2017 Tax Reform: “Tax Cuts and Jobs Act”

2017 Tax Reform: “Tax Cuts and Jobs Act”

By In Uncategorized On December 27, 2017


On December 20, the House approved H.R. 1, the “Tax Cuts and Jobs Act,” the sweeping tax reform measure, by a vote of 224 to 201. The Senate had passed the measure, as revised to address some procedural complications, the night before, and the bill has been signed by President Trump.

TAX RATES & KEY FIGURES

New Income Tax Rates & Brackets

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax brackets apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The Act also provides four tax brackets for estates and trusts: 10%, 24%, 35%, and 37%. (Code Sec. 1(i)), as amended by Act Sec. 11001) The specific application of these brackets, and the income levels at which they apply, is shown below.

FOR MARRIED INDIVIDUALS FILING JOINT RETURNS

AND SURVIVING SPOUSES:

If taxable income is:                 The tax is:

——————–                  ———–

Not over $19,050                      10% of taxable income

Over $19,050 but not                  $1,905 plus 12% of the

over $77,400                          excess over $19,050

Over $77,400 but not                  $8,907 plus 22% of the

over $165,000                         excess over $77,400

Over $165,000 but not                 $28,179 plus 24% of the

over $315,000                         excess over $165,000

Over $315,000 but not                 $64,179 plus 32% of the

over $400,000                         excess over $315,000

Over $400,000 but not                 $91,379 plus 35% of the

over $600,000                       excess over $400,000

Over $600,000                       $161,379 plus 37% of the

excess over $600,000

FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND

SURVIVING SPOUSES):

If taxable income is:                 The tax is:

——————–                  ———-

Not over $9,525                       10% of taxable income

Over $9,525 but not                   $952.50 plus 12% of the

over $38,700                           excess over $9,525

Over $38,700 but not                  $4,453.50 plus 22% of the

over $82,500                           excess over $38,700

Over $82,500 but not                  $14,089.50 plus 24% of the

over $157,500                          excess over $82,500

Over $157,500 but not                 $32,089.50 plus 32% of the

over $200,000                          excess over $157,000

Over $200,000 but not                 $45,689.50 plus 35% of the

over $500,000                          excess over $200,000

Over $500,000                         $150,689.50 plus 37% of the

excess over $500,000

FOR HEADS OF HOUSEHOLDS:

If taxable income is:                 The tax is:

——————–                  ———–

Not over $13,600                      10% of taxable income

Over $13,600 but not                  $1,360 plus 12% of the

over $51,800                           excess over $13,600

Over $51,800 but not                  $5,944 plus 22% of the

over $82,500                          excess over $51,800

Over $82,500 but not                  $12,698 plus 24% of the

over $157,500                          excess over $82,500

Over $157,500 but not                 $30,698 plus 32% of the

over $200,000                          excess over $157,500

Over $200,000 but not                 $44,298 plus 35% of the

over $500,000                          excess over $200,000

Over $500,000                         $149,298 plus 37% of the

excess over $500,000

FOR MARRIEDS FILING SEPARATELY:

If taxable income is:                 The tax is:

——————–                  ———-

Not over $9,525                       10% of taxable income

Over $9,525 but not                   $952.50 plus 12% of the

over $38,700                           excess over $9,525

Over $38,700 but not                  $4,453.50 plus 22% of the

over $82,500                           excess over $38,700

Over $82,500 but not                  $14,089.50 plus 24% of the

over $157,500                          excess over $82,500

Over $157,500 but not                 $32,089.50 plus 32% of the

over $200,000                          excess over $157,500

Over $200,000 but not                 $45,689.50 plus 35% of the

over $300,000                          excess over $200,000

Over $300,000                         $80,689.50 plus 37% of the

excess over $300,000

FOR ESTATES AND TRUSTS:

If taxable income is:                 The tax is:

———————                 ———–

Not over $2,550                       10% of taxable income

Over $2,550 but not                   $255 plus 24% of the

over $9,150                            excess over $2,550

Over $9,150 but not                   $1,839 plus 35% of the

over $12,500                            excess over $9,150

Over $12,500                          $3,011.50 plus 37% of the

excess over $12,500

Standard Deduction Increased

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind. (Code Sec. 63(c)(7)).

Personal Exemptions Suspended

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is effectively suspended by reducing the exemption amount to zero. (Code Sec. 151(d)), as modified by Act Sec. 11041(a)) A number of corresponding changes are made throughout the Code where specific provisions contain references to the personal exemption amount in Code Sec. 151(d), and in each of these instances, the dollar amount to be used is $4,150, as adjusted by inflation. These include Code Sec. 642(b)(2)(C) (exemption deduction for qualified disability trusts), Code Sec. 3402 (wage withholding, subject to an exception below for 2018), and Code Sec. 6334(d) (property exempt from levy).

