Sweeping Tax Overhaul Will Affect Almost Everyone
The House-Senate Conference Committee revealed their agreed-upon tax reform package late on Friday, December 15th. As we write this, the Act has not yet become law, but we expect the House and Senate to separately pass it quickly and send it to President Trump shortly thereafter. While the devil is in the details, we wanted to pass along some of the key provisions.
Individual Tax Rates. The Conference bill calls for a maximum individual tax rate of 37 percent, down from 39.6 percent, but did not change the number of brackets as expected. To give you an idea of the changes, here is a 2017 – 2018 comparison for married filing jointly:
Capital Gains Rates. The Conference bill generally retains the present-law maximum rates on net long-term capital gains and qualified dividends: 15 percent and 20 percent depending on income levels.
Standard Deduction and Personal Exemptions. The standard deduction will nearly double in 2018 to $24,000 for joint filers, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation for tax years after 2018. However, personal exemptions of over $4,050 per eligible person will be eliminated.
Mortgage Interest Deduction. The Conference bill limits the mortgage interest deduction to interest on $750,000 of “acquisition indebtedness” ($375,000 in the case of married taxpayers filing separately), beginning in 2018. For acquisition indebtedness incurred before December 15, 2017, the current-law limitations of $1,000,000 ($500,000 in the case of married taxpayers filing separately) remain. However, no interest deduction is allowed for interest on home equity indebtedness after 2017.
State and Local Taxes. The Conference bill limits deductions for nonbusiness state and local tax expenses, including property and income taxes, to $10,000 ($5,000 for married filing separately). Moreover, taxpayers will not be able to deduct any 2018 taxes prepaid in 2017 on their 2017 tax returns.
Other Itemized Deductions Under the Conference Bill:
Charitable Contributions. Generally kept the same as 2017 except the deduction for certain contributions is limited to 60 percent of adjusted gross income rather than 50 percent. Also, a deduction will no longer be allowed for contributions made to gain seating rights for college sports.
Miscellaneous Itemized Deductions. Repealed.
Medical expenses. Not only retained but enhanced for 2017 and 2018 in that the threshold for the deduction was lowered to 7.5 percent of adjusted gross income for all taxpayers.
Casualty Losses. Allowed but only for losses attributable to federally-declared disaster areas.
Alimony. The Conference bill repeals the deduction for alimony payments and the inclusion in the income of the recipient, but only for divorces executed after December 31, 2018.
Moving Expense Deduction. The Conference bill repeals moving expense provisions, except for members of the military required to move.
Dependent Tax Credits. The Conference bill increases the child tax credit to $2,000 per qualifying child, up to $1,400 of which may be refundable. There is also a $500 nonrefundable credit for qualifying dependents other than qualifying children. The adjusted gross income threshold for phasing out the credits is increased to $400,000 for joint filers and $200,000 for others.
Alternative Minimum Tax (AMT). The Conference bill keeps AMT for individuals but increases the exemption (to $109,400 for joint filers) and exemption phase-out thresholds (to $1 million for joint filers) to reduce the number of taxpayers subject to it. The corporation AMT is repealed.
Section 529 Plans. The Conference bill enhances Section 529 college savings plans by allowing up to $10,000 of distributions per student during the year to be used for elementary or secondary school.
Estate and Gift Taxes. The Conference bill does not repeal the estate tax as once expected but it doubles the estate and gift tax exemption for estates of decedents dying and gifts made after 2017.
C Corporation Tax Rate. The Conference bill provides for a 21 percent corporate rate effective for taxable years beginning after December 31, 2017. This rate also applies to personal service corporations.
Depreciation Rules. The Conference bill generally increases the 50 percent “bonus depreciation” allowance to 100 percent for new AND used property placed in service after September 27, 2017, and before January 1, 2023. Business passenger automobiles will also be eligible for more favorable depreciation rules. In addition, among Section 179 changes, HVAC equipment is now eligible for Section 179 expensing.
Deduction for Pass-through Businesses. The Conference bill effectively lowers the tax rate for individual and trust owners of certain “qualified” S Corporations, LLCs, partnerships and sole proprietorships by providing a 20 percent deduction on qualified business income. The deduction is limited to 50 percent of the W-2 wages with respect to such business, or if greater, the sum of 25 percent of the W-2 wages plus 2.5 percent of the cost of qualified property acquired during the year. Owners of “specified service businesses” where the principal asset of the business is the reputation or skill of one or more of its employees or owners, such as businesses in the fields of health, law, consulting, and financial services, are generally not eligible for the 20 percent deduction. However, there is a small taxpayer exception to both the wage limitation and the “specified service business” exclusion as both generally do not begin phasing in until owners have adjusted taxable income of more than $157,500 ($315,000 for joint filers).
Small Business Methods of Accounting. Beginning after 2018, small businesses with average gross receipts of $25 million or less will be allowed to use the cash method of accounting regardless if it is a C Corporation or a partnership with a C Corporation partner. Moreover, taxpayers that meet the $25 million gross receipts test are not required to account for inventories.
Revenue Recognition. The Conference bill generally requires accrual method taxpayers subject to the “all events test” for revenue recognition to be in conformity with its “applicable financial statements” if such are prepared by the taxpayers.
Business Interest Expense Limitations. The Conference bill limits the deduction of net interest expense for businesses with average gross receipts in excess of $25 million. The deduction is generally limited to 30 percent of adjusted taxable income (after adding back depreciation and amortization expense).
Corporate Net Operating Losses (NOL). For losses generated after 2017, the Conference Bill limits the NOL deduction to 80 percent of taxable income, disallows most carrybacks, but generally allows indefinite carryforwards.
Business Entertainment Expenses. The Conference bill generally repeals the business deduction for entertainment, amusement or recreation expenses. The 50 percent deduction for business meals is generally retained.
Domestic Production Deduction. The Conference bill repeals this popular deduction.
Affordable Care Act (ACA) or “Obamacare.” The Conference bill repeals the ACA’s individual mandate to buy health insurance by making any required payment $0 beginning in 2019.
Effective Dates. Unless noted otherwise above, the tax changes generally are effective beginning in 2018. Many of the individual provisions “sunset” after 2025 resulting in a reversion to current law unless Congress acts beforehand.
Stay Tuned. We will continue to closely monitor the decision process for the proposed tax changes and will send follow-up emails soon on:
The international provisions for those who are interested.
Year-end tax planning strategies given the changes ahead.
In the meantime, if you have questions about your specific situation, please do not hesitate to call a member of WBL’s tax team.