Tax Reform – The Tax Cuts and Jobs Act Distilled In Plain Terms
Unless you’ve been under a rock the past month, you know that there have been significant tax changes in America. In fact, on Dec. 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law.
This Act modifies many facets of the tax code, including rates, credits, and deductions for individuals and businesses. Most of the changes went into effect on Jan. 1, 2018 and will expire after December 31, 2025. While the TCJA will not likely impact your 2017 tax return, it will affect next year’s return, so it’s important to stay on the pulse of these changes.
Here are a few specifics on the new law:
Tax Rate Changes
- It replaces the seven existing tax brackets with seven new brackets; the highest rate is 37%.
- It keeps the current long-term capital gain three-rate system.
- It taxes unearned income of children (“kiddie tax”) at trust rates.
- It modifies the individual Alternative Minimum Tax (AMT) by increasing the AMT exemptions and the exemption phaseout thresholds.
Tax Deductions and Tax Credits
- It repeals the deduction for personal exemptions.
- It increases the standard deduction.
- It increases the itemized deduction limitation for cash contributions to 60% of AGI
- It establishes a new 20% deduction on the passthrough business income of individuals.
- It temporarily lowers the AGI threshold to deduct medical expenses to 7.5% for 2017 and 2018 only.
- It increases the Child Tax Credit and makes it partially applicable to other dependents.
- It limits the mortgage interest deduction for debt incurred after Dec. 15, 2017 to mortgages of up to $750,000.
- It limits the deduction for state and local taxes – income tax (or sales tax in lieu of), real property tax, and personal property tax – to a total of $10,000.
- It repeals the overall limitation on certain itemized deductions.
Miscellaneous Tax Provisions
- It expands Section 529 plans to include elementary and secondary education, with certain restrictions.
- It increases the lifetime gift, estate, and generation-skipping transfer tax exclusion to $10 million.
- It changes the rate structure for estates and trusts to a four-bracket system; the highest rate is 37%.
- It repeals the ACA mandate and related penalty incurred for failure to carry minimum essential health insurance coverage starting in 2019.
Impacts on Businesses
- It reduces the corporate tax rate from a maximum of 35% to a flat 21% rate and repeals the corporate AMT (permanent changes).
- It allows increased expensing of the costs of certain property.
- It repeals the deduction for entertainment expenses.
- It repeals the domestic production activities deduction (DPAD).
- It limits business losses, generally disallows net operating loss carrybacks, but allows indefinite carryforwards.
- It limits the net interest expense deduction to 30% of the business’s adjusted taxable income.
- It modifies or repeals various business deductions and credits.
- It modifies the taxation of foreign business income.
Many tax reform changes have been made recently, which is why it may be more important than ever to consult a tax professional with expertise and experience. With tax advisors armed with 15 years of experience each, on average, Block Advisors should be your go-to resource. Get matched here.
And stay tuned for more blog posts on tax reform on Block Advisors Insights!