What is in the Tax Cuts and Jobs Act of 2017?
The new tax law has dominated political discussion for months and will likely continue to do so well into 2018. Consequences, both intended and otherwise, are still unclear. But for now, these are the big changes for both individuals and companies. In general, the changes to individual provisions expire at the end of 2025, but the corporate changes are permanent.
Taxes for Individuals
The big news here is bracket changes. They’ve changed and are generally lower:
- 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
- 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
- 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
- 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
- 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
- 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
- 37% (over $500,000; over $600,000 for couples)
The standard deduction nearly doubles, to $12,000 for singles and $24,000 for couples. This means fewer people will find it advantageous to itemize. ***YEAR-END TAX PLANNING NOTE: If you think you will not be itemizing in 2018, consider accelerating charitable deductions into 2017.***
Those who continue to itemize, however, will see significant changes — especially if they’re homeowners:
- All state and local tax deductions are limited to $10,000. ***YEAR-END TAX PLANNING NOTE: The IRS announced late yesterday (12/27/2017) that pre-payment of state and local real property taxes may not be deductible if paid in 2017 unless the tax is actually assessed. Click here to see if pre-payment would qualify you for a deduction.***
- The mortgage interest deduction is limited to payments on $750,000 of debt.
The alternative minimum tax is still in existence, but the exemption is increased, meaning fewer will be paying it.
The child tax credit is doubled to $2,000, with a refundable portion up to $1,400.
The estate tax is still with us, but the exemptions have been doubled. The number of families that will be subject to the federal estate tax is now vanishingly small.
Taxes for Businesses
The big story here is the lowering of the tax rate from 35% to 21% for C corporations. However, there are other important provisions:
- The corporate AMT is eliminated.
- The limit on Section 179 expensing is increased to $1 million.
- The new law limits the deduction for net operating losses to 80% of taxable income.
- Instead of being an immediate deduction, research and development expenditures will need to be written off gradually.
- Pass-through business income. Under law in effect for the 2017 tax year, all pass-through business income is taxed at the individual taxpayer’s marginal rate, as is most ordinary income. Under the TCJA, qualified pass-through business income will be addressed in a new IRC Section 199A as follows:
- Deduction of 20 percent of the non-wage allocation of qualified business income from the trade of business
- In general, deduction is limited to 50 percent of W-2 wages paid to employees.
- For individuals: Income earned over $157,000 is subject to 50% wage limitation
- For married couples: Income earned over $315,000 is subject to 50% wage limitation
- Certain service professionals (e.g., attorneys, accountants, financial professionals) will be excluded from taking the deduction for taxable income above $157,000 for an individual and $315,000 for a married couple.
- This new 20% deduction is quite complex and has many thresholds and limitations.
More planning opportunities will continue to arise as the new tax code unfolds. We are here to help. If you have questions or concerns about how the Tax Cuts and Jobs Act of 2017 will impact you, please call us at 301.662.9200.