A Quick Summary of Tax Cuts and Jobs Act effective January 1, 2018
Tax Attorney Matthew Schippers reviews the sweeping changes of the Tax Cuts and Jobs Act
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”), the largest tax reform since 1986. Most of the Act’s provisions became effective January 1, 2018.
The Act includes the following provisions for individual taxpayers, many of which are set to expire after December 31, 2025:
Notably, the legislation provides a new 20% deduction for non-corporate taxpayers with “qualified business income” from pass-through entities (partnerships, S corporations, and sole proprietorships). The deduction is under new Internal Revenue Code Section 199A. For this provision, the term “qualified business income” means the net amount of qualified items of income, gain, deduction, and loss relating to the taxpayer’s qualified trade or business within the United States. The term does not include capital gains or losses, dividend income, interest income, an owner’s reasonable compensation, guaranteed payments, or payments to a partner acting in a capacity other than as a partner.
The legislation imposes limits on the 20% deduction for a partner or shareholder of a “specified service trade or business,” which includes law and accounting firms, consulting firms, financial and brokerage services, and doctors, but excludes engineering and architecture services. If a partner or shareholder of a “specified service trade or business” has taxable income (without regard to this new deduction) equal to or less than the “threshold amount” ($157,500 for single taxpayers; $315,000 for joint returns), the full 20% deduction is available to the partner or shareholder. If such a taxpayer has taxable income greater than the threshold amount, the deduction is subject to a phase-out. The deduction is completely phased out once taxable income reaches $50,000 above the threshold amount for single taxpayers ($100,000 for joint returns).
For taxpayers not involved in a specified service trade or business, the full 20% deduction is available if such taxpayer has taxable income equal to or less than the threshold amount. The 20% deduction may become limited when taxable income exceeds the threshold amount. Generally, the deduction is limited to the lesser of: (1) 20% of qualified business income; or (2) the greater of (i) 50% of the taxpayer’s allocable share of W-2 wages paid by the pass-through entity or (ii) 25% of the taxpayer’s allocable share of W-2 wages plus 2.5% of the taxpayer’s allocable share of unadjusted basis of qualified depreciable assets. This limitation phases in over the first $50,000 for single taxpayers ($100,000 for joint returns) of taxable income in excess of the threshold amount. Therefore, if taxable income exceeds $207,500 for single taxpayers ($415,000 for joint returns), the limitation applies fully.
For business taxpayers, provisions of the Act include the following:
A summary should not be considered legal advice. For specific details regarding the new tax law provisions and the impact on you, contact the tax law professionals at Triplett Woolf Garretson, LLC.