Kiddie Tax Modified

Changes: For tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child’s ordinary income and his income taxed at preferential rates. (Code Sec. 1(j)(4)).

INCOME FROM PASS-THROUGH ENTITIES

New Deduction for Pass-Through Income

Changes: Generally for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act adds a new section, Code Sec. 199A, “Qualified Business Income,” under which a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship is allowed to deduct:

  • (1)  the lesser of: (a) the “combined qualified business income amount” of the taxpayer, or (b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year; plus
  • (2)  the lesser of: (i) 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year, or (ii) taxable income (reduced by the net capital gain) of the taxpayer for the tax year. (Code Sec. 199A(a), as added by Act Sec. 11011)

The “combined qualified business income amount” means, for any tax year, an amount equal to: (i) the deductible amount for each qualified trade or business of the taxpayer (defined as 20% of the taxpayer’s QBI subject to the W-2 wage limitation; see below); plus (ii) 20% of the aggregate amount of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income of the taxpayer for the tax year. (Code Sec. 199A(b))

QBI is generally defined as the net amount of “qualified items of income, gain, deduction, and loss” relating to any qualified trade or business of the taxpayer. (Code Sec. 199A(c)(1)).  For this purpose, qualified items of income, gain, deduction, and loss are items of income, gain, deduction, and loss to the extent these items are effectively connected with the conduct of a trade or business within the U.S. under Code Sec. 864(c) and included or allowed in determining taxable income for the year. If the net amount of qualified income, gain, deduction, and loss relating to qualified trade or businesses of the taxpayer for any tax year is less than zero, the amount is treated as a loss from a qualified trade or business in the succeeding tax year. (Code Sec. 199A(c)(2)).  QBI does not include: certain investment items; reasonable compensation paid to the taxpayer by any qualified trade or business for services rendered with respect to the trade or business; any guaranteed payment to a partner for services to the business under Code Sec. 707(c); or a payment under Code Sec. 707(a) to a partner for services rendered with respect to the trade or business.

The 20% deduction is not allowed in computing adjusted gross income (AGI), but rather is allowed as a deduction reducing taxable income. (Code Sec. 62(a)).

Limitations. For pass-through entities, other than sole proprietorships, the deduction cannot exceed the greater of:

  • (1)  50% of the W-2 wages with respect to the qualified trade or business (“W-2 wage limit”), or
  • (2)  the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.” Qualified property is defined in Code Sec. 199A(b)(6) as meaning tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year.

Thresholds and exclusions. The deduction does not apply to specified service businesses, for instance, the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.  The service business limitation begins phasing out in the case of a taxpayer whose taxable income exceeds $315,000 for married individuals filing jointly ($157,500 for other individuals), both indexed for inflation after 2018.  The benefit of the deduction for service businesses is phased out over the next $100,000 of taxable income for joint filers ($50,000 for other individuals). (Code Sec. 199A(d)). The deduction also does not apply to the trade or business of being an employee.

Deduction for Personal Casualty & Theft Losses Suspended

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a Federally-declared disaster. (Code Sec. 165(h)(5)).  However, where a taxpayer has personal casualty gains, the loss suspension doesn’t apply to the extent that such loss doesn’t exceed gain.

Gambling Loss Limitation Modified

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limitation on wagering losses under Code Sec. 165(d) is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings. (Code Sec. 165(d)).

CHANGES TO TAX CREDITS

Child Tax Credit Increased

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000, and other changes are made to phase-outs and refundability during this same period, as outlined below.

Phase-out. The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers)

Non-child dependents. In addition, a $500 nonrefundable credit is provided for certain non-child dependents.

Refundability. The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500.

MODIFIED DEDUCTIONS & EXCLUSIONS

State and Local Tax Deduction Limited

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, subject to the exception described below, State, local, and foreign property taxes, and State and local sales taxes, are deductible only when paid or accrued in carrying on a trade or business or an activity described in Code Sec. 212 (generally, for the production of income). State and local income, war profits, and excess profits are not allowable as a deduction.

However, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of (i) State and local property taxes not paid or accrued in carrying on a trade or business or activity described in Code Sec. 212; and (ii) State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Foreign real property taxes may not be deducted.

Depending on whether you are in the Alternative Minimum Tax, you should check with me to see if real estate and state estimated taxes should be paid by December 31, 2017.

Prepayment provision. For tax years beginning after Dec. 31, 2016, in the case of an amount paid in a tax year beginning before Jan. 1, 2018 with respect to a State or local income tax imposed for a tax year beginning after Dec. 31, 2017, the payment will be treated as paid on the last day of the tax year for which such tax is so imposed for purposes of applying the above limits. (Code Sec. 164(b)(6)). In other words, a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, can’t claim an itemized deduction in 2017 for that prepaid income tax.  Not sure how that gets monitored!

