New Tax Law – New Opportunities!
The Tax Cuts and Jobs Act (which has a new, really long name, so we’re sticking to the old one for now) has now passed Congress and been signed by the President. Some of the answers will take years to determine but here are some answers and a review of the major elements.
New Personal Income Tax Brackets
There are still seven, but they’re lower in most cases. They look like this:
|Single Bracket||Married Bracket||2017 Rate||New Rate (2018+)|
|$0 – $9,525||$0 – $19,050||10%||10%|
|$9,525 – $38,700||$19,050 – $77,400||15%||12%|
|$38,700 – $82,500||$77,400 – $165,000||25% to 28%||22%|
|$82,500 – $157,500||$165,000 – $315,000||25% to 28%||24%|
|$157,500 – $200,000||$315,000 – $400,000||28% to 33%||32%|
|$200,000 – $500,000||$400,000 – $600,000||33% – 39.6%||35%|
Personal Exemptions & Child Tax Credit
In 2017, taxpayers could claim $4,100 for themselves, their spouse, and each dependent. Personal exemptions are eliminated. However, the Child Tax Credit was increased from $1,000 to $2,000 and a new $500 credit for non-dependents (such as parents). The phase-out income levels were also adjusted up for all taxpayers so more will qualify for the credits ($200,000 if single; $400,000 if married).
Originally, single filers could claim a $6,350 deduction and married filers claimed $12,700. Under the new law this increases to $12,000 and $24,000 respectively.
Most of these have been eliminated under the new law with a few exceptions noted here.
- Property Taxes, State & Local Taxes – Deductible, but only up to a TOTAL of $10,000.
- Medical Expenses – Deductible AFTER they exceed 7.5% of income for 2017 and 2018, after that, only deductible AFTER they exceed 10% of income.
- Mortgage Interest – Only deductible on acquisition debt (no more interest from Home Equity debt) and only on the first $750,000 in debt (down from $1,000,000 under current law).
Those who pay alimony (called “spousal support” or “spousal maintenance” in some states) can deduct the amount paid from income under current law. And conversely, those who receive it are taxed on it as things currently stand.
The new law reverses this for divorce decrees executed AFTER December 31, 2018. Those who pay can’t deduct it and those who receive it won’t be taxed on it.
No change – the current law remains unchanged under the new law.
And under the existing law, an employer may pay up to $5,250 on behalf of an employee to obtain work-related education without the payment being included in the taxable income of the employee. This little known, and little used exception is a real opportunity for small business owners who have depends who are also employees of the business.
Primary Residence Sale Exclusion
No change – the current law remains unchanged under the new law.
Long-Term Capital Gains
No meaningful change between the original and new law on this front. Low income earners pay 0% capital gains tax. Earners with income above $38,700 (single) and $77,400 (married) pay 15% capital gains tax and earners with incomes above $424,950 (single) and $480,050 (married) pay the max capital gains rate of 20%.
Alternative Minimum Tax
The new law eliminates the AMT for corporations but retains it for individual taxpayers. However, the exemption amount is raised from $84,500 to $109,400 for married taxpayers so it will apply to fewer taxpayers.
ObamaCare – Individual Insurance Mandate
This is the “shared responsibility payment” (penalty) if the taxpayer doesn’t have health insurance or an exception for the entire year. The new law eliminates this requirement starting January 1, 2019.
The new law retains the Estate Tax but doubles the exemption. Currently at $5.5 million (single) and $11 million (married), the new law doubles the exemption amount to $11 million and $22 million respectively.
Pass-Through Business Income
Currently, any income reported to the taxpayer on a Schedule K-1 (from a partnership, S-Corp, etc.) is taxed as ordinary income at the taxpayer’s tax rate (see tables above).
Under the new law, 20% of this income could be deducted and the remaining 80% would be taxed at the taxpayer’s prevailing rate. There are limitations for some personal service corporations (attorneys, doctors, dentists, etc.) and general restrictions (50% of W-2 wages paid for wages above $157,500 if single or $315,000 if married, PLUS 2.5% of the purchase price of the assets producing the income). This should help most small business owners and could be a huge savings for profitable real estate holding companies.
Corporate Tax Rate
Corporations that do pay tax (like “C-Corps”) will see a rate reduction. The new law lowers the top corporate rate from 35% to 21%.
Other Changes impacting Businesses
A few other changes of note that particularly impact businesses.
- Businesses may retain the “Cash method” of accounting up to $25 million (raised from $5 million under current law) before they must convert to the “Accrual method.”
- Section 179 Accelerated Depreciation cap was raised from $510,000 under current law to $1,000,000 under the new law.
- Expensing at 100% is available under the new law for business assets purchased before the end of 2022. This opportunity then phases out over the subsequent five years.
- Interest Expense Limitation – we suspect you’ll hear about this one but keep in mind that the limitation to 30% of taxable income ONLY applies if annual receipts are greater than $25 million.
- Net Operating Losses will only carry forward (no more carry-back adjustments) and can only offset 80% of taxable income.
- The Domestic Production Deduction is eliminated under the new law.
About the Future – things to Watch
There are three important things to keep in mind about the new law.
- This law passed Congress VERY quickly (60 days – unheard of in Washington DC) and covers LOTS of areas. Accordingly, there are likely to be LOTS of issues, inconsistencies, and loopholes. This new law significantly changes the rules of taxation. The right tax strategy can capitalize under these new rules just like the past. Knowledge and adaptability are going to be key.
- Most of the individual provisions in the new law expire within 10 years. There are going to be plenty of discussions in another decade surrounding the extension of these provisions. But it will likely be very unpopular to raise taxes so extensions, or amendments that make the provisions permanent, are more likely than anything else. The corporate provisions are permanent.
- Also due to the size, speed and complexity of the new law, there are likely to be many correcting amendments over the next several years to address errors, close loopholes and clarify inconsistencies. Keep an ear to the ground (or an eye on our blog site – NLGBlog.com) as the changes emerge.
Note: Tony Nitti, a contributing author to Forbes Magazine, did an excellent job in mid-December 2017 of discussing the impact of the law in several areas. While we don’t share the author’s commentary and opinions, he did an excellent job of laying out the nuts and bolts. Here’s the link to the article if you’re interested: https://www.forbes.com/sites/anthonynitti/2017/12/16/the-tax-bill-is-finalized-whos-happy-and-whos-not/#7f194c302288
DISCLAIMER: The contents of this article are provided for educational purposes only and is not intended to be construed as legal advice. The reader is strongly encouraged to consult a professional tax attorney or other adviser regarding the new tax law and its impact on their specific financial circumstances.
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