TAX CUTS AND JOBS ACT 2017 -WHAT TAXPAYERS NEED TO KNOW

By:  Teresita C. Miglio CPA

*Most provisions commence January 1, 2018.

*Most individual provisions will expire on December 31, 2025.

*Corporate provisions are permanent.

*The individual mandate of the Affordable Care Act was not repealed, but the penalty for not having insurance was reduced to Zero, starting January 1, 2019.

*The 2018 standard deduction will be as follows:

Married Filing Jointly ((MFJ)$24,000 (2017 was $12,700)

Single$12,000 (2017 was $   6,350)

Married Filing Separately (MFS)$12,000 (2017 was $   6,350)

Head of Household (HH)$18,000 (2017 was $   9,350)

*Itemized deductions:

Medical expenses  deductible above 7.5% of AGI for 2018 and above 10% of AGI for 2019 and beyond.

Property and state and local income or sales tax deduction is limited to $10,000 per return.

Home mortgage interest is now limited to mortgages of $750,000 MFJ ($375,000 MFS) for homes purchased after 12/31/2017. The $1 Million acquisition debt was grandfathered for prior purchases. Interest deduction is allowed for primary and secondary residences. Interest on $100,000 of home equity debt is no longer deductible.  (There are any variables that need to be looked at more closely)

Charity remains a deduction with a 60% AGI limit on cash contributions and a 30% AGI limit on non-cash contributions.  Charitable mileage remains at 14 cents per mile. The 5-year carryforward continues.

Casualty Theft and Losses has a ‘modified definition’.  Losses only allowed if attributable to a disaster declared by the President of the United States under Section 401 of the Robert T. Stafford Disaster Relief Act.  Deduction is limited to 10% of AGI.

Gambling losses remain a deduction to the extent of winnings.  Added allowable gambling losses are the ‘costs of gambling’ such as traveling to and from a casino.

Deductions subject to the 2 percent of adjusted gross income floor are suspended. No longer deductible are unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel, investment management fees, safety deposit box fees, tax preparation fees, investment expenses from pass-through entities, home office expenses, education related expenses, expenses for searching for a job and expenses for the production of income. 

*The $4,050 personal exemption was eliminated.

*The ‘blind and disabled’ add-ons to the standard deduction remain the same:

Married Filing Jointly$1,300 

Unmarried$1,600

*Child tax credit (CTC) per child increased to $2,000 (2017 was $1,000), and the ‘refundable’ portion of the credit is limited to $1,400. Phaseout for CTC begins at $200,000 ($400,000 for joint filers).

*Earned income threshold for the refundable credit is lowered to $2,500.

*Credit for the Elderly and Permanently Disabled remains the same: $750 for individual and $1,125 for a return with two qualifying individuals.

*Head of Household filing status has been added to the “due diligence” list in Form 8867 and a $500 penalty applies.

*Individual tax brackets for 2018:

% Tax rate	Single	Head of Household	Married filing jointly	Married filing separately
10	$9,525	$13,600	$19,050	$9,525
12	38,700	51,800	77,400	38,700
22	82,500	82,500	165,000	82,500
24	157,500	157,500	315,000	157,500
32	200,000	200,000	400,000	200,000
35	500,000	500,000	600,000	300,000
37	EXCESS	EXCESS	EXCESS	EXCESS

*Estates and Trusts tax brackets for 2018:

% Tax rate	Dollar limit
10	$2,550
24	9,150
35	12,500
37	EXCESS

*Long-term capital gains tax brackets for 2018:

% Tax rate	Single	Head of Household	Married filing jointly	Married filing separately
0	$38,700	$58,850	$77,400	$38,700
15	426,700	453,530	480,050	240,025
20	EXCESS	EXCESS	EXCESS	EXCESS

*Medicare tax of 3.8% on modified Adjusted Gross Income (AGI) in excess of:

$250,000 MFJ

$125,000 MFS

$200,000 Single and Head of Household

(This makes the highest marginal tax rate to be 40.8% and the highest capital gains rate to be 23.8%)

*The “kiddie tax” which is a tax on unearned income (investment earnings) for children under age 19 (up to 23 if student) and under will no longer be connected to parents’ tax rate.  Now, any earnings over $2,100, threshold amount per year will be taxed at the tax rates that apply to Trusts and Estates as follows:    Up to $2,550 10%

$2,550 to $9,15024%

$9,150 to $12,50035%

Over $12,50037% 

*Both the American Opportunity Tax Credit and Lifetime Learning Credit were retained.  The Act now allows the student loans to be forgiven due to death or disability and this forgiveness will not be taxable.

*The new Act retained the following:  

Above the line deduction for qualified education expenses.

US savings bond interest exclusion. 

Employer provided education assistance exclusion from wages up to $5,250.

*IRC 529 plans have been expanded to allow a $10,000 PER STUDENT (not per plan) qualifying education expense deduction for K-through 12 as well as college. The qualified expenses were expanded also to include, curriculum and curriculum materials, books and instructional materials, online educational materials, tuition for tutoring and educational classes outside the home (excludes payments to family members) and educational therapies for students with disabilities.

*Alimony paid for decrees after 2018 will not be deductible to the payor nor income to the recipient.

*Above-the-line moving expenses are no longer deductible and if reimbursed by employer will be taxable.  Excluded are armed forces moving expense.

