By Michael G. Radich, CPA, MST
A tax reduction bill – some 1,097 pages in length – was signed into law by President Donald Trump on Dec. 22, 2017, and took effect Jan. 1, 2018. So, what does all of this mean? Here is a quick overview of a large and complex bill.
The GOP tax bill keeps seven tax brackets for individuals: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. These rates will sunset in 2025 unless Congress extends them or changes them. The standard deduction increases to $24,000 for married couples filing jointly (to $12,000 for single filers and those married filing separately), almost double the previous standard deduction. However, there will be a cap on state and local tax deductions of $10,000 and the elimination of personal exemptions. Furthermore, mortgages over $750,000 now have a limit on the amount of deductible interest. Mortgage loans in place prior to 2018 are grandfathered in under the old rule of $1,000,000. For 2018 and 2019, the floor for deducting medical expenses has been lowered back to 7.5 percent from 10 percent. The individual insurance mandate penalty tied to the Affordable Care Act has been reduced to zero. For tax years after Dec. 31, 2017, and beginning before Jan. 1, 2026, the alternative minimum tax (AMT) exemption amount increases to $109,400 for married couples filing jointly, half that for married couples filing separately, and $70,300 for all others (excluding estates and trusts). The phase-out threshold increases to $1 million (married filing jointly) and $500,000 for all other taxpayers (excluding estates and trusts). The estate tax exemption doubles to $11.2 million. The adoption credit remains, as do tuition waivers. Individuals will also see an increase in the child care tax credit.
The most confusing change under the new law is the pass-through income deduction. This deduction is geared toward small-business owners of sole proprietorships, partnerships, and S corporations. The owners of these businesses would be allowed to exempt 20 percent of their income from taxation, thus reducing their overall tax rate. Any salaries paid from these entities would still be subject to the income tax brackets detailed above. This 20 percent exemption ensures pass-through income is taxed at a maximum of 29.6 percent. Taxpayers operating professional service firms would not get the 20 percent break unless their income was $315,000 or less. For traditional C corporations, the top corporate tax rate drops from 35 percent to 21 percent (on income over $10 million). There had been talk of a 25 percent tax rate for professional service companies, but that language never found its way into the final bill. The corporate AMT goes away. These provisions are permanent (or as permanent as something can be in Washington, D.C.).
Starting in 2018, bonus depreciation under IRC Section 168(k) is expanded to allow a 100 percent deduction of the cost of capital investments of short-lived assets like equipment. This remains in effect until 2022, and then it will be phased down over the next four years by 20 percent. The new law also removes the provision requiring equipment to be new to qualify for the deduction. Furthermore, deductions under IRC Section 179 would be increased from $500,000 to $1 million, with the phase-out threshold being raised to $2.5 million. Bonus depreciation also has been expanded under the new law. The bill scraps net operating loss carrybacks and caps carryforwards to 90 percent of taxable income (falling to 80 percent in 2022). The IRC Section 199 deduction for domestic production activities has been completely eliminated. Lastly, the bill provides for a repatriation tax. Liquid assets such as cash and equivalents are subject to 15.5 percent rate, and illiquid assets are subject to 8 percent.
There is more in this bill than can be fully detailed in a blog post, so consider this a “jumping on point” to help you identify what is important.
Michael G. Radich is a tax manager at Wilke & Associates LLP in Pittsburgh, Pa. He can be reached at firstname.lastname@example.org.
Other blogs in the Federal Taxation Committee Series: