A Sum-Up of the Tax Cuts and Jobs Act Applicable to Individuals and Businesses
Donald J. Sauder, CPA
With President Trump’s signature, the week before Christmas, the Tax Cuts and Jobs Act has legislated major changes to US tax laws. Most notably, lower tax rates for both individual taxpayers and businesses. The new tax rates for individuals remain effective until 2025, when they revert again to the 2017 rates.
The Tax Cuts and Jobs Act Individual Taxes
The new individual tax rates are as follows:
| Rate | Married Filing Jointly | Individual Filing |
| 10% | $0 -$19,050 | $0 – $9,525 |
| 12% | $19,050 – $77,440 | $9,525 – $38,700 |
| 22% | $77,400 – $165,000 | $38,700 – $82,500 |
| 24% | $165,000 – $315,000 | $82,500 – $157,500 |
| 32% | $315,000 – $400,000 | $157,500 – $200,000 |
| 35% | $400,000 – $600,000 | $200,000 – $500,000 |
| 37% | Over $600,000 | Over $500,000 |
Personal exemptions have been omitted from the calculation of individual taxes until 2025; along with this reduction in deductions to taxable income, the standard deduction has been increased from $12,000 to $24,000 for joint filers, and from $6,000 to $12,000 for individual filers. This increase has reduced the benefit of itemized deduction for 2018 to an increasing number of taxpayers. Filing requirements will now be subject to applicable new deduction thresholds.
The bill also prevents prepayment of state and local income taxes in 2017, and allows only $10,000 of property taxes to be deducted on Schedule A. The new law repeals all miscellaneous itemized deductions subject to the two percent floor, e.g. portfolio deductions, unreimbursed employee expenses, etc. Medical expenses have a lower threshold to deduction of 7.5% of adjusted gross income.
Although the increased standard deduction will trim the balance of taxpayers itemizing on Schedule A, charitable contributions deduction threshold will increase from 50% to 60% of income. Therefore, more charitably favoring taxpayers will obtain greater opportunity to reduce taxes. If you maximize the 50% rule every year, this is in the new bill just for you.
The child tax credit increases from $1,000 to $2,000 with a $1,400 refundable feature per child. Families who will forfeit tax dollars on the standard exemption, will now be rewarded from the family friendly higher child tax credits.
The federal estate and gift tax threshold increases from the $5.49m 2017 exemption to $10m; the new exclusion will permit married couples to exempt up to $22m for 2018. Heirs will continue to receive a “stepped up, date of death” basis for inherited assets on costs basis for following transactions. This exclusion will help families retain more of what they’ve accumulated, and pass it to the next generation. The generation skipping transfer exemption has also doubled.
The student loan interest deduction is retained in the bill, and the American Opportunity Tax Credit is not overhauled, supporting students and the incentive to higher levels of education.
The Tax Cuts and Jobs Act Business Taxes
The new tax bill features a 21% corporate tax rate in 2018, and a 20% deduction on taxes for small business, e.g. pass-through ownership of say a partnership or S-Corporation. Therefore, partnership income tax rates will be 80% of the calculation from the prior table, after applicable thresholds. This pro-business tax atmosphere is designed to stimulate business activity, and support entrepreneurial ventures.
Businesses also benefit from a 100% bonus depreciation allowance for new assets placed in service after September 27, 2017, and before January 1, 2023. All new equipment placed in service before December 31, 2017 qualifies for the 100% bonus addends. The new law places a $10,000 cap on first year vehicles for business. Section 179 expensing, a well-regarded business tax planning feature, has been increased to $1,000,000 for 2018, from prior year $500,000.
The “free expense” know as Section 199 domestic production activities deductions is eliminated in 2018; the research and development credit stays in place.
Net operating losses are limited to 80% of taxable income from losses after December 31, 2017, and carrbacks are denied in most cases, with indefinite carryforwards, subject to certain limits. The new law keeps the “Johnson Amendment” in place, generally restricting 501(c)(3) organizations from political activities.
The law repeals the Affordable Care Act (ACA) individual shared responsibility requirement, making the payment $0, a change effective for penalties after 2018. The IRS has cautioned that full-year coverage compliance is required for 2017, or applicable exemption. If absent, a shared responsibility payment will be assessed.
The historic tax legislation is the largest in the US in at least 30 years, and to quote:
According to the Tax Foundation’s Taxes and Growth Model, the plan …….. would lead to a 1.7 percent increase in GDP over the long term, 1.5 percent higher wages, and an additional 339,000 full-time equivalent jobs.
The enormity and speed of the tax legislation is no less surprising than the pro-business environment that it supports.
If you have questions regarding the newly passed tax laws from the Tax Cuts and Jobs Act, please contact our office.
This blog is not to be construed as advice for tax or accounting, or any other purposes; it is for informational purposes only. Please consult with your advisors before making any decision applicable to this information.