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.

Individuals

The Act includes the following provisions for individual taxpayers, many of which are set to expire after December 31, 2025:

  • New income tax rates and brackets, with the maximum rate reduced from 39.6% to 37%;
  • Increases the standard deduction to $12,000 for single taxpayers and $24,000 for married filing jointly taxpayers;
  • Repeals the personal exemption;
  • Increases the child tax credit from $1,000 to $2,000 per qualifying child;
  • Limits the state and local tax deduction to $10,000; and
  • Doubles the estate and gift tax exemption for estates of decedents dying and gifts made after 2017 and before 2026. Adjusted for inflation, this provision results in an $11.2 million exemption for 2018.

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.


Businesses

For business taxpayers, provisions of the Act include the following:

  • Permanently reduces the maximum corporate tax rate from 35% to a flat rate of 21%;
  • Repeals the corporate alternative minimum tax;
  • Imposes a business interest expense deduction limit of 30% of AGI if a taxpayer has gross average annual receipts of more than $25 million, subject to certain exceptions and exclusions;
  • Allows bonus depreciation of 100% for new and used assets acquired after September 27, 2017 and before January 1, 2023;
  • Allows expensing of up to $1 million per year for depreciable tangible property used in an active trade or business, with a phase-out beginning at $2.5 million of qualified acquisitions;
  • The legislation also makes significant changes to the tax treatment of foreign income and taxpayers, including the exemption from U.S. tax for certain foreign income and the deemed repatriation of off-shore income.

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.

Comment

No Very





Captcha Image