President Trump promised, when he was on the campaign trail, that he would push for tax reform legislation. On Dec, 22, 2017, he signed The Tax Cuts and Jobs Act into law, the first major tax reform in 31 years. The new law makes many changes to the tax code. Every taxpayer is impacted. A highlight of the changes follows:
Tax rates. Personal tax rates are reduced. The top rate is reduced from 39.6% to 37%. Lower rates are also reduced.
Exemptions and the child tax credit. The deduction for personal exemptions is eliminated. An expanded child tax credit will help make up for the loss of personal exemptions for some families. The credit is increased to $2,000 (from $1,000) for qualifying children under 17. For children 17 and older Cand for other dependents, the credit is $500.
Standard deduction. The new tax reform law doubles the standard deduction. The higher standard deduction ($12,000 for singles, $18,000 for heads of household, and $24,000 for married filing joint) means that fewer taxpayers will benefit from itemizing deductions.
State and local taxes. Itemized deductions for all state and local taxes, including property taxes, are capped at $10,000.
Mortgage interest. The limit on mortgage debt for purposes of the mortgage interest deduction is reduced from $1,000,000 to $750,000 for loans made after Dec. 15, 2017. Loans made before Dec. 15, 2017 are grandfathered at the $1,000,000 debt limit. The interest on home equity borrowing is no longer deductible.
Medical expenses. The threshold for medical expense deductions is lowered to 7.5% of adjusted gross income (from 10%) for tax years 2017 and 2018.
Miscellaneous itemized deductions. Itemized deductions subject to the 2% of AGI limitation are not allowed. This includes employee business expenses, investment adviser fees, union dues, and tax preparation fees. Personal casualty losses are not allowed unless the losses were suffered in a federally declared disaster area.
Alimony. The new tax reform law eliminates the alimony deduction for agreements signed after Dec. 31, 2018. Alimony income is not taxable for agreements signed after Dec. 31. 2018. There is no change to the law for agreements signed before Jan. 1, 2019.
Moving expenses. The new tax reform law eliminates the moving expense deduction and makes employer reimbursement of moving expenses taxable to the employee beginning in 2018.
AMT. The new tax reform law temporarily increases the alternative minimum tax (AMT) exemption for tax years 2018 through 2025. The increase in the exemption, as well as the elimination of major tax preferences (exemptions, state taxes above $10,000 and miscellaneous itemized deductions), means that fewer people will be subject to AMT under the new law.
Education. The new tax reform law modifies qualified tuition programs - §529 plans. Funds in the 529 plan can now be used to pay for grades K to 12 private school tuition. The above-the-line deduction for college tuition expenses was renewed in later legislation, but only for 2017. The American Opportunity and the Lifetime Learning credits continue to be available.
Roth IRA conversions. The new tax reform law repeals the special rule permitting recharacterization of Roth IRA conversions. A conversion of a traditional IRA to a Roth IRA may still be advisable, but once the conversion is completed, it can’t be undone.
Faster Equipment Depreciation. The new tax reform law increases the §179 expensing election to $1 million and the investment limitation to $2.5 million. Additional real property, such as a roof on a non residential property, can qualify for a §179 expensing deduction.
Relaxed Auto Depreciation. The new tax reform law increases the depreciation for passenger automobiles placed in service after Dec. 31, 2017. The maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service; $16,000 for the second year; $9,600 for the third year; and $5,760 for the fourth and later years.
Pass-Through Businesses. The new tax reform law allows noncorporate taxpayers to deduct up to 20% of domestic qualified business income from an S corporation, partnership, LLC, sole proprietorship or farm. In some situations, net rental income can qualify for some or all of the 20% deduction. Limitations apply based on wages paid or if the qualified business income is from a specified service business (like law, accounting, medical, loan-out corporations, etc.). Neither limitation applies if the taxpayer’s taxable income on their Form 1040 is less than $157,500 for a single person ($315,000 for a married filing joint couple.)
Tax deferred (1031) exchanges. The tax deferred exchange rules in §1031 will only apply to real property. Personal property, such as autos, machines, tractors, equipment, etc. will no longer qualify under the tax deferred exchange rules.
Entertainment deductions. The entertainment deduction has been repealed. The cost of tickets to concerts, football games or the ballet are no longer deductible.
These are just a few of the changes included in the Tax Cuts and Jobs Act. We would be pleased to explain how the new law applies to your personal tax situation. Please feel free to contact us at your convenience.