Changes to the individual tax code are effective January 1, 2018. The IRS says that the 2018 withholding rates will be adjusted in February to reflect the new rules.
Most individual changes would expire at the end of 2025, so the old tax code rates and deductions would be back in 2026.
Here’s a look at what’s in the bill:
New Tax brackets and rates
Lowers (many) individual rates: The bill preserves seven tax brackets, but changes the rates that apply to: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Today’s rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
Here’s how much income would apply to the new rates:
— 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
— 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
— 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
— 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
— 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
— 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
— 37% (over $500,000; over $600,000 for couples)
Standard deduction is increased, from $12,700 this year to $24,000 next year for couples filing jointly. For individuals, the amount goes from $6,350 to $12,000
Personal exemptions are eliminated, which in 2017 reduce taxable income by $4,050 each for taxpayers, spouses and dependent children.
An update on some the Adjustments to income
Alimony – starting in 2019, alimony would no longer be deductible by the payor for new decrees. Payments would be excluded from the recipient’s income.
Moving expenses are not deductible and employer reimbursements will be taxable. Members of the military are allowed to claim the deduction if the move is pursuant to a military order.
Itemized Deductions are changing
Medical expenses- taxpayers continue to deduct medical expenses. For 2018 and 2019, expenses exceeding 7.5% of income are deductible; that percentage increases to 10%, the current level, in 2020.
Limited State and local tax deduction (combined with real estate tax) – new maximum of $10,000 for a combination of property and income taxes or property and sales taxes.
Mortgage interest-remains deductible for those who itemize, but for new mortgages on first and second homes, only the interest on the first $750,000 borrowed is deductible. The interest on home equity loans will no longer be deductible. Currently that’s allowed on loans up to $100,000.
Charitable contributions-remain deductible for those who itemize, and the current limitation of 50% of income is increased to 60%.
Miscellaneous itemized deductions are not deductible. This includes financial advisor fees, tax preparation fees, employee business expenses as well as several other currently deductible expenses.
Casualty losses-no longer deductible unless covered by specific federal disaster declarations.
Some changes for credits
Child tax credit-increased from $1,000 per child to $2,000 of which $1,400 is refundable, meaning it would be paid to parents even if they do not owe income tax. Value of the credit begins to decrease when family income exceeds $400,000.
Creates temporary credit for non-child dependents: The bill would allow parents to take a $500 credit for each non-child dependent whom they’re supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability.
Provisions discussed and not changed
Capital gains rates remain intact.
Sale of principal residence rules are still intact.
School supplies-teachers still deduct supplies they buy for their classrooms at $250.
Education credits will continue
Student loan interest would continue to be deductible
Retirement accounts such as 401(k) plans stay the same. No changes to the amounts people are allowed to put into 401(k)s, IRAs and Roth IRAs.
There is still the 3.8% Net Investment Income Tax on net investment income above $200,000 for individuals and $250,000 for couples.
The Earned income tax credit remains
The Adoption tax credit is still available
Estate tax- the exemption is doubled so no estate worth less than nearly $11 million would be taxed. A married couple could pass on twice that amount or $22 million to their heirs. The Minnesota estate tax exemption will be $2.4 million in ’18, $2.7 million in ’19 and $3 million thereafter.
The Affordable Care Act mandate that requires health insurance or face a fine imposed by the IRS would be repealed starting in 2019.
Alternative Minimum Tax
Alternative minimum tax remains for individuals, but the exemption is raised to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples. The exemption begins to phase out at $1 million of income which is substantially higher than the current law phase out.
FOR BUSINESSES AND CORPORATIONS
The bill cuts the corporate rate to 21% from 35%, starting next year. The bill would also repeal the alternative minimum tax on corporations.
Lowers tax burden on pass-through businesses: The tax burden on owners, partners and shareholders of LLC’s, partnerships and S-corporations will be lowered by a 20% deduction.
There is a limitation on the deduction based on W-2 wages which is similar to the current domestic production deduction limitation (i.e. the deduction cannot exceed 50% of wages). In addition, there is a special rule for real estate partnerships that bases the limitation on 2.5% of the unadjusted basis of property plus 25% of wages.
The deduction is not available to “specified service trades or businesses” which includes any business in the fields of accounting, health, law, consulting, athletics, financial services or brokerage services. However, the service business limitation does not apply in the case of a taxpayer whose taxable income does not exceed $315,000 if married ($157,500 if single). The benefit of the deduction for service business is phased out over the next $100,000 of income for married taxpayers ($50,000 for others).
Bonus depreciation- businesses could fully and immediately deduct the cost of certain equipment purchased after Sept. 27, 2017 and before Jan. 1, 2023
Section 179 deduction-increase the maximum annual Section 179 deduction to $1 million and increase the phase-out threshold to $2.5 million
Luxury Auto depreciation limits have increased substantially- the §280(f) limits will be about 4 times greater than the current limits ($10k in year 1, $16k year 2, $9.6k year 3 and $5.76k thereafter).
For years after 12/31/17, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement are eliminated. A general 15-year recovery period and straight-line depreciation is provided for qualified improvement property.
Like-kind exchange treatment limited
Like-kind exchange treatment only applied to real property. Like-kind exchanges for personal property (such as vehicles) is eliminated.
More businesses could use cash method of Accounting
Allow a C corporation or partnership with a C corporation partner to use the cash method of accounting if its annual gross receipts for the prior three years don’t exceed $25 million. (current limit is $5 million)
For years after 12/31/17, taxpayers that meet the current $25 million gross receipts test are not required to account for inventories under the UNICAP rules. (Current rules apply UNICAP $1 million and $10 million for certain industries.)
Accounting for long-term contracts
For contracts entered into after 12/31/17, the exception for small construction contracts from the requirement to use Percentage of completion is expanded to apply to contracts for the construction or improvement or real property if the contract is (1) expected to be completed within two years and (2) is performed by a taxpayer meets the $25 million gross receipts test.
Limits on Deducting Interest Expense
Deductions for business interest expense in tax years beginning in 2018 and beyond generally couldn’t exceed 30% of the business’s adjusted taxable income (subject to exceptions).
The bill eliminates the domestic production activities deduction.
Net Operating Losses
Taxpayers could generally use an NOL carryover to offset only 80% of taxable income (versus 100% under current law). In addition, NOLs cannot be carried back to earlier tax years but could be carried forward indefinitely.
Meals & Entertainment
The bill eliminates entertainment expenses (currently entertainment expenses are 50% deductible)
The bill retains the 50% deduction for meals.
Carried Interest related to Partnerships
To get the long-term rate associated with carried interest would require a three-year holding period vs. the one year holding period under current law.
U.S. Multinational Taxation
Currently U.S. companies owe tax on all their profits, regardless of where the income is earned. They’re allowed to defer paying U.S. tax on foreign profits until the money comes back to the U.S. Most foreign competitors come from countries with territorial tax systems, meaning they don’t owe tax to their own governments on income they make offshore.
The final GOP bill proposes switching the U.S. to a territorial system. It also includes anti-abuse provisions. The bill requires companies to pay a one-time, low tax rate on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets.