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Volume 38; Tax Cuts and Jobs Act

Posted by Admin Posted on Jan 16 2018

 

TAX CUTS AND JOBS ACT


Written by, Cindy Smith, CPA, CFE

House Republican Bill H.R. 1 “Tax Cuts and Jobs Act” was introduced on November 2, 2017. If this becomes law, the majority of the items in the bill would be effective for tax years after 2017. Here are some of the key provisions in the bill:
          

FOR INDIVIDUALS            


 
Reduction of income tax brackets:
The current seven federal income tax brackets of 10%, 15%, 25%, 28%, 33%, 35% and 39.6% would be consolidated into four brackets of 12%, 25%, 35% and 39.6% as follows:
 Tax brackets under current Law
Married filing joint     %  Single          %  Head of Household      % 
 $0 - $18,550  10%  $0 - $9,275  10%  $0-$13,250  10%
 $18,551 - $75,300  15%  $9,276 - $37,650  15%  $13,251-$50,400  15%
 $75,301 - $151,900  25%  $37,651 - $91,150  25%  $50,401-$130,150  25%
 $151,901-$231,450  28%  $91,151 - $190,150 28%  $130,151-$210,800 28%
 $231,451-$413,350  33%  $190,151 - $413,350 33% $210,801-$413,350 33%
 $413,351-$466,950  35%  $413,351-$415,050 35%  $413,351-$441,000 35%
 $466,950+  39.6%  $415,050+ 39.6%  $441,000+ 39.6%
 Tax brackets under H.R. 1
 Married Filing Joint  Single  % Head of Household   %
 $0-$90,000  12%  $0-$45,000  12%  $0-$67,500  12%
 $90,001-$260,000  25% $45,001-$200,000  25%  $67,501-$200,000  25%
$260,001-$1,000,000  35% $200,001-$500,000  35%  $200,001-$500,000  35%
$1,000,000+  39.6% $500,000+  39.6%  $500,000+  39.6%

For high-income taxpayers, the 12% tax bracket will effectively be phased out for individuals with incomes over $1,000,000 and married couples with incomes over $1,200,000. They will pay a tax equal to the difference between what they would pay at the 12% bracket and what they would have paid if that income was taxed at 39.6%. This will be done by adding a surcharge of 6% on each dollar earned from $1,000,000 to $1,207,000 for single people and $1,200,000 to $1,614,000 for married couples.

Increase in standard deduction:

Current Law H.R. 1
The basic standard deduction is $6,350 for individual filers, $9,350 for heads of household, and $12,700 for married filing jointly. The standard deduction is increased to $12,000 for individual filers, $18,000 for single filers with at least one qualifying child, and $24,000 for joint filers.

Elimination of personal exemptions:

Current Law H.R. 1 
Taxpayers are allowed to claim a $4,050 personal exemption for themselves, spouse, and dependents. The bill eliminates personal exemptions.

Maximum rate on business income of individuals:

Current Law H.R. 1
Income from pass-through entities such as sole proprietorships, partnerships, and S Corporations are taxed at the same income tax rates as the individual.  A portion of the net income distributed by a pass-through entity may be treated as “business income” and subject to a maximum rate of 25%. Income from passive activities would be fully eligible for the 25% maximum rate. The calculation of “business income” for owners or shareholders from an active business activity will depend upon several factors

Enhancement of child tax credit and new family tax credit:

Current Law H.R. 1
Under current law an individual may claim a tax credit for each qualifying child under 17 of $1,000 per child. This is phased out for AGI’s over $75,000 for single filers and $110,000 for joint filers. It is also not indexed for inflation. The credit would be increased to $1,600 and would also allow a $300 credit for non-child dependents. The phase out would be increased to $115,000 for single filers and $230,000 for joint filers. In addition, it would be indexed for inflation based on chained CPI.

Repeal of nonrefundable credits:

Current Law H.R. 1 
Current law allows for an adoption tax credit, credit for individuals over 65 and the permanently and totally disabled, credit associated with mortgage credit certificates, and the credit for electric plug-in vehicles. The bill eliminates these credits.

