01/26/2018
Cheat sheet for the new tax laws:
Individual Tax Provisions under the Tax Cuts and Jobs Act of 2017
Seven Tax Brackets Adjusted:
Income Tax Rate Income Levels for Those Filing As
2017 2018-2025 Single Married-Joint
10% 10% $0-$9,525 $0-19,050
15% 12% $9,525-$38,700 $19,050-$77,400
25% 22% $38,700-$82,500 $77,400-$165,000
28% 24% $82,500-$157,500 $165,000-$315,000
33% 32% $157,500-$200,000 $400,000-$600,000
33%-35% 35% $200,000-$500,000 $400,000-$600,000
$39.6% 37% $500,000+ $600,000+
Increased Standard Deduction/Eliminated Personal Exemptions: The standard deduction will increase to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly (formerly $6,350 for individuals, $9,350 for heads of household and $12,700 for married taxpayers). If taxpayers are age 65 or over, blind, or disabled, they may tack on an additional $1,300 to the standard deduction. Personal exemptions have been eliminated (formerly $4,050 per person).
Certain Personal Deductions Eliminated: The Act eliminates taxpayer options to deduct tax preparation fees, investment management fees, and unreimbursed business expenses, including the moving deduction. Interest on home equity indebtedness is also no longer deductible. Unless taxpayer's homes are located in federally declared disaster areas, personal casualty losses are also disallowed. The Act has also eliminated the phase-out of deductions previously known as the "Pease" limitations.
Other Deductions Limited: The Act also limits various other deductions, as follows:
The deduction of state and local taxes is limited to a maximum of $10,000.
Mortgage interest is now deductible up to $750,000 in principal.
For mortgages in place and not modified after 12/15/17, there is a "grandfather" provision allowing the deduction of interest up to $1 million of principal.
Cash gifts to public charities will be now be subject to a 60% of income limitation (previously 50%). All other charitable limitations remain the same.
For tax years 2017 and 2018, medical expenses are deductible to the extent that they exceed 7.5% of a taxpayer's adjusted gross income. Thereafter, the limitation reverts to 10% of a tax payer's adjusted gross income.
For divorce or separation agreements executed after 12/31/18, alimony paid will no longer be considered a deductible expense.
Passthrough Laws: The Act made some changes to taxation of income that flows through certain "passthrough" entities, including sole proprietorships, partnerships, and S-corporations.
Taxpayers may be entitled to a deduction of 20% on their passthrough income. A phase-out of the deduction begins to apply if taxable income exceeds $157,500 for single taxpayers and $315,000 for married taxpayers. If taxable income exceeds these amounts and the taxpayer's business is a service-type business, the taxpayer may be forced to forfeit the deduction.
The Act imposes a 3-year holding period requirement on those wishing to obtain long-term capital gains treatment related to certain profits interests ("carried interest") in partnerships received in connection with services.
The Act also limits the extent to which taxpayers may use losses flowing from active trade or business passthrough entities to offset other income of more than $250,000 for single taxpayers and $500,000 to married taxpayers.
Tax Credits:
The Act modifies the Child Tax Credit to allow taxpayers to claim up to $2,000 per child or $500 for other relatives. The credit begins to phase out when income exceeds $400,000 for married taxpayers or $200,000 for all other taxpayers.
The Act has made no changes to the plug-in electric motor vehicle credit. Taxpayers may continue to utilize this credit for qualifying purchases of vehicles.
Alternative Minimum Tax: The Act increases the exemptions for AMT purposes. Due to the elimination of many tax deductions for regular tax purposes that were previously disallowed for AMT purposes, we expect that fewer numbers of taxpayers will be subject to AMT for the 2018 tax year.
529 Plans: The Act now allows distributions of up to $10,000 per year in connection with K-12 expenses.
Estate Tax: The Act increases the lifetime exemption amounts from $5.6M to $11.2M per person beginning in 2018. As with all individual provisions, this increase in lifetime exemption will sunset in 2025.
Provisions for Businesses under the Tax Cuts and Jobs Act of 2017
Reduction of Corporate Tax Rate: The Act permanently reduces the corporate tax rate to a flat 21%. In addition, corporate alternative minimum tax has been repealed. Personal service corporations will also be subject to the flat 21% tax rate. Personal holding corporations (companies with five or fewer shareholders and 60% of ordinary income derived from passive sources) will also be subject to the 21% tax rate and, if income is not distributed, an additional tax of 20% on undistributed income.
Fixed Asset Tax Treatment:
Section 179 Expensing: The Act allows certain small businesses to deduct fixed assets up to a maximum of $1 million. If asset purchases exceed $2.5 million, the amount eligible for deduction may be reduced. Both amounts will be indexed for inflation for 2018 and thereafter.
Bonus Depreciation: The Act provides for a full and immediate expensing of 100% of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. Additionally, bonus depreciation is now available for used property in addition to new property.
Listed Property: The Act increases the depreciation limitation for passenger automobiles to: $10,000 in the 1st year, $16,000 in the 2nd year, $9,600 in the 3rd year, and $5,760 for the 4th year and thereafter.
Leasehold Property: The Act provides a 15-year recovery period for qualified property improvements, eliminating former restrictions for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
Interest Expense Limitation: The Act limits the deduction of business interest expense to 30% of business adjusted taxable income. Small businesses (average gross receipts of less than $25 million), real property trades or businesses, and farming businesses are exempt from this limitation. Any interest not deductible is carried forward.
Meals & Entertainment Limitation: The Act only allows a 50% deduction for meals going forward. There is no longer an exception to the 50% limitation for meals provided for the convenience of the employer or directly related to the active conduct of the taxpayer's trade or business. In addition, entertainment expenses such as club memberships, golf outings, tickets to professional sporting events, and theater tickets are no longer deductible.
Transportation Benefits: The Act disallows the deduction of transportation benefit subsidies going forward. Employees who receive transportation benefit subsidies will still be able to exclude such amounts from their taxable income. Please note that for employers who provide pre-tax transportation benefits, there is no change to the deductibility of the benefits for employers or employees.
Net Operating Loss Limitations: The Act limits the deduction of net operating losses to 80% of taxable income. The Act also eliminates the carryback of losses, but does allow the indefinite carryforward of unused losses.
Regarding California's Response to the Tax Cuts and Jobs Act of 2017:
California has officially declared that it will not comply with many of the stipulations in the Federal Tax Cuts and Jobs Act. For example, California will continue to allow the full deduction of real estate taxes, home equity loans, and miscellaneous itemized deductions.
California state senators have also introduced a bill (Senate Bill 227) that would create a new dollar-for-dollar California tax credit for gifts made to a newly created California "excellence fund." Presumably, gifts to the excellence fund would be considered tax deductible for Federal tax purposes as a charitable contribution. While there is precedence for such a deduction (IRS Chief Counsel Memorandum 201105010), it is expected to receive pushback from both the IRS and Congress similar to the attempted legislation changes involving prepayment of 2018 taxes at the end of 2017.
