We have fielded many inquiries regarding tax reform and what it means to our clients. Tax reform began with two very different bills emerging from both houses of Congress. A congressional conference committee met earlier this month to reconcile the differences into one final bill. On Friday, December 15th, the committee announced an agreement. This week the reconciled bill was passed by both houses of Congress and signed into law by the President.

Lawmakers crafting the reconciliation bill were careful to keep enough of the provisions in order to maintain majorities in both houses, but were also cautious to keep the cost of the bill under $1.5 billion, the threshold at which the Senate may pass it with 51 votes. However, now the individual tax provisions sunset in 2025, meaning if Congress doesn’t act before then, the tax law reverts to its current state.

The new tax bill is a game-changer. This newsletter highlights changes to individual and business provisions affecting many of our clients. Most of these provisions had remained largely unchanged since the tax overhaul of 1986. Review these changes and contact us with any and all questions you may have.

Individual Provisions:

Tax Rates:
The original bill put forth by the House condensed the number of tax-rates to four, however; the Senate’s version of seven brackets won-out in the conference committee. Rates extend from 10% to 37% (for taxable income over $500,000).

Standard Deduction/Personal Exemptions:
The bill increases the standard deduction to $12,000 for single taxpayers, $24,000 for married taxpayers, and $18,000 for heads of households. Elderly and blind taxpayers will still receive an additional deduction. The bill repeals all personal exemptions.

Child Tax Credit:
The child tax credit is doubled to $2,000 per qualifying child. The maximum “refundable” portion is $1,400. A new credit of $500 has been created for dependents who are not qualifying children. The phase-out threshold is now $200,000 for single taxpayers ($400,000 for married taxpayers), allowing many more filers to receive the credit.

Passthrough Income:
Gone is the “domestic production activities deduction”. Individuals will now be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole-proprietorship. “Qualified business income” is defined as the net of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. The business must be conducted within the United States. Specials rules apply to specified agricultural or horticultural cooperatives. The deduction is limited to 50% of W2 wages paid with respect to the business. The deduction is phased-out for specified personal service trades (such as accounting, health, law, etc.) to individuals with overall income less than $157,500 ($315,000 for married-filing-jointly returns).

Alimony:
For any divorce agreements entered into after 2018, alimony payments are no longer deductible by the payor or included in the taxable income of the payee.

Moving Expenses:
The moving expense deduction is repealed. Also, moving expense reimbursements are no longer excludable from income. Special rules apply for active members off the military.

Itemized Deductions:
With the increases in the standard deductions, fewer taxpayers will find themselves itemizing. The limitation on itemized deductions is also repealed.

Medical expenses:
The 7.5% income limitation would return for all taxpayers. This was changed to 10% in recent years.

State and local taxes:
The deduction for all state and local income or property taxes is limited to $10,000.

Mortgage interest:
Taxpayers are allowed to deduct interest on qualifying acquisition debt up to $750,000, changing from the current limit of $1,000,000. Home equity interest is no longer deductible. These changes take affect only on new mortgages, meaning mortgage interest on loans entered into before the passage of the bill would be grandfathered-in under current law.

Charitable giving:
Payments made to obtain collegiate athletic event seating are no longer deductible.

Misc. deductions:
Previous miscellaneous itemized deductions subject to 2% are no longer deductible.

Education:
Taxpayers may distribute up to $10,000 per student from a 529 plan to tuition at an elementary or secondary school.

IRA Recharacterizations:
Taxpayers are no longer allowed to undo a Roth conversion.

Alternative Minimum Tax (AMT):
The AMT remains in the final bill, however; the amount of the exemption has been increased to $109,400 for married-filing-jointly taxpayers. The phaseout threshold has been increased to $1 million.

Estate and Gift Tax:
Amount would double to $10 million.

Individual Healthcare Mandate:
The penalty for not having insurance is reduced to $-0-, effectively eliminating the healthcare mandate for all individuals.

Business Provisions

Rates:
Corporations will now be taxed at a flat 21%

Corporate AMT:
The corporate AMT is fully repealed.

Depreciation:
Bonus depreciationBonus depreciation is extended through 2022, then phases-out through 2026. The requirement for property to be “brand-new” is removed.

Luxury auto limits:
Caps for depreciating luxury automobiles are increased.

Sec. 179 expensing:
The amount which may be expensed under section 179 is increased to $1 million. This amount is indexed for inflation beginning in 2018. Also, eligible property now includes certain qualified real property, such as roofs, heating and air-conditioning property, fire protection, and security systems.

Interest Expense:
The deduction for business interest is limited for taxpayers with gross receipts greater than $25 million to the sum of business interest income, 30% of the taxpayers’ adjusted taxable income for the year, AND the taxpayer’s floor plan financing interest for the tax year.

Net-Operating-Loss (NOL):
The NOL deduction is now limited to 89% of taxable income.

