First New Tax Legislation in a Generation
With the new tax bill ready to be signed into law by the President, we wanted to give you a recap of the major provisions.
The final bill still leans heavily toward tax cuts for corporations and business owners. But it also expands or restores some tax benefits for individuals relative to the earlier bills passed by the House and Senate.
The individual provisions will expire by the end of 2025, but most of the corporate provisions would be permanent.
Below you will find the key provisions:
For Individuals
Many individuals will experience lower tax rates in 2018. See table to the left which will show the decrease for many tax brackets and the fact that there will still be seven tax brackets.
Nearly doubles the standard deduction:
For single filers, the bill increases it to $12,000 from $6,350 currently; for married couples filing jointly it increases to $24,000 from $12,700.
The net effect: The percentage of filers who choose to itemize would drop sharply, since the only reason to do so is if your deductions exceed your standard deduction.
Eliminates personal exemptions:
Today you’re allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. Doing so lowers your adjusted gross income and thus your tax burden. You will see these exemptions eliminated in 2018.
Caps state and local tax deduction:
The final Bill limits the combined deduction for state/local and real estate taxes to $10,000. Currently taxpayers who aren’t subject to the Alternative Minimum Tax (AMT) can deduct these expenses as itemized deductions.
What to do:
If you are not subject to AMT ensure that you pay all of you 2017 state and real estate taxes in 2017.
Expands child tax credit:
The credit will be doubled to $2,000 for children under 17. It also will be made available to high earners because the bill would raise the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today. Like the first $1,000 of the child tax credit, $400 of the additional $1,000 would also be refundable, meaning a low- or middle-income family will be able to have the money refunded to them if their federal income tax liability nets out at zero.
Creates temporary credit for non-child dependents:
The bill would allow parents to take a $500 credit for each non-child dependent whom they’re supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability.
Lowers cap on mortgage interest deduction:
If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change. The bill would no longer allow a deduction for the interest on home equity loans. Currently that’s allowed on loans up to $100,000.
What to do:
If you are currently paying interest on a home equity line of credit, consider paying it down because the interest will no longer be deductible beginning in 2018.
Curbs who’s hit by AMT:
The final version keeps AMT, but reduces the number of filers who would be subject to it by raising the income exemption levels to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples.
Preserves smaller but popular tax breaks:
Earlier versions of the bill had proposed repealing the deductions for medical expenses, student loan interest and classroom supplies bought with a teacher’s own money. They also would have repealed the tax-free status of tuition waivers for graduate students. The final bill, however, preserves all of these as they are under the current code. And it actually expands the medical expense deduction for 2018 and 2019.
Doubles Estate Tax Exclusion:
Currently set at $5.49 million for individuals, and $10.98 million for married couples. The exclusion will be increased to $10 million for individuals and $20 million for married couples.
What to do:
Review your estate plan and utilize annual-exclusion gifts
Slows inflation adjustments in tax code:
The bill would use “chained CPI” to measure inflation, which is a slower measure than is used today. The net effect is your deductions, credits and exemptions will be worth less — since the inflation adjusted dollars defining eligibility and maximum value would grow more slowly. It also would subject more of your income to higher rates in future years than would be the case under the current code.
Eliminates mandate to buy health insurance:
There would no longer be a penalty for not buying insurance. While long a goal of Republicans to get rid of it, the measure also would help offset the cost of the tax bill. It is estimated to save money because it would reduce how much the federal government spends on insurance subsidies and Medicaid. The Congressional Budget Office expects fewer consumers who qualify for subsidies will enroll on the Obamacare exchanges, and fewer people who are eligible for Medicaid will seek coverage and learn they can sign up for the program. But policy experts also note that the mandate repeal could raise premiums because more healthy people might decide to skip buying insurance.
For Businesses and Corporations
Lowers tax burden on pass-through businesses:
The tax burden on owners, partners and shareholders of S-corporations, LLC’s and partnerships — who pay their share of the business’ taxes through their individual tax returns — would be lowered by a 20% deduction, somewhat less than the 23% called for in the Senate-passed bill. The 20% deduction would be prohibited for anyone in a service business — unless their taxable income is less than $315,000 if married ($157,500 if single).
What to do:
Consult with your tax advisor to see if your current form of business makes the most sense going forward. This is something that a lot of businesses should study beginning in 2018. Nothing to do in 2017.
Includes a rule to prevent abuse of the pass-through tax break:
If the owner or partner in a pass-through also draws a salary from the business, that money would be subject to ordinary income tax rates. But to prevent people from re-characterizing their wage income as business profits to get the benefit of the pass-through deduction, the bill would place limits on how much income would qualify for the deduction. Tax experts nevertheless have warned that this kind of anti-abuse measure still presents taxpayers with a lot of opportunities to game the system, and favors passive owners of a business over active owners who actually run things.
Substantial cuts to corporate tax rates:
The bill cuts the corporate rate to 21% from 35%, starting next year. That’s somewhat higher than the 20% called for earlier. The bill would also repeal the alternative minimum tax on corporations.
Change how U.S. multinationals are taxed:
Today U.S. companies owe Uncle Sam tax on all their profits, regardless of where the income is earned. They’re allowed to defer paying U.S. tax on their foreign profits until they bring the money home. Many argue that this “worldwide” tax system puts American businesses at a disadvantage. That’s because most foreign competitors come from countries with territorial tax systems, meaning they don’t owe tax to their own governments on income they make offshore.
179 Depreciation limits doubled:
For property placed in service beginning after December 31, 2017, the maximum amount a taxpayer may expense under code section 179 is increased from $500,000 to $1 million.
Temporary 100% Cost Recovery of Qualifying Business Assets
Currently known as Bonus Depreciation, a 100% (currently 50%) first-year deduction for the adjusted basis is allowed for qualified property acquired and placed into service after September 27, 2017, and before Jan 1, 2023. The additional first-year depreciation deduction is allowed for new and used property (previously only applied to new property).
If you are not sure if this will effect your taxes, the best advice we can give you is to contact us. Whether you email Susan Hopkins at susan@marshalljones.com or schedule an appointment with Kristen Hughes 404-231-2001, we would be happy to discuss your individual situation.