 

 

Mortgage & Home Equity Indebtedness Interest Deduction Limited

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for interest on home equity indebtedness is suspended, and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately). (Code Sec. 163(h)(3)(F)) For tax years after Dec. 31, 2025, the prior $1 million/$500,000 limitations are restored, and a taxpayer may treat up to these amounts as acquisition indebtedness regardless of when the indebtedness was incurred. The suspension for home equity indebtedness also ends for tax years beginning after Dec. 31, 2025.

Treatment of indebtedness incurred on or before Dec. 15, 2017. The new lower limit doesn’t apply to any acquisition indebtedness incurred before Dec. 15, 2017.

Refinancing. The $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before Dec. 15, 2017, so long as the indebtedness resulting from the refinancing doesn’t exceed the amount of the refinanced indebtedness. (Code Sec. 163(h)(3)(F))

Charitable Contribution Deduction Limitation Increased

No charitable deduction is allowed for contributions of $250 or more unless the donor substantiates the contribution by a contemporaneous written acknowledgment from the donee organization.

Changes: For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations is increased to 60%. (Code Sec. 170(b)(1)(G)) Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year’s ceiling.

No Deduction For Amounts Paid For College Athletic Seating Rights

Changes: For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event. (Code Sec. 170(l)).

Alimony Deduction by Payor/Inclusion by Payee Suspended

Changes: For any divorce or separation agreement executed after Dec. 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. Rather, income used for alimony is taxed at the rates applicable to the payor spouse.

 

Miscellaneous Itemized Deductions Suspended

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. (Code Sec. 67(g)This includes the deduction for tax preparation expenses.

Overall Limitation (“Pease” Limitation) on Itemized Deductions Suspended

Under pre-Act law, higher-income taxpayers who itemized their deductions were subject to a limitation on these deductions (commonly known as the “Pease limitation”). For taxpayers who exceed the threshold, the otherwise allowable amount of itemized deductions was reduced by 3% of the amount of the taxpayers’ adjusted gross income exceeding the threshold. The total reduction couldn’t be greater than 80% of all itemized deductions, and certain itemized deductions were exempt from the Pease limitation.

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the “Pease limitation” on itemized deductions is suspended.

Exclusion for Moving Expense Reimbursements Suspended

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the exclusion for qualified moving expense reimbursements is suspended, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station. (Code Sec. 132(g)).

Moving Expenses Deduction Suspended

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.

.HEALTHCARE PROVISIONS

Short-Term Reduction to Medical Expense Deduction Threshold

Changes: For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshhold on medical expense deductions is reduced to 7.5% for all taxpayers. (Code Sec. 213(f).

In addition, the rule limiting the medical expense deduction for AMT purposes to 10% of AGI doesn’t apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019. (Code Sec. 56(b)(1)(B).

 

 

Repeal of Obamacare Individual Mandate

Changes: For months beginning after Dec. 31, 2018, the amount of the individual shared responsibility payment is reduced to zero. (Code Sec. 5000A(c).  This repeal is permanent.

ALTERNATIVE MINIMUM TAX (AMT)

AMT Retained, with Higher Exemption Amounts

Changes: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act increases the AMT exemption amounts for individuals as follows:

  • . . . For joint returns and surviving spouses, $109,400.
  • . . . For single taxpayers, $70,300.
  • . . . For marrieds filing separately, $54,700. (Code Sec. 55(d)(4),

Under the Act, the above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the AMTI of the taxpayer exceeds the phase-out amounts, increased as follows:

  • . . . For joint returns and surviving spouses, $1 million.
  • . . . For all other taxpayers (other than estates and trusts), $500,000.

For trusts and estates, the base figure of $22,500 and phase-out amount of $75,000 remain unchanged, but these amounts will, as will those above, be adjusted under the new C-CPI-U inflation measure (see above). (Code Sec. 55(d)(4)).

With the state and local taxes being limited to $10,000, it will be interesting to see how many people can take advantage of the increased AMT exemption.

EDUCATION PROVISIONS

Expanded Use of 529 Account Funds

Under pre-Act law, funds in a Code Sec. 529 college savings account could only be used for qualified higher education expenses. If funds were withdrawn from the account for other purposes, each withdrawal was treated as containing a pro-rata portion of earnings and principal. The earnings portion of a nonqualified withdrawal was taxable as ordinary income and subject to a 10% additional tax unless an exception applied.

“Qualified higher education expenses” included tuition, fees, books, supplies, and required equipment, as well as reasonable room and board if the student was enrolled at least half-time. Eligible schools included colleges, universities, vocational schools, or other postsecondary schools eligible to participate in a student aid program of the Department of Education. This included nearly all accredited public, nonprofit, and proprietary (for-profit) postsecondary institutions.

Changes: For distributions after Dec. 31, 2017, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school. (Code Sec. 529(c)(7).