*Adoption credit and tax-free reimbursement were retained in the new bill.

*Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs) were retained in the new bill.

*The following employee fringe benefits were repealed:  achievement awards and qualified transportation (such as transportation passes).

*Retirement plan reconversions were repealed. Taxpayers will no longer be able to reconvert regular IRAs, after paying applicable taxes, to a Roth IRA.

*Estate Tax Exemption was increased to $10 million (which adjusted for inflation as of 2012 is $11.2 million in 2018. This amount is doubled if the ‘post mortem’ election of “portability” is made. Step up basis at date of death was also retained.

*Gift Tax Exemption was increased to $10 million (which adjusted for inflation as of 2012 is $11.2 million in 2018.  Carryover basis is donor’s basis at date of gift.  Annual exclusion is also retained, which, including cost of living increase makes it $15,000 for 2018.

*Generation Skipping Transfer Tax Exemption was increased to $10 million (which adjusted for inflation as of 2012 is $11.2 million for 2018.

*House (primary residence) Sale Capital Gains Exclusion remains at $500,000 MFJ or $250,000 Single, with the following qualifications:  you have lived 2 of the last 5 years in the home and you have not excluded another personal residence capital gain within the last years.

*Private Activity Bonds continue to be tax-exempt under the new Act and are still subject to AMT.

*Business Alternative Minimum Tax (AMT) was repealed.

*Individual Alternative Minimum Tax (AMT) was retained. Exemptions increased and will be adjusted for inflation.  Phase-out thresholds increased to $1 million for MFJ and $500,000 for single and other taxpayers:

Single$70,300

MFJ$109,400

MFS$54,700

HH$70,300
*Bonus Depreciation business expensing is allowed to 100% for assets acquired after 9/27/2017 through 12/31/2022. A 20% phase down kicks in starting 2023. This does not apply to Real Estate.

*Luxury auto depreciation limits (with adjusted cost of living after 2018) without bonus are as follows, and applies to automobiles placed in service after 12/31/2017 where bonus depreciation was not taken:

$10,000 first year ($3,160 for 2017)

$16,000 second year ($5,100 for 2017)

$ 9,600 third year ($3,050 for 2017)

$5,760 additional years ($1,875 for 2017)

*Real Estate Recovery Periods for both residential and non-residential have been shortened to 25 years (from 39 years) and Qualified Improvement Property shortened to 10 years (from 15 years).

*Section 179 Expensing limits have been increased to $1 million (from $510,000) with annual cost of living adjustments. The phase-out is at $2.5 million.  The following definitions have been added: lodging furnishings, non-residential replacement of roofs, air conditioning, alarm, fire protection and security systems.

*Business interest expense limited to 30% AGI, with remainder to be carried over to future years. Small Businesses ($25 million average gross receipts or less) can fully deduct all business interest.

*Business Entertainment Expenses no longer allowed:

Entertainment

Amusement facilities

Recreational facilities

Membership dues

*Quiet business meals continue to be allowed at 50% deduction.

*Net Operating Losses (NOL), after 12/31/2017:

Carryback repealed (except for farmers retain a 2-year carryback)

Limited to 80% of income

Indefinite carryforward

*Business Credits repealed are:

Employer-provided childcare

Rehabilitation

New Markets

Disabled Access

*Business Credits allowed:

Research and Development (with a 5-year amortization requirement)

Work Opportunity

New Temporary Credit for Employees who are on a medical family leave

*Pass through Businesses:

Tax-rates are the same for individuals (via a flow-through).

A 20% deduction from income first applies-to create parity between C-Corporations and flow-through businesses, with a phase-out for higher income taxpayers starting at $315,000 (MFJ).

Applies to Sole-proprietorships, Partnerships, S-Corporations, and LLCs not electing to be C-Corporations.

*Corporate Taxation:

Flat 21% tax rate

Personal Service Corporation – 21% flat rate

*IRS Administration:

Period for bringing a civil action for a wrongful levy against the IRS is extended to two years and nine months.

Increase in IRS user fees are not prohibited.

*International:

A ‘dividend exemption’ system has been created for taxing US Corporations on foreign earnings of foreign subsidiaries when earnings are distributed.

*Repatriation:

A portion of deferred overseas-held earnings and profits of subsidiaries will be taxed at a reduced rate of 15.5% for cash assets and 8% for illiquid assets.

Foreign tax credit carryforwards are now fully available.

Foreign tax credits triggered by repatriation are now partially available to offset the United States tax.

IT IS IMPORTANT THAT YOU REVIEW WITH YOUR EMPLOYER YOUR NEW TAX DEDUCTIONS TO MAKE SURE THERE WILL NOT BE ANY SURPRISES WHEN YOU FILE YOUR 2018 INCOME TAX RETURN. IF YOU ITEMIZE DEDUCTIONS AND/OR HAVE MANY DEPENDENTS, THE CHANGES IN THE NEW ACT MAY ACTUALLY INCREASE YOUR TAX LIABILITY AND IF YOUR FEDERAL WITHHOLDING HAS BEEN REDUCED YOU CAN END UP OWING TAXES.  IT IS ALWAYS ADVISABLE THAT YOU CONSULT WITH YOUR TAX PROFESSIONAL AND ESTIMATE WHAT YOUR TAX LIABILITY WOULD BE UNDER THE NEW TAX ACT.