The new tax law that went into effect on January 1, 2018 is known as the “Tax Cuts and Jobs Act” (“TCJA”), or Reconciliation Act of 2017, or 2017 Tax Act. The following will provide a brief overview of income tax changes under TCJA. The following is not all-encompassing and should not be relied on for guidance but is being provided for informational purposes only. Always check with your professional advisors before taking any particular action. Finally, the following is intended to be very brief and is intended to only provide a general overview.
- Corporate Tax Rate – top rate is now 21% (versus top rate of 35% in 2017).
- Partnership and Other Pass-Through Entities – taxed at an individual’s income tax rate (but as of 2018, these entities are now allowed a 20% Qualified Business Income (QBI) deduction (note that the QBI deduction phases out at higher income levels).
- Individual Tax Rates – There are still 7 brackets (between 10% to 37%).
- With TCJA, top rate was reduced from 39.6% to 37%.
- Capital Gains Tax – Remains unchanged with three brackets: 0%/15%/20% (plus a 3.8% NIIT).
- The personal exemption has been eliminated.
- Standard Deduction – for a Single Person it is now $12K (up from $6,500) and for Joint filers it is now $24K (up from $13K).
- Potential strategy: “Bunching” deductions into a particular year in order to be able to itemize deductions in that year and then use the increased standard deduction in other years.
- Example: Pre-paying expenses or making large charitable contributions.
- Itemized Deductions – Itemized deductions are eliminated except for mortgage interest, state and local taxes, medical expenses, investment interest expense, and charitable contributions.
- SALT Deduction (State and Local Income Taxes) – Limited to $10K.
- Mortgage Interest – limited to interest on up to $750K of acquisition indebtedness (though pre 12/15/17 debt is grandfathered in); repealed deduction for home equity indebtedness (unless the home equity loan is used to buy, build or substantially improve the taxpayer’s home that secures the loan – in such a case, the deduction for home equity loans and lines of credit can still be used).
- Charitable Contributions – The percentage limit was increased from 50% to 60% (for cash contributions).
- Medical Expenses – For the next 2 years, the deduction threshold is at 7.5% of AGI instead of 10%.
- Miscellaneous Itemized Deductions – all deductions subject to the 2% adjusted gross income floor were repealed (e.g. tax prep fees, investment management fees).
- Sec. 67(b) still allows deductions for: payment of interest, taxes, charitable contributions by individuals or trusts and estates, medical expenses, and estate tax attributable to income in respect of a decedent.
- It is believed that Sec. 67(e) fiduciary expenses (except investment advisory fees) still apply.
- 529s – Under the new law, distributions of up to $10K can now be used for “qualified expenses” for elementary and high school.
- Basis – As a reminder to our clients, don’t forget the concept of ‘cost basis’ (what the person bought it at, plus improvements) versus ‘step-up in basis’ (an asset’s tax basis is the fair market value at a person’s passing).
- Continue to be careful about gifting assets with low cost basis.
- Basis adjustment potential strategy – If a basis adjustment is needed following a gift, consider fixing this issue by buying back the asset.
For individual tax payers, TCJA will ‘sunset’ at the end of 2025. ‘Sunset’ means that the tax laws will revert back to how we were taxed under the previous tax laws (so think about how you were taxed as an individual in 2017). This ‘sunset’ will not apply to how corporations are taxed. Since partnerships and pass-through entities are taxed at the individual’s rate, this ‘sunset’ will apply to these entities.
