Posted April 18, 2018

Highlights of the Tax Cuts & Job Act of 2017

On December 20, 2017, Congress passed the Tax Cuts and Jobs Act. This is the largest tax overhaul since 1986. There will be significant changes to the tax law, most of which take effect on January 1st, 2018. Below is a summary of the changes.

Individual Taxes

Tax Brackets: All tax brackets are reduced, with the top tax bracket dropping from 39.6% to 37%.

Alternative Minimum Tax: Increases the exemption significantly so that fewer people will be subject to AMT starting in 2018.

Standard Deduction: Nearly doubles from $6,500/singles and $13,000/couples to $12,000/singles and $24,000/couples starting in 2018.

Personal Exemptions: Eliminated starting in 2018.

Child Tax Credit: Doubles from $1,000/child to $2,000/child starting in 2018, and the refundable portion is increased starting in 2018. The phase out of this credit also has increased to $200,000/single and $400,000/couples.

Credit for Other Dependents: Eligible taxpayers will now receive a $500 credit for other dependents starting in 2018.

529 Plans: $10,000/child/year can now be used for K-12 private school education starting in 2018.

Itemized Deductions: The deduction for state and local income taxes as well as property taxes is limited to a combined $10,000 deduction. Mortgage interest is deductible on up to $750,000 of debt (down from $1 million). Miscellaneous itemized deductions such as investment fees, employee business expenses, and tax preparation fees are no longer deductible. All these changes take effect for 2018.

Health Insurance Individual Mandate: The individual mandate is repealed beginning in 2019.

Estate Taxes

The estate tax does not take effect until a gross estate is above $11.2 million/person in 2018. This is up from $5.6 million in 2017.

Business Taxes

Pass through Income: Income from S-Corps, partnerships, and sole proprietorships may now receive up to a 20% deduction of their income for tax purposes. Certain industries are not allowed this deduction, including most professional services (doctors, dentists, lawyers, CPAs, investment advisors, et al.). This change takes effect for 2018.

C-Corp Tax Rate: The C-Corp tax rate drops from 35% to 21% starting in 2018.

Business Interest: Starting in 2018, the business interest deduction is capped at 30% of income, excluding depreciation.

C-Corp Alternative Minimum Tax: Eliminated starting in 2018.

New Investment Purchases: Beginning in 2018, you are allowed full expensing for five years, then the rule is phased out over the next five years.

Section 179 Expenses: Limit increases for Section 179 from $500,000 to $1 million starting in 2018.

Net Operating Losses: Starting in 2018, net operating losses can only be deducted up to 80% of income.

By Jason Ackerman, CPA, CFP®, CGMA