Republicans in Congress have blended separate tax bills passed by the House and Senate into compromise legislation that seeks to achieve a sweeping overhaul of the nation’s tax code. Below is a summary of some of the key provisions of the Conference Agreement that will impact individuals and businesses. President Trump signed the bill into law on December 22nd.
|Individual Tax Rates||Provides for seven (7) tax brackets ranging from 10% to 37%. Highest rate at $600,000 married-joint and $500,000 single. The rate structure will apply in 2018-25.|
|Alternative Minimum Tax (AMT)||Increases the AMT exemption and phase-out amounts for 2018-25. Does not repeal tax.|
|Capital Gain/Qualified Dividend Rate||No change.|
|Like-Kind Exchanges||Limits applicability to like-kind exchanges of real property that is not held primarily for sale.|
|Pass-Through Income||Deduction for 20% of qualified business income from a partnership, S corporation or sole proprietorship subject to limits based on W-2 wages and capital acquisitions.|
|Standard Deduction||$24,000 for joint returns.
$18,000 for head of household.
$12,000 for single filers.
Temporary increase for 2018-25.
|Personal Exemption||Suspends the personal exemption for tax years 2018-25.|
|Home Sale Exclusion||No Change.|
|Alimony||For divorce or separation instruments executed after December 31, 2018, alimony will no longer be deductible by the payor, nor will it be includible in income of the payee.|
|Home Mortgage Interest||The deduction for interest expense on post-December 15, 2017 home mortgage debt would be limited to $750,000 of principal for 2018-25. For debt incurred before December 15, 2017 and after 2025, this limitation is $1,000,000. The deduction for home equity loan interest is suspended from 2018-25.|
|State and Local Taxes||The itemized deduction for state and local income, property and sales taxes is limited in total to $10,000 for 2018-25.|
|Medical Expenses||For 2017 and 2018, the threshold for deducting medical expenses is 7.5% of Adjusted Gross Income (AGI).|
|Miscellaneous Itemized Deductions||Suspends all itemized deductions subject to 2.0% of the AGI floor for 2018-25.|
|Charitable Contributions||Increases the limit on cash charitable contributions from 50.0% to 60.0% of AGI.|
|Limitation for Itemized Deductions||Suspends the phase-out of itemized deductions for 2018-25.|
|Child Tax Credit||For 2018-25, the credit increases to $2,000 for a child under 17 with $1,400 refundable. Phase-outs begin at $400,000 married-joint.|
|Estate Tax||Increases the estate tax exemption from $5M to $10M (indexed for inflation) for 2018-25.|
|Affordable Care Act (ACA)||Repeals the individual mandate of the ACA effective 2019.|
|Corporate Tax Rates||Lowers corporate rate to 21.0%.|
|Alternative Minimum Tax (AMT)||The corporate AMT is repealed.|
|Dividends Received Deduction (DRD)||The 80% DRD is reduced to 65% and the 70% DRD is reduced to 50%.|
|Business Interest Expense Deduction||Limits the interest deduction for businesses with gross receipts over $25M to interest income plus 30% of adjusted taxable income.|
|Net Operating Losses (NOL)||The NOL deduction will be limited to 80% of taxable income with no carrybacks.|
|Depreciation – Real Property||Maintains present law MACRS recovery periods of 39 years and 27.5 years for nonresidential real and residential rental property.|
|Section 179 Deduction (current limit: $500K and phaseout of $2M)||Increases the maximum deduction to $1 million and phaseout to $2.5 million.|
|Temporary Expensing for Business Assets (Bonus)||The cost of certain capital expenditures would be 100.0% deductible for 5 years and phased down 20% per year for the next 5 years. This provision applies to property placed in service after September 27, 2017.|
|Cash Method of Accounting||The cash method of accounting gross receipts threshold would increase to $25 million.|
|Accounting for Long-term Contracts||The $10M average gross receipts exception to the requirement to use the percentage-of-completion method is increased to $25M.|
While most of the provisions won’t go into effect until 2018, you can take steps now to minimize your total tax bill for 2017. Below is a discussion of a few general planning opportunities. Note that everyone’s situation is different and not every action will reap a tax benefit.
- Year-end capital investment planning. Consider purchasing assets that may qualify for 100% bonus depreciation or the Section 179 expensing election.
- Acceleration of itemized deductions. Consider timing of itemized deductions that are being repealed such as state and local taxes.
- Deferral of income. This strategy is especially relevant this year since many are expected to have lower marginal tax rates next year under the new bill.
- Percentage of completion method. Consideration should be given in 2018 as to a change in a method of accounting due to increased thresholds.
We very much appreciate the opportunity to serve you. Please contact Wouch, Maloney & Co., LLP at 215-675-8364 with any questions regarding the tax reform legislation, year-end tax planning or for assistance with any other tax, financial or accounting issues.