Education credits:

Current Law H.R. 1
The current law allows an American Opportunity Tax Credit (“AOTC”), and as an alternative to the AOTC, it also offers a Hope Scholarship Tax Credit or a Lifetime Learning Tax Credit. The above three education credits would be combined into an enhanced AOTC credit, providing a similar benefit as the original AOTC but expanding it to a fifth year of post-secondary education at half the rate as the first four years.

Other education related provisions:

Current Law H.R. 1
An individual may claim a deduction for student loan interest up to $2,500. This deduction is phased out for joint returns with a modified adjusted gross income (“MAGI”) of over $165,000 and other returns with a MAGI over $80,000. In addition, interest on US Savings bonds is excluded from income if used to pay qualified higher education expenses. Also, $5,250 of employer-provided education assistance is excludable from income, and qualified tuition reductions provided by education institutions to their employees, spouses or dependents are excluded from income. The bill eliminates these provisions.

Limitation on itemized deductions:

Current Law  H.R.1
Under current law, the total amount of most itemized deductions is reduced once adjusted gross income exceeds $313.800 for married filing joint, and $261,500 for single filers. The bill repeals the limitation on itemized deductions.

Mortgage interest:

Current Law H.R. 1
Taxpayers may claim an itemized deduction for mortgage interest for their primary residence and one other residence, on debt up to $1,000,000 in acquisition indebtedness and up to $100,000 in home equity indebtedness. Taxpayers may still claim the itemized deduction for mortgage interest, however, interest would only be deductible on the principal residence, interest on home equity indebtedness would not be deductible, and for new debt incurred after November 2, 2017, the $1,000,000 limitation would be reduced to $500,000.

Charitable contributions:

Current Law  H.R. 1
In general, charitable contributions to public charities, private operating foundations, and certain non-operating private foundations may only be deducted up to 50% of adjusted gross income (“AGI”). In addition, the mileage rate for charitable mileage is 14 cents per mile. The bill increases the the 50% limitation to 60% of AGI. In addition, the charitable mileage rate will be adjusted for inflation.

Various itemized deductions:

Current Law  H.R.1
Currently, taxpayers may claim itemized deductions for medical expenses, casualty and theft losses, moving expenses, employee business expenses, tax preparation fees, and state and local income or sales taxes. The bill repeals all of these itemized deductions. However, regarding itemized state and local income tax deductions, individuals would still be entitled to deductions for these taxes paid or accrued in carrying on a trade or business or producing income. In addition, individuals could still continue to claim itemized real property taxes, but only for amounts paid up to $10,000.

Alimony:

Current Law H.R. 1
 Alimony income is reported as taxable income by the payee and deducted from income by the payor.  Alimony income would not be taxable on the payee’s return or deductible by the payor. This would be effective for any divorce decree or separation agreement executed or modified after 2017.

Exclusion of gain from sale of a principal residence:

Current Law H.R. 1
A taxpayer can exclude the gain on the sale of a principal residence up to $500,000 for joint filers and $250,000 for single filers. The property must have been owned and used by the taxpayer as a principal residence for two out of the previous five years. The taxpayer may use the exclusion once every two years. The exclusion would be phased out by one dollar for every dollar in which their adjusted gross income exceeds the $500,000 for joint filers and $250,000 for single filers. In addition, they would have to own and use the home as their principal residence for five out of the previous eight years and they could only use the exclusion once every five years.

Dependent Care Assistance:

Current Law  H.R. 1
Currently an employee can exclude up to $5,000 per year from taxable income ($2,500 for married filing separately) for employer-provided dependent care assistance to help pay for child care for children under the age of 13 or for dependents who are physically or mentally unable to care for themselves. The bill repeals this exclusion.

Estate and Generation-skipping Transfer Taxes:

Current Law H.R. 1
Property in an estate is subject to a top tax rate of 40% before it passes to the beneficiaries. When property is transferred during the life of a donor, it is subject to a top gift tax rate of 40%, with the first $14,000 being excluded from the gift tax on a per-donee annual basis. Additionally, property transferred beyond one generation is subject to an additional generation-skipping tax. The first $5 million of transferred property is exempt from the estate, gift, and generation skipping taxes, in any combination thereof, and is indexed for inflation ($5.49 million for 2017). The basic exclusion is doubled from $5 million to $10 million (indexed for inflation). Also, after 2023, the estate and generation-skipping taxes are repealed. The gift tax is lowered to a top rate of 35% for gifts made after 2023.

