December 23, 2017
On December 22nd, 2017, the most sweeping tax reform in more than 30 years was signed by President Trump. There are many updates to both individual and business tax law. Below are summaries of the Act’s major tax provisions and changes that will impact individuals, businesses and foreign operations. If you have any questions or concerns as to your household or business, please give us a call at 216.524.8900.
INDIVIDUAL PROVISIONS
| PROVISION | SUMMARY EXPLANATION |
| Individual Tax Rates | Seven tax rates of 10%, 12%, 22%%, 24%, 32%, 35%, and a new top rate of 37%. The 37% top rate is slightly lower than the current top tax rate.
Rate Joint Return Single 10% $0 – $19,050 $0 – $9,525 12% $19,050 – $77,400 $9,525 – $38,700 22% $77,400 – $165,000 $38,700 – $82,500 24% $165,000 – $315,000 $82,500 – $157,500 32% $315,000 – $400,000 $157,500 – $200,000 35% $400,000 – $600,000 $200,000 – $500,000 37% Over $600,000 Over $500,000 |
| Standard Deduction | $24,000 for married couples filing joint, $12,000 for single taxpayers and $18,000 for head of household. |
| Pass-Through Tax Rates | Adds a new business deduction of 20% of qualified pass-through business income subject to a number of limitations and qualifications. |
| Child/Non-Child Dependent | $2,000 per child credit with up to $1,400 being refundable. Credit begins to be phased-out for families making over $400,000. Additionally, a $500 nonrefundable credit is available for certain non-child dependents. |
| Itemized Deduction for State Income Taxes and Property Taxes | The bill sets an overall cap on these deductions at $10,000 annually and allows taxpayers to decide between property taxes, income taxes, or sales tax for this $10,000 limit. Additionally, a provision was added so there could be no prepayment of future year’s income taxes in 2017. |
| Mortgage Interest | Limits the mortgage interest deduction for mortgages exceeding $750,000 on new mortgages of principal residences or second homes. The effective date is for loans on or after 12/15/2017.Deduction for “home equity interest” is repealed for tax years after 2017. |
| Charitable Contributions | Increases the AGI threshold for charitable contributions to 60% from 50%.Repeals the 80% deduction for amounts paid for the seating rights for college sporting events. |
| Casualty Losses | Itemized deduction repealed in 2018, except for losses in declared disaster areas. |
| Medical Expenses | Medical expense deduction retained. 7.5% of AGI applies for 2017 and 2018, and rises to 10% of AGI thereafter.Also, eliminates individual ACA mandate for health insurance. Effective after 12/31/2018. |
| Alimony | Repeals the alimony deduction for the payer and inclusion in income for the recipient.Effective date would be for divorce decrees executed after 12/31/2018. |
| AMT | AMT would be retained but the exemption would be increased to $109,400 for married couples and to $70,300 for single taxpayers.Additionally, the AMT exemption would begin to phase-out at $1,000,000 for married couples and $500,000 for single filers.Applies in 2018. |
| 401(k)/IRA Contributions | Retains current law regarding 401K and IRA plans. |
| ROTH IRA | Eliminates the option to re-characterize a ROTH IRA conversion back to a traditional IRA. Effective for 2018. |
| Personal Exemptions | The deduction for personal exemptions is suspended for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026. |
| Capital Gains | Retains current treatment and rate structure for capital gains and qualified dividends. |
| Miscellaneous Itemized Deductions | The deduction for miscellaneous itemized deductions subject to the 2% floor is suspended for tax years beginning after Dec. 31 2017 and before Jan. 1, 2026. These deductions include employee business expenses, tax preparation fees and investment advisory fees. |
| Moving Expenses | For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. |
| 529 Plans | For distributions after Dec. 31, 2017, “qualified higher education expenses” also includes tuition at an elementary or secondary public, private, or religious schools up to a $10,000 limit per tax year. |
| FIFO Stock Sale Proposal | The proposed law on first-in-first-out stock sales has not been enacted. Taxpapyers can still specifically identify stock lots when selling their shares to take advantage of potential losses |
| Estate Tax Exemption | Estate tax exemption doubled from current levels. Effective for decedents dying after 12/31/2017. |
BUSINESS PROVISIONS
| Corporate Tax Rates | Regular corporate rate reduced to a flat 21%,Personal Service Corporation rate reduced to flat 21%.Effective in 2018. |
| Corporate AMT | Corporate AMT is repealed. Effective in 2018. |
| Interest Deduction for Companies with over $25 million | Limited in their interest deduction based on 30% of adjusted taxable income. Any unused interest expense above 30% threshold would be disallowed, and would carry forward for an unlimited amount of years. There are exceptions that apply for “real estate businesses” and for “floor plan financing” for auto dealers.Effective in 2018. |
| Bonus Depreciation | 100% bonus depreciation for additions placed in service after September 27, 2017. Applies to new and used property. |
| Section 179 Expensing | Limitation would be increased from $500,000 to $1,000,000.Phase-out amount for annual additions would be increased from $2,000,000 up to $2,500,000.Effective in 2018. |
| Net Operating Losses (NOLs) | Disallows NOL carrybacks except for a special 2 year carryback for farming.NOLs can be carried forward indefinitely but will be limited to 80% of taxable income.Effective in 2018. |
