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Tax Reform Summary

“Tax Cuts and Jobs Act” (AKA Tax Reform) Summary

By: Nick Meals, CPA, CVA

After talking about and campaigning on the issue for at least a decade, Congress has finally passed the most comprehensive tax reform package in over thirty years, and President Trump is expected to sign the law soon. As a result, there are many changes that will be in affect beginning on January 1, 2018. Here is a summary of items that will affect the most taxpayers, as well as some planning tips and thoughts.

Income Tax Rates

Current Law – There are currently seven (7) tax brackets – 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%

New Law – There will still be seven (7) tax brackets, but overall they will be slightly lower than current brackets – 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Tax Planning – Other than some taxpayers in the new 32% and 35% brackets, almost all taxable income levels will be in a lower tax bracket. But, please note, the Obamacare surtaxes did not go away. Higher income taxpayers will still have an additional 3.8% surtax tacked on to their tax bill.

Capital Gains Rates

Current Law – There are three tax brackets, 0%, 15% and 20%.

New Law – There will be no changes to the tax rates, but the brackets will be adjusted.

Tax Planning­ – As with income tax rates, please remember the Obamacare surtaxes apply to this as well. The 20% bracket is effectively a 23.8% bracket in reality.

Standard Deduction

Current Law – If taxpayers do not itemize their deductions, the standard deduction amounts are $6,500 for individuals, $9,550 for head of household, and $13,000 for married filing jointly.

New Law – The amounts will essentially double to $12,000 for individuals, $18,000 for head of household, and $24,000 for married filing jointly. Taxpayers can also add on an additional $1,300 to this if they are over 65 years old, blind, or disabled.

Tax Planning – This move is designed to simplify tax filing. For many low income people, this will effectively create a large 0% tax bracket. For others that have never itemized their deductions, this will also be a good thing.

For people who have traditionally itemized their deductions but will fall short of new higher standard deduction, it is beneficial to prepay some items before the end of 2017 such as property taxes, Hall income taxes, January’s mortgage payment, or go ahead and donate to some charities in 2017 instead of the early months of 2018.

Personal Exemption

Current Law – Taxpayers can claim a $4,050 personal exemption for themselves, their spouse, and dependents.

New Law – The personal exemption goes away.

Tax Planning – This was a move to offset the larger standard deduction. For many, it doesn’t matter and the new standard deduction will be more beneficial. However, for a family of 4 or more that currently itemizes their deductions, this change MAY negatively impact them.

Mortgage Interest Deduction 

Current Law – If taxpayers itemize, they can deduct mortgage interest for home purchases of $1,000,000 and home equity debt of $100,000 on their primary residence and one other home.

New Law – The cap drops to $750,000 and the deduction for home equity debt interest will be eliminated.

Tax Planning – For most residents of East Tennessee, this will not be a problem. Residents who own more than one home or who have home equity debt may be negatively impacted.

State and Local Tax Deductions

Current Law – Taxpayers can deduct 100% of your state/local sales or income taxes plus property taxes.

New Law – There will be a cap of $10,000 of total state/local sales or income taxes plus property taxes.

Tax Planning – For lower tax states such as Tennessee, this isn’t going to affect as many taxpayers. However, people that pay large amounts of Hall Income tax and/or own large amounts of property may want to brace themselves for the impact. And as mentioned above, go ahead and prepay as much in taxes in 2017 as possible to avoid new limits.

Charitable contributions

Current Law – Donations to qualifying non-profits and churches are deductible as a charitable contribution.

New Law – No changes to current law EXCEPT that you will no longer be allowed a deduction for college athletic events donation to purchase season tickets.

Tax Planning – Taxpayers excited about the start of the Jeremy Pruitt era at UT may want to go ahead and make that annual donation before the end of 2017 so they can receive one last tax deduction for their season tickets.

Medical Expense Deduction

Current Law – Taxpayers can deduct medical expenses that exceed 10% of Adjusted Gross Income (AGI)

New Law – The floor to deduct medical expenses will drop to 7.5% of AGI. This is also the lone change that will be retroactive to January 1, 2017.

Tax Planning – Lots of elderly and sick individuals (and their families) are very happy this made the final cut. This is a very large item for taxpayers that require extensive medical care that will help to lower or eliminate any tax burden.

