Tax reform has been a major focus of the Trump Administration. In a determined effort from Republicans to pass new tax legislation before year-end, the Senate and the House reconciled their respective tax bill drafts into one bill. The bill, called the “Tax Cuts and Jobs Act,” was passed on December 20, 2017. President Trump then signed the bill into law on December 22, effective for the 2018 tax year.
STEPS TO CONSIDER BEFORE DECEMBER 31, 2017
Although the Act presents many changes to the current tax environment, one that we’d like to specifically highlight for 2017 year-end planning applies to those who claim itemized deductions, including state and local taxes.
Standard deduction: Beginning in 2018, the standard deduction amounts will increase to $12,000 for single individuals and $24,000 for married taxpayers filing jointly. This is an increase from the 2017 amounts of $6,350 and $12,700, respectively. If you have previously itemized your deductions, there is a chance you may fall within the standard deduction threshold for 2018.
Itemized deduction for state and local taxes: In addition to the increase in the standard deduction, the itemized deduction claimed for state and local taxes will be limited to a maximum of $10,000. The deduction for state and local taxes includes state income taxes, sales taxes, real estate taxes, and personal property taxes.
In 2017 there may be opportunity for accelerating some itemized deductions which may otherwise be lost in 2018 under the increased standard deduction amount. If this applies to you, here are a few actions you may wish to consider by December 31, 2017, in order to maximize your tax savings for 2017 and 2018:
- Pay additional real estate taxes on your personal residence and/or vacation home. If your taxes are escrowed, contact your bank to follow their suggested procedure.
- Make additional charitable contributions.
- Pay state and local income taxes that might be due with your tax return on April 15, 2018.
- Pay 4th quarter state estimated tax payments.
- Accelerate interest payments with your bank.
The following additional key points describe the provisions of the Tax Cuts and Jobs Act in further detail. While these touch on some important areas of tax reform, it is not an all-inclusive list. If you are wondering how this tax reform may affect your specific situation, please do not hesitate to contact our team to set up a proactive tax planning meeting.
- Seven tax brackets with reduced rates, including a 37% top tax bracket. The number of brackets (seven) is consistent with current law. However, the marginal tax rates are lower and accompanied by higher income thresholds that will produce tax cuts for many individuals. The tax brackets consist of the following marginal rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
- Individual tax brackets are temporary. The individual tax cuts under the Act are in effect until 2025.
- Capital gain rates conformed to new brackets. Long-term capital gains remain taxed at 0%, 15%, and 20% rates. For single taxpayers, the 15% and 20% breakpoints are at $38,600 and $425,800 respectively in terms of taxable income. For married taxpayers, these breakpoints are $77,200 and $479,000.
- Doubles standard deduction and eliminates personal exemptions. Both of these changes are consistent with previous tax reform proposals. This will largely decrease the amount of taxpayers that itemize their deductions.
- Child tax credit increased to $2000 per child. This is larger than the $1000 per child credit under current law. The refundable amount has also increased to $1400 per child. The phase-out levels that apply to the credit were also increased to $400,000 for married filers and $200,000 for others. Additionally, there is a new nonrefundable $500 credit for certain non-child dependents.
- Temporary reduction in threshold for medical expenses. The Act reduced the AGI threshold from 10% to 7.5% for 2017 and 2018.
- Limited state and local tax reduction. Taxpayers are limited on the amount of state and local taxes they can use as an itemized deduction. State and local income tax combined with state and local property tax cannot generate an itemized deduction over $10,000.
- Mortgage interest deduction adjusted. The current law allows for the deduction of mortgage interest on home loans up to $1 million. The Act decreases the $1 million limit to $750,000. Additionally, there will be no deduction for interest on home equity loans.
- Repealing of Obamacare’s individual mandate. There would no longer be a penalty for those who do not have health insurance.
- Doubles estate tax exemption amount. The estate tax exemption will be doubled from $5.6 million to $11.2 million per taxpayer.
- Revised Alternative Minimum Tax. Rather than elimination of the AMT in previous proposed legislation, the Act increases the exemption amounts for those that could be subject to the AMT. This will still greatly reduce the amount of taxpayers that will be subject to the AMT.
- Other changes:
- Increased charitable contribution limitation from 50% of “contribution base” to 60%
- No deduction for seating rights at college athletic sporting events
- Suspension of alimony deductions by payor and payee
- No more miscellaneous itemized deductions (professional fees, dues & subscriptions, unreimbursed job expenses, etc.)
- Deduction for pass-through income. In general, the Act allows for 20% of business income from a partnership, S corporation, or sole proprietorship to be deducted as a reduction of taxable income. However, the deduction is phased out when taxable income is higher than $315,000 for joint filers and $157,500 for single filers.
- Corporate tax rate reduced to 21%. Rather than a graduated tax bracket system for corporations, the Act creates a flat rate of 21% tax rate for all corporations.
- Section 179 limits increased. The maximum amount of Section 179 expense allowed by a company will be increased to $1 million from $500,000 per year for new property placed in service. The phase-out threshold also increases to $2.5 million.
- Fully expensing of depreciable assets for 5 years. The Act would allow for immediate expensing for all qualified property purchased after September 27, 2017 until December 31, 2022 in the form of bonus depreciation. The first-year bonus depreciation provisions will then be reduced by 20 percentage points per year as follows:
- 80% for property placed in service between 1/1/2023 and 12/31/2023
- 60% for property placed in service between 1/1/2024 and 12/31/2024
- 40% for property placed in service between 1/1/2025 and 12/31/2025
- 20% for property placed in service between 1/1/2026 and 12/31/2026
CLIENT SEMINARS | PLANNING FOR TAX REFORM
HBE will host two informational client seminars to review the key provisions of the Tax Cuts and Jobs Act on January 23, 2018 (7:30 a.m.) and January 25, 2018 (4:00 p.m.). For more information on these sessions, and to register, click here.
Please note that seating is limited to 40 guests per session.