Like-kind Exchanges:
Like-kind exchanges are now limited to property that is not primarily held for sale.

Meals and Entertainment:
Deductions for amounts paid related to activities generally considered to be entertainment, amusement, or recreation, are no longer deductible. Membership dues to social clubs are also no longer deductible. Meals are still 50% deductible.

Foreign Income:
The rules regarding the taxation of foreign income are modified to a territorial system for corporations that have overseas earnings. These provisions are to incentivize large corporations to have more of their income taxed in the United States.

Individual Provisions

Tax Rates: The original bill put forth by the House condensed the number of tax-rates to four, however; the Senate’s version of seven brackets won-out in the conference committee. Rates extend from 10% to 37% (for taxable income over $500,000).

Standard Deduction/Personal Exemptions: The bill increases the standard deduction to $12,000 for single taxpayers, $24,000 for married taxpayers, and $18,000 for heads of households. Elderly and blind taxpayers will still receive an additional deduction. The bill repeals all personal exemptions.

Child Tax Credit: The child tax credit is doubled to $2,000 per qualifying child. The maximum “refundable” portion is $1,400. A new credit of $500 has been created for dependents who are not qualifying children. The phase-out threshold is now $200,000 for single taxpayers ($400,000 for married taxpayers), allowing many more filers to receive the credit.

Passthrough Income:
Gone is the “domestic production activities deduction”. Individuals will now be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole-proprietorship. “Qualified business income” is defined as the net of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. The business must be conducted within the United States. Specials rules will apply to specified agricultural or horticultural cooperatives. The deduction is limited to 50% of W2 wages paid with respect to the business. It would also be disallowed for specified service trades (such as accounting, health, law, etc.) or businesses with income in excess of $157,500 ($315,000 for married-filing-jointly returns).

Alimony:
For any divorce agreements entered into after 2018, alimony payments are no longer deductible by the payor or included in the taxable income of the payee.

Moving Expenses:
The moving expense deduction is repealed. Also, moving expense reimbursements are no longer excludable from income. Special rules apply for active members off the military.

Itemized Deductions:
With the increases in the standard deductions, fewer taxpayers will find themselves itemizing. The limitation on itemized deductions is also repealed.

Medical expense:
The 7.5% income limitation would return for all taxpayers. This was changed to 10% in recent years.

State and local taxes:
The deduction for all state and local income or property taxes is limited to $10,000.

Mortgage interest:
Taxpayers are allowed to deduct interest on qualifying acquisition debt up to $750,000, changing from the current limit of $1,000,000. Home equity interest is no longer deductible. These changes take affect only on new mortgages, meaning mortgage interest on loans entered into before the passage of the bill would be grandfathered-in under current law.

Charitable giving:
Payments made to obtain collegiate athletic event seating are no longer deductible.

Misc. deductions:
Previous miscellaneous itemized deductions subject to 2% are no longer deductible.

Education:
Taxpayers may distribute up to $10,000 per student from a 529 plan to tuition at an elementary or secondary school.

IRA Recharacterizations:
Taxpayers are no longer allowed to undo a Roth conversion.

Alternative Minimum Tax (AMT):
The AMT remains in the final bill, however; the amount of the exemption has been increased to $109,400 for married-filing-jointly taxpayers. The phaseout threshold has been increased to $1 million.

Estate and Gift Tax:
Amount would double to $10 million.

Individual Healthcare Mandate:
The penalty for not having insurance is reduced to $-0-, effectively eliminating the healthcare mandate for all individuals.

Business Provisions

Rates:
Corporations will now be taxed at a flat 21%

Corporate AMT:
The corporate AMT is fully repealed.

Bonus depreciation:
Bonus depreciation is extended through 2022, then phases-out through 2026. The requirement for property to be “brand-new” is removed.

Luxury auto limits:
Caps for depreciating luxury automobiles are increased.

Sec. 179 expensing:
The amount which may be expensed under section 179 is increased to $1 million. This amount is indexed for inflation beginning in 2018. Also, eligible property now includes certain qualified real property, such as roofs, heating and air-conditioning property, fire protection, and security systems.

Interest Expense:
The deduction for business interest is limited for taxpayers with gross receipts greater than $25 million to the sum of business interest income, 30% of the taxpayers’ adjusted taxable income for the year, AND the taxpayer’s floor plan financing interest for the tax year.

Net-Operating-Loss (NOL):
The NOL deduction is now limited to 89% of taxable income.

Like-kind Exchanges:
Like-kind exchanges are now limited to property that is not primarily held for sale.

Meals and Entertainment:
Deductions for amounts paid related to activities generally considered to be entertainment, amusement, or recreation, are no longer deductible. Membership dues to social clubs are also no longer deductible. Meals are still 50% deductible.

Foreign Income:
The rules regarding the taxation of foreign income are modified to a territorial system for corporations that have overseas earnings. These provisions are to incentivize large corporations to have more of their income taxed in the United States.