While you were spending time with family and friends enjoying the holiday season, the Tax Cuts and Jobs Act legislation was signed into law by Congress on December 22, 2017.
With 505 pages of new tax legislation, significant changes to the taxation of individuals and businesses will be implemented in 2018. For individuals, the majority of the changes are temporary and will revert to previous rules after December 31, 2025 unless otherwise indicated. The majority of the corporate tax changes are permanent. To save you the added torture of reading the entire bill, here is a summary of the most significant changes.
Tax Changes for Individuals
- Alternative Minimum Tax (AMT)
- Exemption amounts have been raised from $86,200 to $109,400 for married and from $55,400 to $70,300 for single taxpayers
- Phase-out of exemption amount has been raised from $164,000 to $1,000,000 for married and from $123,100 to $500,000 for single taxpayers
- Standard Deduction
- The standard deduction has been raised from $13,000 to $24,000 for married and from $6,500 to $12,000 for single taxpayers
- Personal Exemptions
- Personal exemptions have been eliminated
- Child Tax Credit
- The child tax credit has been increased from $1,000 to $2,000 per child, of which $1400 is refundable
- Adds a $500 credit for other non-child dependents
- The phase-out limit for the credit has been increased from $75,000 to $200,000 for single and from $110,000 to $400,000 for married taxpayers
- Itemized Deductions
- State and Local Taxes - The deduction is now capped at $10,000 / year
- Mortgage Interest – The deduction is limited to interest paid on principal residence and second residence mortgages up to a combined $750,000. Home equity loan interest is no longer deductible. Mortgages issued prior to 12/16/17 will be grandfathered into the old rules and allow deductibility for interest paid on mortgages up to $1,000,000 (married) or $500,000 (single)
- Charitable Contributions – The Act increases the percentage of current year income from which charitable contributions may be deducted from 50% to 60%. The 80% deduction for university athletic seating rights is repealed.
- Medical Expenses – Floor of 10% AGI before deduction has been reduced to 7.5% for tax years 2017 and 2018
- Casualty Losses – The Act disallows deductions for casualty losses except in the case of causalities that are declared disasters by the president
- Miscellaneous Itemized Deductions – The Act repeals the miscellaneous itemized deductions subject to the 2% floor
- The PEASE limitation which reduced the availability for itemized deductions at income levels starting at $320,000 (married) and $266,700 (single) has been repealed
- Estate Tax
- The exemption for estate, gift, and generation skipping transfer (GST) taxes has been raised from $5.6 million to $11.2 million
- Alimony Payments
- The Act eliminates the deduction for alimony payments pursuant to a divorce or separation agreement executed after December 31, 2018.
- 529 College Savings Plans
- Under the new rules, distributions from 529s can now be used for tuition at an elementary or secondary public, private, or religious school in addition to post-secondary education.
- This provision does not expire in 2025
- Health Insurance
- The individual mandate to purchase health insurance coverage or pay a penalty has been repealed.
- This provision does not expire in 2025
- Future Inflation Adjustments
- The Act changes the inflation index used to increase the income levels at which progressively higher tax rates take effect from the standard CPI (Consumer Price Index) to a “Chained” CPI. Chained CPI increases less quickly than standard CPI potentially forcing taxpayers into higher tax brackets more quickly than under the previous index.
Tax Changes for Businesses
- Corporate Tax Rate
- The Act makes a permanent reduction in the tax rate for C corporations from 35% to 21% and repeals the corporate alternative minimum tax (AMT)
- Business Income of Pass-Through Entities
- Income earned by pass-through entities such as partnerships, limited liability companies, and S corporations flows through to the owners’ tax returns.
- The Act provides a deduction equal to 20% of business income received by owners of a non-service business. The deduction is only available through 2025.
- Owners of a personal service business may claim the deduction if the owner’s joint income is less than $315,000 and subject to a phase out limit up to $415,000. The Act defines personal service businesses to include entities providing financial, brokerage, health, law, accounting, actuarial, or consulting services, but excludes engineering and architecture businesses.
- Capital Expenditures
- The Act allows businesses to immediately deduct capital expenditures they make through 2022 rather than claim depreciation deductions over the life of the asset purchased. The provision will be gradually phased out from 2022 through 2026.
- Small Businesses
- The amount small businesses may expense is increased to $1 million, with the expense deduction phasing out starting at $2.5 million
- A business may no longer deduct net interest expense to the extent it exceeds 30% of the business income. Real estate businesses and other businesses with gross receipts less than $25 million are exempt from the disallowance.
- Like-Kind Exchanges
- The Act limits tax-deferred like-kind exchange treatment to exchanges of real property
- Entertainment Expenses
- Deductions for business entertainment expenses are eliminated
- Foreign Earnings of U.S. Companies
- Under the prior law, a foreign subsidiary’s earnings were subject to a 35% U.S. tax when the subsidiary repatriated its earnings.
- The Act provides that future earnings of foreign subsidiaries will no longer be subject to tax on repatriation.
- Earnings of U.S. companies that are currently being held overseas will now be subject to tax at a rate of 15.5% for liquid assets and 8% for illiquid assets upon repatriation, payable over eight years.
The new tax laws still offer plenty of financial planning opportunities that you may have benefited from the past. Please consult your financial advisor if you have questions or concerns about how they may affect your financial plan.
Christina L White, CFP®
Neither Voya Financial Advisors nor its representatives offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation
Investment advisor representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc (member SIPC)