The Winners, Losers and how will the Tax Cuts and Jobs Act Impact you and your business?
President Donald Trump’s “big, beautiful Christmas present” to the American people came Dec. 22, when he signed into law a tax plan that will benefit business owners big and small and give individual taxpayers a slight break in 2018. The tax plan starts to take effect January 1, 2018.
By Rmichaelrugg (Own work) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons
The Tax Cuts and Jobs Act: Key Changes for Businesses
Here are some of the most important changes for businesses under the new tax law.
Corporate Tax Rate Reduced
Lowers the corporate tax rate to 21 percent starting in 2018 from the current top 35 percent rate. The 15% rate on corporate income below $50,000 is eliminated.
New Deduction for Pass-Through Entities
Creates a new 20% deduction for pass-through entities, such as LLCs, S Corporations, partnerships, and sole proprietorships. Certain service businesses, such as health care and law, are not allowed to take the deduction if their income exceeds certain levels.
Section 179 Expensing Increased
Increases the Section 179 maximum annual deduction limit to $1 million from $500,000 and increases the phase-out threshold to $2.5 million from $2 million starting in tax year 2018.
Bonus Depreciation Increased
Increases to 100% the first-year bonus depreciation percentage (from the current 50% rate) for long-term assets placed in service after September 27, 2017. Allows bonus depreciation to be used for purchases of used property as well as new property.
Computers No Longer Listed Property
Computers are no longer classified as listed property starting in tax year 2018.
Entertainment and Meals Deduction Eliminated
Eliminates deductions for entertainment and meal expenses starting in tax year 2018. Businesses may still deduct 50% of cost of food consumed by employees during work or travel.
Net Operating Loss Carrybacks Eliminated
Eliminates the net operating loss carryback and limits carryforwards to 80 percent of taxable income.
Business Vehicle Depreciation Limits Increased
Increases the allowable depreciation limits for certain passenger automobiles to: $10,000 for the first year in which the vehicle is placed in service (up from $3,160), $16,000 for the second year (up from $5,100), $9,600 for the third year (up from $3,050), and $5,760 for the fourth and later years in the recovery period (up from $1,875). For passenger autos eligible for bonus first year depreciation, the maximum first year depreciation allowance remains at $8,000.
Alternative Minimum Tax Repealed
Repeals the corporate alternative minimum tax.
The Tax Cuts and Jobs Act: Key Changes for Individuals
Here are some of the most important changes for your personal taxes under the new tax law.
New Individual Tax Rates
The TCJA keeps seven tax brackets with the lowest 10% bracket remaining the same. Other income tax rates are reduced. There is a new 12% tax rate that covers more income than the 2017 10% and 15% brackets, resulting in lower taxes for many middle-income households. At the highest end of the spectrum, married taxpayers with incomes over $600,000, and singles with incomes over $500,000, pay tax at much lower rates—37% instead of 39.6% in 2017.
Higher Standard Deduction
The standard deduction, which reduces all individual taxpayers’ taxable income by a fixed amount, is roughly doubled to $12,000 for single individuals and $24,000 for marrieds filing jointly. Individuals whose taxable income is less than these amounts will pay zero income tax.
The $4,050 per-household-member personal exemption is eliminated. Because of this, larger families may benefit little from the increase in the standard deduction.
Many Itemized Deductions Eliminated
The new tax law eliminates itemized deductions for:
- unreimbursed employee expenses, such as mileage (currently deductible to the extent they exceed 2% of adjusted gross income)
- tax preparation expenses
- alimony payments
- investment expenses
- moving expenses to move to a new job, and
- personal casualty losses (except for losses associated with special disaster relief legislation).
- Charitable contributions remain deductible by itemizers. People who itemize will be allowed to deduct cash contributions up to 60% of their adjusted gross income, instead of 50% under current law.
In addition, fewer taxpayers will itemize their personal deductions because of the increase in the standard deduction.
Under the TCJA, the AGI threshold for deducting medical expenses is reduced from 10% to 7.5% for 2017 through 2019. This is one of the few provisions of the TCJA that applies retroactively to 2017. The threshold is scheduled to go back to 10% of AGI starting in 2020.
Home Mortgage Interest Deduction
The TCJA limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness, a reduction of $250,000 from prior law. The new limit goes into effect January 1, 2018 and applies only to homes purchased after December 15, 2017. Taxpayers with a binding written contract in place before December 15, 2017 who purchase a home before April 1, 2018, can continue to deduct up to $1 million in acquisition debt.
Interest on home equity loans is no longer deductible. This applies to loans made before 2018 as well as to those taken out later.
