President Trump Signs Tax Bill into Law

This week, Congress passed a sweeping overhaul to the tax code, which was signed into law by President Trump earlier today. 415 Group Partner Dan Kloha, CPA, explains the legislation’s key provisions for individuals and businesses.

Our team is hard at work reviewing the details of the new law. There will be challenges and opportunities for businesses and individuals alike, but your advisors at 415 Group are available to help you navigate the changes.

Some of the major impacts for individuals and businesses include:

Individuals

• Income Tax Rates: The law carries temporary tax rates of 10, 12, 22, 24, 32, 35 and 37 percent after 2017. Previously, individual income tax rates were 10, 15, 25, 28, 33, 35 and 39.6 percent.
• Standard Deductions: The law calls for a near doubling of the standard deduction. It increases the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers and $12,000 for all other individuals.
• Itemized Deductions: The doubling of the standard deduction would effectively eliminate most individuals from claiming itemized deductions other than higher income taxpayers. For example, for the vast majority of married taxpayers filing jointly, only those with allowable mortgage interest state income and local income/property taxes (up to $10,000), and charitable deductions that exceed $24,000 would claim them as itemized deductions (absent extraordinary medical expenses).
• Personal Exemptions: The law eliminates the deduction for personal exemptions and the personal exemption phase-out through 2025.
• Mortgage Interest Deduction: The law limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), in the case of tax years beginning after December 31, 2017, and beginning before January 1, 2026. For acquisition indebtedness incurred before December 15, 2017, the law allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately). No interest deductions will be permitted for interest on home equity indebtedness.
• State and Local Tax Deduction: The law limits annual itemized deductions for all nonbusiness state and local tax deductions, including property taxes, to $10,000 ($5,000 for a married taxpayer filing a separate return).
• Miscellaneous Itemized Deductions: The law temporarily repeals all miscellaneous itemized deductions that are subject to the 2-percent floor.
• Child Tax Credit: The law temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child. Up to $1,400 of that amount would be refundable. The law also raises the adjusted gross income phase-out thresholds, starting at adjusted gross income of $400,000 for joint filers ($200,000 for all others). The child tax credit is further modified to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children.
• Alimony Payments: The law repeals the deduction for alimony payments and their inclusion in the income of the recipient. This update will only take effect for divorces that occur after December 31, 2018.
• Estate and Gift Taxes: The law follows the original Senate bill in not repealing the estate tax, but rather doubling the estate and gift tax exclusion amount for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. The current maximum federal estate tax rate is 40 percent with an inflation-adjusted $5 million exclusion ($5.49 million in 2017), which married couples can combine for a $10 million exclusion ($10.98 million in 2017). The new exclusion amounts will now allow married couples to exempt up to $22 million for 2018 (after adjustment for inflation) from any estate or gift tax.
• Alternative Minimum Tax: The final bill retains the alternative minimum tax (AMT) for individuals with modifications. The law temporarily increases (through 2025) the exemption amount to $109,400 for joint filers ($70,300 for others, except trusts and estates). It would also raise the exemption phase-out levels so that the AMT would apply to an income level of $1 million for joint filers ($500,000 for others). These amounts are all subject to annual inflation adjustment.

Businesses

• Corporate Tax Rate: The law calls for a 21 percent corporate tax rate beginning in 2018. The law makes the new rate permanent. The maximum corporate tax rate currently tops out at 35 percent.
• Increased Bonus Depreciation: The law increases the 50 percent "bonus depreciation" allowance to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). A 20 percent phase-down schedule would then kick in. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.
• Business-Use Vehicles: The law raises the cap placed on depreciation write-offs of business-use vehicles. The new caps will be $10,000 for the first year a vehicle is placed in service (up from a current level of $3,160); $16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and $5,760 for each subsequent year (up from $1,875) until costs are fully recovered. The new, higher limits apply to vehicles placed in service after December 31, 2017, and for which additional first-year depreciation under Code Section 168(k) is not claimed.
• Investment Limitation: The final bill enhances Code Section 179 expensing. The Conference bill sets the Code Section 179 dollar limitation at $1 million and the investment limitation at $2.5 million.
• Interest Exemptions: The final bill generally caps the deduction for net interest expenses at 30 percent of adjusted taxable income, among other criteria. Exceptions would exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less.
• Individual Tax Rates: Currently, owners of partnerships, S corporations and sole proprietorships - as “pass-through” entities - pay tax at the individual rates, with the highest rate at 39.6 percent. The new law generally allows a temporary deduction in an amount equal to 20 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications.

For more information, review the latest Wolters Kluwer Tax Briefing or contact 415 Group today.