Highlights of the New Law
The “Tax Cuts and Jobs Act” (the Act) is the largest overhaul of the United States Tax Code in over 30 years and will have an impact on nearly everyone. Below are some of the highlights of the new law.
Individual Tax Provisions
The new law changes the modified tax brackets for individuals. For tax years beginning January 1, 2018, the new tax brackets will be 10%, 12%, 22%, 24%, 32%, 35% and 37%. The new law also increased the size of the standard deduction but eliminated the deduction for personal exemptions. The AMT exemption also increased to $109,400 for married taxpayers filing jointly or half that amount for married individuals filing separately and $70,300 for all others (other than estates and trusts).
There are a number of changes to the deduction for state and local taxes. Beginning on January 1, 2018, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of:
- State and local property taxes and
- State and local income taxes
Another dramatic change is the repeal of the individual mandate under the Affordable Care Act (also known as Obamacare).This mandate required individuals to be covered by a health plan that provided at least minimum essential coverage or be subject to a penalty for failure to maintain the coverage (commonly referred to as the “individual mandate”).
Business Tax Provisions
Corporate Tax Rate Reduction. For taxable years beginning after December 2017, the corporate tax rate is a flat 21%. The 21% tax rate also applies to personal service corporations. It appears that the rate will be pro-rated for fiscal year filers if the taxable year includes January 1, 2018.
Corporate Alternative Minimum Tax. The corporate AMT has been eliminated. Taxpayers that have AMT credit carryforwards will be able to use them against their regular tax liability and will also be able to claim a refundable credit beginning in 2018.
Pass-Through Businesses Business Income of Individuals, Trusts and Estates. The Act generally allows a non-corporate taxpayer (including a trust or estate) who has qualified business income (“QBI”) from a partnership, S corporation or sole proprietorship to a deduction of up to 20% of the pass-through income from your business subject to various limitations and thresholds.
The deduction does not apply to specified service businesses, which includes any trade or business that involves the performance of services for any trade or business where the principal asset of such trade or business is the reputation or skill of one or more employees or owners.
The Act specifically excludes service businesses including businesses in the fields of health, law, accounting, consulting financial services, engineering and architecture services from the pass-through business deduction.
Increased Bonus Depreciation. The new law increased the bonus depreciation allowance to 100% for property placed in service after September 27, 2017, to December 31, 2026, for all property with a recovery period of 20 years or less.
Section 179 Expensing. The “Section 179” small business expensing limitation has been increased to $1,000,000 and the phase-out threshold on asset additions will start at $2,500,000, effective for property placed in service in taxable years beginning after December
31, 2017. The definition of qualifying Section 179 property was expanded to include roofs, HVAC units, security systems and fire suppression and alarm systems.
Domestic Production Activities Deduction. The Tax Cuts and Jobs Act eliminated the domestic production activities deduction.
Business Interest Deduction. The business interest deduction will be capped at 30% of adjusted taxable income; however, exceptions exist for small business and businesses with average gross receipts of $25 million or less.
These are just a few highlights of the Tax Cuts and Jobs Act. For additional information or questions, please contact your local Blue & Co. representative.