Highlights of the Tax Cuts and Jobs Act

  • Individual:
    • Net Income Tax Rates: 10%, 12%, 22%, 24%, 32%, 35%, 37%
    • Capital Gains & Qualified Dividends Tax Rates Remain: 0%, 15%, 20%; however, the 15% breakpoint is $77,200 MFJ and the 20% breakpoint is $479,000 MFJ.
    • Standard Deduction: increased to $24,000 MFJ and adjusted for inflation for years after 2018
    • Personal Exemption: suspended for years after 12/31/17 and before 1/1/2026
    • Obamacare Individual Mandate: suspended after 12/31/18
    • 8% Net Investment Income Tax and 0.9% Additional Medicare Tax Remains intact
    • Kiddie Tax: Unearned Income of children will be taxed at the tax rates for trusts and no longer will be allowed to be included on parents return.
    • Itemized Deductions:
      • State and Local Tax Deduction: Maximum deduction allowed up to $10,000 for the aggregate of (i) property taxes paid or accrued, and (ii) income or property taxes paid or accrued in the tax year.
      • Mortgage Interest: years after 12/31/17 and before 1/1/2026,
        • Home equity indebtedness – suspended
        • Mortgage interest up to $750,000 MFJ
        • Post 12/31/2025: prior $1 million/$500,000 acquisition indebtedness and the home equity indebtedness are restored
      • Medical Expense for years post 12/31/16 and before 1/1/2019, 7.5% threshold is restored. However, everyone is at 10% thereafter.
      • Charitable Contribution for year post 12/31/17 and before 1/1/2026: 50% limitation is increased to 60%. Unused contributions are carried forward and deducted up to 5 years and subject to the later years limitation.
      • Miscellaneous Deductions subject to 2% limitation have been suspended for years after 12/31/17 and before 1/1/2026.
      • Personal Casualty & Theft Losses for year after 12/31/17 and before 1/1/2026: suspended except for personal casualty losses incurred in a federally-declared disaster; however, if the loss doesn’t exceed the gain, the loss suspension does not apply
    • Alimony: divorce or separation agreement executed after 12/31/18: alimony and separate maintenance payments are not deductible by the payor spouse and are not included in income of the payee spouse.
    • Moving Expenses reimbursements exclusion for years after 12/31/17 and before 1/1/2026 are 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.
    • Child Tax Credit for years after 1/31/17 and before 1/1/2026 is increased to $2000/child, phaseout increased to $400,000 MFJ, and refundable amount of the credit is increased to $1,400/qualifying child.
    • Carried Interest Holding period; for tax years after 12/31/17, a 3 year holding period requirement for certain partnership interest received in connection with the performance of services and taxed as long-term capital gains; otherwise, gain is treated as short term gain taxed at ordinary income rates.
    • Recharacterization of IRA contributions: rule that allow that allow a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA.
  • Estates and Trusts (Form 1041):
    • Rates and bracket changes: 10% (up to $2,549), 24% ($2,550 to $9,149), 35% ($9,150 to $12,499), and 37% (over $12,500)
  • Estates:
    • Exemption doubles: $11.2M ($22.4 M per married couple)
  • Corporations:
    • Rates reduced to flat 21%
    • 179 maximum expense increased to $1 Million and phased out at $2.5 Million for qualified real property.
    • Bonus Depreciation for qualified property increased to 100% first year deduction if placed in service after 9/27/17 and before 1/1/23. Phased down begins after 12/31/22.
    • Changed recovery period for real property placed in service after 12/31/17 to 15 year straight line and 20 year ADS.
    • Every Business (regardless of form) is disallowed a deduction for net interest expense in excel of 30% of the business Adjusted Taxable Income, which is computed without regard to depreciation, amortization, or depletion. Except for taxpayers with average annual gross receipts for the 3 tax year period ending with the prior tax year that do not exceed $25M.
    • Losses arising after 12/31/17: The 2 year carryback provision is repealed and the NOL deduction is limited to 80% of taxable income and carryforward indefinitely.
    • IRC §199 Domestic Production Activities deduction is repealed.
    • Like-Kind Exchange treatment is limited with respect to real property that is not held primarily for sale.
    • Fringe Benefit expenses:
      • Entertainment Expenses are disallowed
      • Business meals 50% limit is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer. For tax years after 12/31/25, the employer’s deduction for expenses associated with meals provided for the convenience of the employer on the employer’s business premises or near the employer’s business premises through an employer operated facility are disallowed.
      • Employee transportation fringe benefits are denied.
      • Employee achievement awards are excludable to the extent the employer can deduct the cost of the award. The act includes the definition of the achievement award being “tangible personal property” and does not include cash, cash equivalents, gift cards, gift coupons, gift certificates, vacations, meals, lodging, tickets to theatre or sporting events, stock, bones, or similar items.
    • Cash Method may be used by taxpayers that satisfy the $25M gross receipts test: annual average gross receipts that do not exceed $25M for the three prior tax years. Exceptions: Qualified Personal Service Corporation, Partnerships with out C Corp partners, S Corporations and other pass through entities are allowed to use cash method without regard to the $25M gross receipts as long as the method clearly reflects income.
  • Pass-through Entities
    • 20% deduction of taxpayer’s qualified business income (QBI) from a partnership, S Corporation, or sole proprietorship ~ applied to taxable income after Adjusted Gross Income.
    • QBI is defined as income, gain, deductions, and loss with respect to the trade or business. Items excluded from QBI: investment related income, capital gains or losses, dividends or interest, reasonable compensation and guaranteed payments paid to the taxpayer.
    • If the net amount of qualified business income is less than zero, the amount is treated as a qualified business loss in the succeeding year.
    • Service Related businesses (trade or business whose principal asset is the reputation or skill of one or more of its employees: healthcare professionals, law, accounting, consulting, financial services, etc…) are eligible. However, the deduction is phased out if the taxpayer’s taxable income exceeds the threshold of $315,000 MFJ ($157,500 single).
      • Engineering and architecture are not included in Service Related businesses as they are included in production activities.
      • Taxpayers whose taxable income exceeds the threshold amount of $157,500 ($315,000 MFJ) are also subject to the limitation based on the w-2 wages and adjusted basis in acquired qualified property. This limitation is the greater of:
        • 50% of W-2 wages: each partner or s corporation shareholder is treated as having W-2 wages for the tax year in an amount equal to his/her allocable share of the W-2 wages of the entity for the tax year, OR
        • The sum of 25% of the W-2 wages plus 5% of the unadjusted basis, immediately after acquisition, of all “qualified property”.

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