Alternative Minimum Tax (“AMT”):

Current Law H.R. 1
Currently, taxpayers must compute their income for purposes of both the regular income tax and AMT, and their tax liability is the greater of the two. Under the bill, the AMT would be repealed



FOR BUSINESSES


Reduction in corporate tax rate:

Current Law H.R. 1
Under current law, a corporation’s tax rate brackets are $0 - $50,000 at 15%, $50,001-$75,000 at 25%, $75,001-$10,000,000 at 34% and over $10,000,000 at 35%. Personal service corporations are taxed at 35%. The corporate tax rate would be a flat 20%. Personal service corporations would be taxed at a 25% rate.

Bonus depreciation:

Current Law H.R. 1
Currently taxpayers may deduct 50% of the cost of certain “qualified property” in the year it is placed in service. This phases down to 40% in 2018 and 30% in 2019. The original use of the property must begin with the taxpayer. Under the bill, taxpayers would be able to expense 100% of certain “qualified property” in the year it is placed in service for property placed in service after September 27, 2017 and before January 1, 2023. It also repeals the requirement that the original use of the property begins with the taxpayer, and allows for the additional depreciation if it is the taxpayer’s first use.

Section 179 Expensing:

Current Law  H.R. 1
Businesses may immediately expense up to $500,000 of the cost of any “section 179 property” placed in service each taxable year. If the business places in service more than $2 million of section 179 property in a year, the amount available for immediate expensing is reduced. The expense limitation increases to $5 million and the phase-out amount increases to $20 million (and will index for inflation) for years after 2017 and before 2023. It also expands the definition of section 179 property to include qualified energy efficient heating and air conditioning equipment placed in service after November 2, 2017.

Entertainment expenses:

Current Law H.R. 1
A business can deduct up to 50% of expenses related to entertainment, amusement or recreation activities, or facilities (including membership dues with respect tosuch activities or facilities) if directly related to the active conduct of the taxpayer’s trade or business. An item is considered directly related if it is associated with a substantial and bona fide business discussion. No deduction would be allowed for these items. The 50% limitation under current law would apply only to expenses for food or beverages and to qualifying business meals, with no deduction allowed for other entertainment expenses.

Business interest deduction:

Current Law  H.R. 1
Generally speaking, business interest is allowed as a deduction in the year in which it is paid or accrued. The business interest deduction would be limited to no more than 30% of the businesses adjusted taxable income. The amount disallowed would be carried forward to the succeeding five taxable years. Businesses with average gross receipts less than $25 million would be exempt from these interest limitation rules.

Net Operating Loss (“NOL”) Deduction:

Current Law  H.R. 1
 NOL’s may be carried back two years and carried forward 20 years to offset taxable income in such years.  Taxpayers would be able to deduct an NOL carryover or carryback only to the extent of 90% of the taxpayer’s taxable income (determined without regard to the NOL deduction). H.R. 1 also repeals all carrybacks but provides a special one-year carryback for small businesses and farms in the case of certain casualty and disaster losses. Regarding carryforwards, it changes the 20 year limit on carryforwards to an indefinite carryforward period and increases it by an interest factor. The provision would be effective for losses arising in tax years beginning after 2017.

Like-kind exchanges:

Current Law H.R. 1
Under current law, the like-kind exchange rules apply to a wide range or property from real estate to tangible personal property, as long as it is held for productive use in the taxpayer’s trade or business, or for investment purposes. Under the bill, the like-kind exchange rules would only apply to real property.

Domestic Production Activities Deduction:

Current Law H.R. 1
Currently taxpayers can take a deduction related to qualified domestic production activities. The bill repeals this deduction.

           

           

IMPORTANT TAX DATES TO REMEMBER


We want to remind you of important tax due dates and deadlines that are just around the corner.
           
Here is a recap of important dates to keep in mind as 2017 progresses:

  • January 16, 2018 - 2017 4th quarter estimate payment    
                     
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Becker and Rosen CPAs, LLC Disclaimer

This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions. 

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