environment we face. If you wish to discuss the provisions affecting you as well as the available tax strategies that would be appropriate to minimize your tax liability and maximize your tax savings, please give us a call at 209.955.0174 to set up an appointment.