The TCJA passed by Congress and signed into law by President Trump is a sweeping tax package. Below is an outline of some changes and the TCJA’s impact on individual and business tax filers.
Individual Tax Change Highlights
There are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your income and how you file will determine your tax bracket. To see which tax bracket you are in, visit https://www.thf-cpa.com/2018/01/05/newtaxbrackets/www.thf-cpa.com.
Increased to $24,000 (joint filers), $18,000 (heads of household), and $12,000 (singles and married taxpayers filing separately). These figures will be indexed for inflation.
Child and Family Tax Credit
Increased the credit for qualifying children to $2,000 and the refundable portion of the credit to $1,400. Also introduces a new nonrefundable $500 credit for taxpayer’s dependents who are not qualifying children.
Mortgage interest on loans used to acquire a principal residence and a second home is now only deductible on debt up to $750,000, starting with loans taken out after 12/15/17. There is no longer any deduction for interest on home equity loans.
Business Tax Change Highlights
Pass-through entities such as S-Corporations, Partnerships, and Schedule C Businesses will receive a 20% deduction on their “Qualified Business Income” and may have limitations for the deduction allowed.
Service Industries and Pass-Through Income
The 20% deduction applies to operating income of a business. Above certain income thresholds, the deduction is not available to service businesses such as health, law, accounting, actuarial science, services, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees (or owners). Non-service businesses may have limitations as to the 20% pass-through deduction as well, depending upon their income levels.
Meals and Entertainment Expenses
Entertainment expenses are no longer deductible. Meal expenses (including meals for employees) are 50% deductible.
Other Individual Changes
- Exemptions. The deduction for personal or dependency exemptions is suspended.
- State and local taxes. The itemized deduction for state and local income, sales, and property taxes is limited to $10,000.
- Miscellaneous itemized deductions. This deduction is suspended. This category included items such as tax preparation costs, dues, investment expenses, and unreimbursed employee expenses.
- Health care “individual mandate.” Starting in 2019, there will be no penalty for individuals who fail to obtain minimum essential health coverage.
- Casualty and theft losses. This deduction is suspended except for losses incurred in a federally declared disaster.
- Moving expenses. The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion for moving expense reimbursements is also suspended.
- Alimony. For post-2018 divorce decrees and separation agreements, alimony will not be deductible for the paying spouse and will not be taxable to the receiving spouse.
- Estate and gift tax exemption. Effective for decedents and gifts made starting in 2018, the exemption has been increased to $11.2 million ($22.4 million for married couples).
- Alternative Minimum Tax (AMT) Exemption. Retained for individuals with expanded exemption amounts.
- Expiration of above individual provisions is 2025.
Other Business Changes
- C-Corporations. The new tax rate is a flat 21% and the business AMT has been repealed.
- Paid Family Leave Credit. A new credit for businesses paying employees while on leave under the Family and Medical Leave Act (FMLA) has been established.
- Net Operating Losses (NOL). Losses are now limited to 80% of taxable income and can no longer be carried back; however, for most they may now be carried forward indefinitely
- Luxury Automobile Depreciation. The deduction will increase from $3,160 first year to $10,000, increasing the cap to $50,000.
- Bonus Depreciation. Increased to 100% deduction for assets both new and used when acquired and placed in service.
- Business Interest. Interest paid on business debt will only be deductible up to 30% of your business’ “adjusted taxable income.” For pass-through entities, the deduction will be calculated at the entity level. Any interest disallowed will be carried forward indefinitely.
- Like-kind exchange treatment limited. The rule allowing the deferral of gain on like-kind exchanges of property held for productive use in a taxpayer’s trade, business, or for investment purposes is limited to cover only like-kind exchanges of property not held primarily for sale. Non-real property is not eligible for like-kind exchange treatment.
The TCJA affects many areas of taxation. If you wish to discuss how the law impacts your particular situation, you can contact me at (850) 668-8100 or email@example.com.
Submitted by: Michael Kalifeh, Shareholder & Tax Services Department Leader, Thomas Howell Ferguson P.A. CPAs.