The Tax Cut and Jobs Act has finally been passed by Congress. This is a sweeping tax bill which will affect individuals and businesses immediately in 2018 and for many years thereafter. Understanding the ramifications and planning techniques will impact your 2018 income taxes. As an individual taxpayer or business entity, you will need to meet with your tax advisors to update personal tax withholdings and business planning to take advantage of the law.
Some of the highlights and low points of the agreement include:
1. Seven tax brackets with rates between 10% and 37% for married filing jointly with an income level of $600,000 and beyond. (The full brackets are included below.) These rate changes expire on 12/31/25, and at that time the rates revert back to the current law.
2. Personal exemptions are suspended until 2026.
3. The standard deduction is raised to $24,000 for married couples from $12,000.
4. For new mortgages, interest is limited to the first $750,000 of a mortgage.
5. AGI limits for medical expenses reverts to 7.5% of AGI for 2018 and 2019 only. It returns to 10% in 2020.
6. There is a $10,000 limit for personal deductions of State and Local taxes (property, income and sales).
7. The new tax bill expands the use of 529 Plans for elementary and secondary school education.
8. The estate tax is not repealed. The exemption is now at $11,200,000 for single persons and $22,400,000 for married persons, with an inflation adjustment. This is only a temporary change. The exemption returns to $5,000,000 in 2026.
9. After 2019, alimony will no longer be deductible by the payor. It will be included in the payee’s income.
Individuals should meet with their personal tax advisor and accountants to make sure that their 2018 withholdings are sufficient to cover the loss of the personal exemptions, as well as State and Local tax deduction limits, while taking into account the new tax brackets.
1. The corporate tax rate (“C” Corporations) is reduced 21%.
2. A 20% income tax rate for pass through entities (LLC’s, S Corps, Sole Proprietorships) for individual taxpayers subject to certain W-2 wage limitations is added. This may not apply to all service trades, such as doctors and attorneys.
3. Various tax credits are eliminated, but the research and development tax credit is preserved.
4. Like kind exchange eligibility is limited to certain real estate transactions only after 12/31/17. There will be increased capital expensing limits for 2018, but they will be phased out in 2022.
5. Qualified commercial real estate placed in service in 2018 will be depreciable over 15 years.
6. Qualified residential real estate is depreciable over 30 years (down from 40 years).
7. Employer deductions for certain fringe benefits are limited. Entertainment expenses are no longer deductible. Parking expenses are no longer deductible by the employer.
TAX CUT AND JOBS ACT TAX BRACKETS
Married Individuals Filing Joint Returns and Surviving Spouses
• Not over $19,050 – 10 percent of the taxable income
• Over $19,050 but not over $77,400 – $1,905 plus 12 percent of the excess over $19,050
• Over $77,400 but not over $165,000 – $8,907 plus 22 percent of the excess over $77,400
• Over $165,000 but not over $315,000 – $28,179 plus 24 percent of the excess over $165,000
• Over $315,000 but not over $400,000 – $64,179 plus 32 percent of the excess over $315,000
• Over $400,000 but not over $600,000 – $91,379 plus 35 percent of the excess over $400,000
• Over $600,000 – $161,379 plus 37 percent of the excess over $600,000
• Not over $9,525 – 10 percent of the taxable income
• Over $9,525 but not over $38,700 – $952.50 plus 12 percent of the excess over $9,525
• Over $38,700 but not over $82,500 – $4,453.50 plus 22 percent of the excess over $38,700
• Over $82,500 but not over $157,500 – $14,089.50 plus 24 percent of the excess over $82,500
• Over $157,500 but not over $200,000 – $32,089.50 plus 32 percent of the excess over $157,500
• Over $200,000 but not over $500,000 – $45,689.50 plus 35 percent of the excess over $200,000
• Over $500,000 – $150,689.50 plus 37 percent of the excess over $500,000