State and Local Tax (SALT) Deduction
The TCJA limits the state and local tax deduction to a total of $10,000. Under prior law, individuals who itemized were allowed to deduct the full amount of property tax and state and other local taxes they paid each year, including state income and sales tax.
Child Tax Credit
The child tax credit is increased to $2,000 per child under 17, up from $1,000 per child. $1,400 of the credit is refundable, meaning you need owe no tax to receive the credit amount. The TCJA increases the phase out to over $200,000 for individual taxpayer income (up from $75,000) and over $400,000 income for marrieds (up from $110,000).
The plan also establishes a new $500 credit for each parent and nonchild dependent, such as college students.
Alternative Minimum Tax Relief
The TCJA increases the amount of income exempt from the Alternative Minimum Tax by 39%. As a result, fewer taxpayers will be subject to the AMT.
Under the TCJA, estates worth up $11 million per person are exempt from the federal estate tax, double the prior amount. This means that married couples with estates worth up to $22 million will not be affected by the federal estate tax.
Alimony Not Deductible
Under prior law, alimony could be deducted by the ex-spouse who paid it. The TCJA eliminates this deduction. However, ex-spouses who receive alimony will no longer be required to pay income tax on the payments.
Obamacare Individual Tax Penalty Repealed
The Affordable Care Act (popularly called Obamacare) required individuals to obtain minimally adequate health insurance for themselves and their dependents. Those that failed to comply had to pay a tax penalty to the IRS. The TCJA permanently eliminates this penalty starting 2019, effectively making individual compliance with Obamacare purely voluntary. However, the penalty remains in effect for 2018.
- Currently, corporations tax rates range from 15% to 35% on taxable income over $10m. Implementation of new plan creates a single 21% corporate rate, which takes effect in 2018.
- The Act effectively switches the US to a territorial system, which means multinationals will no longer face US tax on profits earned overseas, barring certain exceptions. In exchange, the US has imposed a one-time, ultra-low tax on the profits companies currently have stashed abroad, levied at 8% on illiquid assets and 15.5% on liquid assets like cash.
- Corporations are thrilled – and so are shareholders, who expect companies to use the extra cash for bigger dividends or share buybacks. That is one reason why the stock market has soared in recent weeks.
- Top tax rate in the US will fall from 39.6% to 37%. That applies to income above $500,000 for individuals and $600,000 for couples
- The new law also doubles the amount exempt from the 40% inheritance tax to roughly $11m for individuals and $22m for couples.
HOWEVER, only about 1% of households earn more than $500,000, according to the Joint Committee on Taxation. Tax Policy Center estimates that under the current law, only 5,500 estates will pay tax in 2017. Both provisions expire after 2025.
The commercial property industry: (Benefit expires after 2025)
- New plan creates a deduction for businesses owners organised as pass-through entities – a favourite structure of property firms in the US
- Under the current law, owners of those firms pay taxes on profits based on the personal rate (since the profits “pass through” to the owners).
- The new plan allows 20% of that income to be deducted for households making less than $315,00. Above that, the perk is more limited – but it is available to commercial property owners.
- Property businesses also managed to beat back other proposals they said would hurt the industry.
- The new plan expands the uses of tax-privileged education savings accounts. Reserved for higher education, the new plan allows parents to use up to $10,000 to pay for private or religious schools.
Families in high-tax, high -cost states
- Under the current law, families can claim deductions for what they pay in state and local taxes. The new law will cap the deduction at $10,000 – a provision expected to hurt some people in states such as New York, New Jersey and Maryland.
- High housing costs, homeowners could be hit by the new cap on the mortgage interest deduction. Currently loans up to $1m are eligible, but that falls to $750,000 under the new plan.
- Many of the states most affected by the provisions are Democratic.
Most taxpayers in the future
- Analyses suggest almost 80% of the taxpayers will have lower tax bills in 2018, after the new plan implementation go into effect according to the Tax Policy Centre
- Cuts expire after 2025. The plan also switches to a less generous calculation of inflation.
- By 2027, the Tax Policy Center estimatesthat the overall change would be negligible. And 53% of taxpayers would face higher bills, many of them in the lower income brackets.
People paying for their own health insurance
- The new plan repeals the requirement that people carry health insurance or face a tax penalty. Analysts expect healthy people to quit purchasing plans – which would make costs rise for those who remain.
- The plan temporarily expends a deduction for medical expenses to try to counter those effects.
- Republicans attached a measure to the tax bill that opens drilling in the Arctic National Wildlife Refuge. Bridging a way for American business to tap into the rich oil fields based in the Artic Region.