The U.S. tax landscape will undergo significant changes, with the sweeping overhaul bill on its way to the president’s desk for signature. At RKL, our tax team has been monitoring this tax overhaul push through its various forms and stages. The new law is sizeable and complex, so we’ve assembled a quick primer on some high-level takeaways for business and individual taxpayers.
An important point about this bill is that some of its provisions are temporary, while others are permanent. Without additional legislative action, some of the tax breaks and benefits in this bill will expire in the future.
Key Individual Provisions
Reduced Tax Rates
The new law temporarily adjusts the individual income tax rates. Previously, the rates were 10, 15, 25, 28, 33, 35 and 39.6 percent. Starting in 2018, the rates will be 10, 12, 22, 24, 32, 35 and 37 percent. These rates will return to previous 2017 levels after 2025. The IRS recently announced that it will issue updated guidance next month on withholding under the new law (Notice 1036).
AMT Retained, Exemption Temporarily Increased
While the individual alternative minimum tax (AMT) remains in the new tax law, there are some alterations, including a temporary increase through 2025 of the exemption amount to $109,400 for joint filers and $70,300 for all others (excluding estates and trusts). The exemption phase-out level is also raised to subject income of $1 million and above (joint filers) and $500,000 (all other filers) to AMT. These amounts will be adjusted annually for inflation.
Standard Deduction Doubled
The law nearly doubles the standard deduction. For married taxpayers filing jointly, the standard deduction rises to $24,000; for head-of-household filers, it increases to $18,000; and for individual filers, the amount jumps to $12,000.
The standard deduction increase is intended to offset another component of the law – the elimination or reduction of many tax credits and deductions. Many taxpayers who previously itemized deductions may now fall under the standard deduction threshold.
Numerous Deductions and Credits Changed
As with the new tax rates, all changes made to individual tax credits and deductions are temporary and generally expire after 2025.
Starting in 2018, the mortgage interest deduction is reduced to mortgages of up to $750,000, from a previous $1 million level. Second home mortgage interest is still deductible, within the limit listed above, but deductions of home equity loan interest are now disallowed.
The combined deductibility of state and local income taxes, sales tax in lieu of income taxes and real estate taxes is capped at $10,000, starting in 2018. The law also disallows a 2017 deduction for the prepayment of state and local taxes attributable to taxable income earned in 2018 and beyond.
Miscellaneous itemized deductions, including professional service fees, are repealed under the tax bill. The deduction for medical expenses, however, remains and is temporarily lowered for tax years 2017 and 2018 to a threshold of 7.5 percent of adjusted gross income.
Under the new law, alimony payments are no longer deductible, nor must the recipient report such payments as income.
Child Tax Credit Doubled, Eligibility Expanded
The law temporarily doubles the child tax credit from $1,000 to $2,000 per child, with up to $1,400 of the total amount refundable. The adjusted gross income (AGI) phase-out thresholds are also raised, starting at $400,000 AGI for joint filers and $200,000 AGI for the rest. An additional $500 nonrefundable credit for dependents other than children was also introduced in the new law.
Estate, Gift Tax Exemption Doubled
While previous iterations of the tax legislation proposed a full repeal of the estate tax, the bill signed into law instead doubles the exclusion amounts for estate and gift taxes, effective January 1, 2018. This doubled exclusion sunsets after January 1, 2026.
The maximum federal estate tax is 40 percent for tax year 2017 remains in place moving forward. The estate and gift exclusion amount for married couples, however, increases from $10.98 million in 2017 to $22 million in 2018. In future years, the $22 million joint exclusion will be adjusted annually for inflation.
Individual Mandate Repealed
The tax law repeals the individual shared responsibility requirement of the Affordable Care Act by reducing penalties assessed after 2018 to $0. The IRS recently cautioned that returns submitted for tax year 2017 that do not report full-year coverage, report a shared responsibility payment or claim a coverage exemption will be rejected as incomplete and inaccurate.
Key Business Provisions
Corporate tax rate reduced, excluded from AMT
The tax law permanently reduces the corporate tax rate from 35 to 21 percent, and also excludes corporations from AMT.
Asset Purchase Tax Benefits Expanded
Under the new law, bonus depreciation doubles from 50 to 100 percent for property purchased between September 27, 2017, and January 1, 2023 (or January 1, 2024, for a small category of property). After that date, at 20 percent phase-down takes effect. Also, bonus depreciation amount is now permitted for the purchase of used property, in addition to new property.
The tax law also raises the cap on depreciation write-offs for business-use vehicles (now including passenger automobiles) purchased after December 31, 2017. The new cap schedule is: $10,000 (up from $3,160) for the first year a vehicle is used; $16,000 (up from $5,100) for the second year; $9,600 for the third year (up from $3,050); and $5,760 (up from $1,875) for each remaining year until all costs are fully recovered.
The Section 179 expensing limitations under the new law are $1 million (dollar) and $2.5 million (investment).
Favorable Treatment for Pass-Through Businesses
Generally taxed at the top individual rate, owners of so-called “pass-through” entities – partnerships, S corporations, most LLC’s, and sole proprietorships – are permitted to deduct 20 percent of qualified income, subject to variety of qualifications and limitations.
Small Business Expansion
The definition of “small business” has been expanded to include many companies with average annual gross receipts of less than $25 million, allowing these taxpayers to take advantage of several favorable tax accounting rules previously only available to taxpayers with under $10 million of gross receipts.
One-Time Repatriation Tax
In addition to systemic changes to the taxation of multinational companies, the new law imposes a one-time reduced tax on overseas-held earnings and profits: 15.5 percent for cash and 8 percent for illiquid assets.
In addition to these top-level impacts, the new tax law alters a number of other tax policies, deductions and strategies. Over the coming weeks and months, RKL will drill down into the changes and assess the impact to various industries and segments of the business community, so be sure to sign up for our monthly e-news, follow us on LinkedIn and visit our Tax Reform Resource Center.
Contributed by Robert M. Gratalo, CPA, MST. Rob is a Partner and Leader of RKL’s Tax Services Group. He serves as business and tax advisors for a wide range of clients, with a focus on the manufacturing, distribution, construction and real estate development industries. Rob specializes in the taxation of privately held businesses and their owners, and he often consults on the tax impact of transactions like business sales, mergers or acquisitions.
Don’t miss the latest RKL business analysis and insights. Sign up for our e-newsletter.