Miscellaneous Deductions

Current Law – Items such as unreimbursed job expenses, investment advisory fees, union dues, and tax preparation fees can be deducted as long as they exceeded 2% of AGI.

New Law – These deductions are being eliminated.

Tax Planning – There isn’t much that can be done, but one thing to consider would be asking employers to reimburse any employee business expenses in exchange for a lower salary. Additionally, it will be beneficial to pay any outstanding bills before the end of 2017.

Educational Items

Current Law – Current law provides deductions for teacher expenses and student loan interest deductions. For higher education students, items such as the American Opportunity Credit, Lifetime Learning Credit, or tuition waivers for graduate students allow lower tax liabilities.

New Law – No changes to current law.

Tax Planning – Anyone who is involved or wants to further their education should be pleased with the final bill. For a while it appeared that many of the education incentives would be cut.

529 Savings Plans

Current Law – No tax is owed on earnings or distributions for college expenses such as tuition, room, books, etc.

New Law – In addition to this, up to $10,000 per student can be used for public, private, and home school students.

Tax Planning – The details are still murky, but initial thoughts are that 529 plans can now be used to help pay for things such as private school tuition.

Child Tax Credit

Current Law – Current credit is $1,000 per child and refundable.

New Law – The credit will increase to $2,000 per child under age 17 and up to $1,400 will be refundable. There is also a $500 credit for other qualifying dependents such as elderly adults.

Tax Planning – The increase is designed to offset the removal of the personal exemption. The increase in the amount that can be refundable was a major win for lower income taxpayers.

Individual Mandate

Current Law – Taxpayers must pay a penalty if they do not have qualifying health care coverage or meet an exemption requirement.

New Law – This penalty will be eliminated and individuals will effectively no longer be required to carry health insurance policies.

Tax Planning - Ask in late summer/early fall when new insurance rates begin to be released. If as many younger people drop from insurance rolls as some predict, health insurance rates could skyrocket.

Alternative Minimum Tax (AMT)

Current Law – This is a secondary tax that was intended to make sure the ultra-wealthy paid tax, but has since not been adjusted upward and makes more people pay the tax than originally intended

New Law – It will remain in place for individuals but the threshold will increase to $70,300 for individuals and $109,400 for married couples.

Tax Planning – While the increase in the threshold will mean less taxpayers have to deal with the headache known as AMT, it does still exist. As before, please contact us here at IOB to discuss any investments that you may make that will generate “tax free” income to make sure that these do not actually hurt you instead.

Pass Through Entity Income

Current Law – Businesses taxed as partnerships (Form 1065) and S-corporations (Form 1120-S) income flows through and is taxed at the individual owner level.

New Law – The above is still true but owners of pass through entities and sole proprietorships (Schedule C on 1040) MAY receive up to a 20% deduction on their business related income.

Tax Planning – This is going to be a very case-by-case basis. In general, businesses that have employees or income producing property (including real estate) and are NOT classed as a professional service (accountants, lawyers, doctors….) may be entitled to this deduction.

Corporate Taxes

Current Law – Corporations that do not pass income on to shareholders are taxed at the corporate level at 35%.

New Law – The rate drops to 21% beginning January 1, 2018.

Tax Planning – This was the holy grail of the tax reform package. Small corporate owners should begin to consider potential changes to current and traditional tax planning models, depending on income levels.

Business Capital Asset Expensing

Current Law – Currently businesses can write off up $510,000 of capital asset purchases under Code Section 179, subject to phaseouts.

New Law – Section 179 limit increases to $1 million. In addition, an additional 100% expensing law will be in affect through 2022.

Tax Planning – From a purely tax perspective, there hasn’t been a better time for businesses to begin to invest in capital projects and expand operations or create new ones.

Federal Estate Taxes

Current Law – Tax is imposed on estates that exceed $5.5 million for individuals and $11 million per married couple.

New Law – The estate tax remains, but the exemption would double to $11 million for individuals and $22 million for married couples.

Tax Planning – Less people will have to worry about estate taxes. However, be warned that this reverts to current amounts beginning on January 1, 2023.

And there you have it, a brief summary of the items that will likely affect the most taxpayers as a result of Tax Reform. This is not a complete or exhaustive list as the bill is roughly 500 pages. Of course, every person’s or business’s situation is different and needs to be addressed individually. If you don’t see something listed here, or have further questions about some of the items above, please contact us at IOB, we’d love to help!