Doggone! We have a new tax law! To paraphrase an old expression, if you don’t like the new law much, you must get to know it better. Even if the knowledge you acquire doesn’t change your opinion, you’ll at least be able to keep up your end of holiday conversations.
Here are questions about the awkwardly named Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (formerly known as the Tax Cuts and Jobs Act).
All of the new rules are effective for tax years beginning after December 31, 2017.
Personal exemptions for taxpayers and any dependents are eliminated beginning with 2018 returns.
Beginning in 2018, the itemized deduction for non-business state and local property taxes will be limited to $10,000.
The penalty for not having health insurance is repealed for tax years after December 31, 2017.
The alternative minimum tax for individuals will be repealed as of January 1, 2018.
The act reduces the corporate tax rate to a flat 21%.
The act creates a new deduction for qualified business income that will apply to partnerships, S corporations, limited liability companies, and sole proprietors.
The act repealed estate and gift taxes for years after December 31, 2017.
The home sale exclusion rules have been repealed for tax years beginning after December 31, 2017.
Beginning January 1, 2018, individual taxpayers will no longer be able to deduct tax return preparation fees.
Note: Taxing Lessons provides a summarized version of sometimes lengthy legislation. The full rules may include facts and issues not presented here. Please use the link provided in the post to read the entire act.
This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.
The 10%-of-adjusted-gross-income floor limiting the itemized deduction for medical expenses is reduced to 7.5% for tax years 2017 and 2018. The reduction applies for purposes of the alternative minimum tax rules as well.
A 100% first-year bonus depreciation deduction is effective for new or used qualified property bought and placed in service after September 27, 2017. Note that this change applies to the bonus depreciation rules, and not section 179.
For tax years beginning after Dec. 31, 2017, the exemption amount for personal exemptions is reduced to zero.
Note that the standard deduction is increased for tax years beginning after Dec. 31, 2017.
For 2018 federal income tax returns, the standard deduction will be $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers.
The deduction will be adjusted for inflation.
The rules for the additional standard deduction for the elderly and blind remain the same.
Editorial note: For tax year 2018, the act allows wage withholding rules to remain the same (as an administrative convenience for the Internal Revenue Service).
For tax years beginning after December 31, 2017, an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) is allowed for nonbusiness state and local property taxes and state and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) that are paid or accrued in the tax year. Foreign real property taxes are not deductible.
Editorial note: The act specifically disallows a deduction on 2017 federal income tax returns for prepaying next year’s state or local income tax. Note that taxpayers can pay and deduct the final 2017 fourth quarter estimate of these taxes.
The “individual shared responsibility payment” is reduced to zero for months beginning after 12/31/2018.
Editorial note: Both the 3.8% net investment income tax and the 0.9% additional Medicare tax remain.
The individual alternative minimum tax remains, with a higher exemption beginning after December 31, 2017.
The exemption will be $70,300 for single filers and $109,400 for taxpayers who are married and file jointly.
Exemption amounts begin to phase out at $1 million for married taxpayers filing joint returns and $500,000 for all other taxpayers.
Editorial note: The corporate alternative minimum tax was repealed for taxable years beginning after December 31, 2017.
A federal corporate income tax flat rate of 21% is effective January 1, 2018.
Editorial note: For tax years beginning before December 31, 2017 (the current year), the current graduated rates of
–15% (for taxable income of $0-$50,000)
–25% (for taxable income of $50,001-$75,000)
–34% (for taxable income of $75,001-$10,000,000)
–35% (for taxable income over $10,000,000)
remain in effect.
In addition, the tax rate for personal service corporations remains 35% for 2017.
The deduction of 20% of qualified business income is available for certain domestic “pass-through businesses,” including partnerships, limited liability companies, S corporations, and sole proprietorships. The deduction is claimed on individual income tax returns as a below-the-line deduction (not an itemized deduction).
–limiting the deduction to 20% of business income or 50% of total wages paid (or 25% of wages paid plus 2.5% of the unadjusted basis of qualified property)
–excluding certain service businesses such as those in the professions of health, law, and accounting
–making investment income ineligible
Note that the act provides a definition of “qualified business income” and that the rules and restrictions presented here are not all-encompassing.
The estate and gift tax remains in effect.
Exemption amounts will increase for estates and gifts (and generation-skipping transfers) after December 31, 2017.
The act doubles the base estate and gift tax exemption amount from $5 million to $10 million. The exemption will be indexed for inflation.
The original house bill included a provision repealing the home sale exclusion rules, but the provision did not survive the conference agreement.
Existing rules still apply: an exclusion of up to $250,000 for single filers ($500,000 for married taxpayers filing jointly) of the gain from the sale of a principal residence when the home is used as the taxpayer’s principal residence for at least two of previous five years.
Miscellaneous itemized deductions subject to the 2%-of-adjusted gross income floor, such as tax preparation fees, unreimbursed employee expenses, and investment advisory fees, are no longer deductible for taxable years beginning after December 31, 2017.