| Accounting Method Reforms for Small Businesses ($25 million or less of annual gross receipts) | Permits use of the cash method (even if the small business had inventories).Removes the Uniform Cost Capitalization for Inventory (UNICAP) rules for small businesses.Permits use of the completed contract method or other method for long-term contracts for contractors.Effective in 2018. |
| Like-Kind Exchanges (§1031 Exchanges) | Limits the use of like-kind exchanges to real property and eliminates the use of like-kind exchanges with personal property.Applies to exchanges after December 31, 2017. |
| Luxury Auto Limits | For passenger automobiles placed in service after Dec. 31, 2017, in tax years ending after that date, for which the additional first-year bonus depreciation deduction not claimed, the maximum amount of allowable depreciation is increased to: $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period. |
| Domestic Production Activities Deduction | For tax years beginning after Dec. 31, 2017, the DPAD is repealed. |
| Employer Fringe Benefits | For amounts incurred or paid after Dec. 31, 2017, deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related; the current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer; and deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained. |
| Excessive Employee Compensation | For tax years beginning after Dec. 31, 2017, the exceptions to the $1 million deduction limitation for commissions and performance-based compensation are repealed. The definition of “covered employee” is revised to include the principal executive officer, the principal financial officer, and the three other highest paid officers. If an individual is a covered employee with respect to a corporation for a tax year beginning after Dec. 31, 2016, the individual remains a covered employee for all future years.Under pre-Act law, exceptions applied for: (1) commissions; (2) performance-based remuneration, including stock options; (3) payments to a tax-qualified retirement plan; and (4) amounts that are excludable from the executive’s gross income. |
Employer-Paid Family and Medical Leave |
For wages paid in tax years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, the Act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. |
Dividends-Received Deduction |
For tax years beginning after Dec. 31, 2017, the 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%. |
Partnership Technical Termination |
For partnership tax years beginning after Dec. 31, 2017, the Code Sec. 708(b)(1)(B) rule providing for the technical termination of a partnership is repealed. The repeal doesn’t change the pre-Act law rule of Code Sec. 708(b)(1)(A) that a partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership. (Code Sec. 708(b), as amended by Act Sec. 13504) |
FOREIGN OPERATIONS
Repatriation/Foreign Source Dividends |
Under pre-Act law, U.S. citizens, resident individuals, and domestic corporations generally were taxed on all income, whether earned in the U.S. or abroad. Foreign income earned by a foreign subsidiary of a U.S. corporation generally was not subject to U.S. tax until the income was distributed as a dividend to the U.S. corporation.For tax years of foreign corporations that begin after Dec. 31, 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign corporations end, the current-law system of taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when these earnings are distributed is replaced. The Act provides for an exemption by means of a 100% deduction for the “foreign-source portion” of dividends received from specified 10% owned foreign corporations by domestic corporations that are U.S. shareholders of those foreign corporations.No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to a dividend that qualifies for the deduction. There is also a provision in the Act that disallows the deduction if the domestic corporation did not hold the stock in the foreign corporation for a long enough period of time. |
Taxation of Foreign Earnings and Profits |
Under the Act, U.S. shareholders owning at least 10% of a foreign subsidiary generally must include in income, for the subsidiary’s last tax year beginning before 2018, the shareholder’s pro rata share of the net post-86 historical E&P of the foreign subsidiary to the extent such E&P has not been previously subject to U.S. tax.The portion of the E&P comprising cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8%.At the election of the U.S. shareholder, the tax liability is payable over a period of up to eight years The payments for each of the first five years equals 8% of the net tax liability. The amount of the sixth installment is 15% of the net tax liability, increasing to 20% for the seventh installment and the remaining balance of 25% in the eighth year. |
Hobe & Lucas Certified Public Accountants, Inc. is a full-service accounting and business consulting firm dedicated to providing clients with exceptional value.
Upload 8879 Make A Payment
Check us out on BrokerCheck®.
Investment advisory services are offered through Avantax Planning PartnersSM. Commission-based brokerage services are offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Insurance services offered through licensed agents of Avantax Planning Partners. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. The Avantax entities are independent of and unrelated to Hobe & Lucas Certified Public Accountants, Inc.
Although Avantax does not provide or supervise tax or accounting services, our Financial Professionals may offer these services through their independent outside business. Financial Professionals may only conduct business with residents of the states for which they are properly registered. Not all Financial Professionals are licensed to offer all products or services. Financial planning and investment advisory services require separate licenses.
