The tax cuts and jobs act overview

The Tax Cuts and Jobs Act (the “Act”) is a piece of legislation that was first passed by the House of Representatives on November 16, 2017.  Only one month later, both the House and the Senate have passed a unified version of tax reform that will modify tax policy for the next several years.  These changes range from reducing both corporate and individual tax rates to international taxation implications.  On December 22, 2017, President Trump officially signed it into law.  Below is a brief analysis of the key points.

Individual Tax Changes

  • All of the ordinary income tax rates have been modified with the top rate changing from 39.6% to 37%. Capital gains rates remain unchanged.
  • A passthrough deduction of up to 20% of income is created. See our detailed analysis in Individual Reform Changes for more information and exceptions.
  • The Alternative Minimum Tax (“AMT”) remains but with higher thresholds.
  • 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.
  • Personal exemption deductions have been eliminated.
  • The medical expense threshold is reduced to 7.5% of adjusted gross income (“AGI”) for all taxpayers through 2019 when it will increase back to 10%.
  • The combination of personal state/local income AND property taxes is capped at maximum deduction of $10,000.
  • The limitation for cash contributions to public charities and certain private foundations is increased to 60%.
  • Casualty losses have been repealed unless they relate to federally declared disaster zones.
  • The deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. This includes investment fees, tax preparation fees, and others.
  • The Pease limitation on itemized deductions is suspended through 2025.
  • The child tax credit is increased to $2,000 with a refundable portion of $1,400.
  • The Act includes a repeal of The Affordable Care Act’s individual mandate. However, net investment income tax (“NIIT”) and the additional Medicare tax are retained.
  • The moving expense deduction is repealed through 2025.
  • The Act includes expanded use of qualified tuition programs, 529 plans, to secondary schools (public, private, or religious).
  • Taxpayers are no longer able to unwind Roth IRA conversions/recharacterizations.
  • The lifetime estate tax exemption increased to $10 million per taxpayer.

Business Tax Changes

  • Corporate tax rates are collapsed to a flat 21%.
  • Corporate AMT tax is repealed, and carryforward credits have limited refundability.
  • Changes to depreciation:
    • Section 179 expensing increased to $1 million with a phase-out starting at $2.5 million.
    • Bonus depreciation increased to 100% for assets placed in service after Sept 27, 2017. This applies to both used and new property.
    • Luxury auto limits have increased.
    • Real property is depreciable over a shorter life.
  • Deductible business interest is limited to 30% of adjusted taxable income (taxable income less depreciation, amortization, and depletion). However, the limitation does not apply if the 3-year average of gross receipts is less than $25 million.
  • Using net operating losses created after Dec 31, 2017 is limited to 80%. Generally, no carryback is allowed.
  • Domestic Production Activity Deduction (“DPAD”) is repealed.
  • Deductions for entertainment expenses are disallowed. Deduction for 50% of meals still exists for all meals, although there is no special treatment for meals provided for the convenience of the employer.
  • The use of cash method of accounting, accounting for inventories, inventory capitalization, and the use of percentage of completion are all based on the 3-year average gross receipts more than $25 million.
  • Partnership technical termination rules are repealed.

Topics: Tax, IRS