NEW YORK--(BUSINESS WIRE)--With the most significant piece of tax legislation in perhaps the last 30 years enacted in December of 2017, the Tax Cuts and Jobs Act has brought changes that will affect virtually all taxpayers.
“Taxpayers will find much is changed in the tax law for both individuals and businesses, and those changes will present both challenges and planning opportunities to try to maximize the tax benefits,” said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting.
The following are some of the more significant changes included in the legislation, which generally come into effect in 2018:
Lower Rates and Higher Standard Deduction
For individuals, the most basic changes are lower rate brackets, doubling of the standard deduction and elimination of personal exemptions. It is estimated that more than half of taxpayers who currently itemize deductions will now be better off claiming the standard deduction. This is the result not only of the increase in the standard deduction but also a scaling back of many of the itemized deductions. Almost all of the individual tax changes expire after 2025. (View 2017-2018 tax rates and standard deduction.)
The new legislation includes new lower limits on mortgage debt for the mortgage interest deduction and a new $10,000 cap on the state and local tax deduction. Casualty losses will only be allowed for federally-declared disasters and miscellaneous itemized deductions that had been subject to a floor of two percent of adjusted gross income, such as unreimbursed employee business expenses and tax preparation fees, have also been eliminated. On the other hand, the AGI threshold for the medical expense deduction has been lowered to 7.5 percent for a couple of years and the AGI limit for charitable contributions has been increased to 60 percent.
Child Tax Credit
Also helping families lower taxes is a doubling of the Child Tax Credit to $2,000, although the refundable portion is only increasing to $1,400. There is also a new $500 credit for non-child dependents.
The individual alternative minimum tax survives but with a higher exemption amount. This should help counter the possibility that lower regular tax rates would push more taxpayers into the AMT.
Major proposed changes to tax advantaged retirement accounts did not survive in the final legislation. A few provisions that made it in include elimination of recharacterizations of Roth conversions and an extended ability to repay plan loans on termination or separation from employment in order to avoid the penalty on early distributions.
With a number of major disasters in 2017, for federally declared disasters that occurred in 2016 or 2017, the legislation provides for penalty-free distributions from retirement accounts with the option to repay over three years, relief from the ten percent of AGI limit on casualty loss deductions, and ability to elect to claim the casualty loss as an additional standard deduction.
Most education deductions and credits survived in the legislation, except for the above-the-line deduction for tuition and fees. Funds in 529 plans may now be used for elementary and secondary education or rolled over into ABLE accounts for disabled individuals.
While few changes were finally made to the Affordable Care Act in the Tax Cuts and Jobs Act, one significant change that was made was the repeal of the individual mandate, the penalty imposed on individuals who do not acquire health insurance, after 2018.
Business Tax Changes
Unlike the individual provisions in the new tax law, most of the business tax changes are permanent.
Corporate Tax Rate
The corporate tax rate is significantly reduced from a top rate of 35 percent to 21 percent.
Pass-through Entity Deduction
While historically owners of pass-through entities were taxed at ordinary income rates, the legislation now provides a 20-percent deduction for qualified business income of pass-through entities, including partnerships, S corporations, sole proprietorships and trusts and estates.
Depreciation and Interest Deductions
There are significant enhancements, albeit temporary, for businesses to write off capital acquisitions rather than having to depreciate them over time. As a trade-off for the expensing provisions, there are some additional limits on deducting interest expense.
The legislation includes significant changes to the way that U.S. companies are taxed on their overseas activities. These include provisions moving the U.S. toward a territorial tax system rather than a world-wide tax system, a one-time tax on previously untaxed earnings of U.S. companies held overseas, and provisions to penalize U.S. companies that move business activity overseas.
View a comparison of the Tax Cuts and Jobs Act and prior law and sample taxpayer scenarios under the new legislation.
Provisions of the Tax Cuts and Jobs Act Retroactive to 2017
|Mortgage Interest Deduction||Limit drops to $750,000 for new mortgage debt after December 15, 2017 ($375,000 for married filing separately)|
|Medical Expense Deduction||7.5 percent AGI threshold preserved retroactive to January 1, 2017, also for AMT|
|Excessive Employee Remuneration||The elimination of the exceptions to the $1 million compensation deduction limit for commissions and performance-based compensation applies after November 2, 2017|
|Disaster Zone Relief||Provisions waiving the 10 percent early withdrawal penalty from retirement plans and 10 percent AGI limit threshold for casualty losses, as well as the ability to elect to treat the casualty loss as an additional standard deduction, apply to federal casualties after December 31, 2015 and before January 1, 2018|
|Business Expensing||100 percent first-year bonus depreciation applies to property acquired and placed in service after September 27, 2017|
|Local Lobbying Expenses||Repeal of deduction for local lobbying expenses effective for expenses paid on or after December 22, 2017|
|Citrus Plants||Certain costs of replanting citrus plant lost to casualty applies to costs incurred after December 22, 2017|
For more information and additional resources to help with the upcoming tax season, visit Wolters Kluwer’s 2018 Whole Ball of Tax.
About Wolters Kluwer Tax & Accounting
Wolters Kluwer Tax & Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency.
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