Tax Reform Bill Passes Congress

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Joel C. Jones, CPA/ABV, CVA, CIA, CFF, CGMA Director, Kassouf & Co.

On December 20, 2017, both the United States House of Representatives and the United States Senate passed what is known as the Tax Cuts and Jobs Act, which is the most sweeping income tax reform since 1986. This bill will impact all taxpayers beginning in 2018 as tax rates changed and deductions were both created and eliminated. This bill includes provisions that will affect individuals, businesses, estates and trusts, pensions and retirement plans, and the treatment of certain foreign income.

Some of the provisions that will impact many individuals and businesses are:

Individual Taxpayers

A tax rate reduction for most tax brackets, including a reduction in the maximum tax bracket from 39.6% to 37%,

Increases in the standard deduction from $6,500 to $12,000 for single and married filing separately taxpayers, $9,550 to $18,000 for heads of household, and $13,000 to $24,000 for married taxpayers,

Suspension of personal exemptions,

Taxable income of certain children, which was previously taxed at either the parents’ tax rate or the child’s tax rate, will be taxed at tax brackets applicable to estates and trusts,

Creation of a deduction associated with “Qualified Business Income” from certain pass-through businesses (sole proprietorships, partnerships, limited liability companies, and S Corporations),

Suspension of certain personal casualty and theft losses,

Increases in child tax credits for eligible taxpayers,

Limitation of deductions for state and local taxes (income and property taxes) to a maximum combined amount of $10,000 ($5,000 a for married taxpayer filing a separate return),

Suspension of deductions for home equity indebtedness and the deduction for home mortgage interest is limited to indebtedness of $750,000 ($375,000 for married taxpayers filing separately), (certain existing mortgages are grandfathered),

Increase in the adjusted gross income limitation applicable to cash charitable contributions made by taxpayers to public charities and certain private foundations from 50% to 60% for many taxpayers,

Elimination of charitable deductions for any payment to an institute of higher learning in exchange for the right to purchase tickets or seating to an athletic event,

Suspension of deductions for payments of alimony and its inclusion as income,

Suspension of deductions for certain miscellaneous itemized deductions,

Suspension of deductions for moving expenses and suspension of income exclusions for certain moving expenses paid by employers,

Repeal of the individual shared responsibility payment required under the Affordable Care Act (Obamacare),

Increases in alternative minimum tax exemption (AMT),

Expansion of use of funds from a Section 529 savings account to allow distributions for tuition at an elementary or secondary public, private, or religious school, and

Doubles base estate and gift tax exemption from $5 million to $10 million.

Businesses

Establishes flat corporate income tax rate of 21%,

Reduction in dividends received deductions,

Repeal of corporate alternative minimum tax (AMT),

Increases in amounts deductible under IRC Section 179 to $1 million,

100% first-year deduction for purchase of qualifying property, including certain used property. This provision reduces from 100% first year deduction to no first year deduction in 2027,

Increases in luxury automobile depreciation deductions,

Reduction in depreciable life of certain real property,

Disallowance of a deduction for net interest expenses in excess of 30% of the business’s adjusted taxable income for taxpayers with annual gross receipts exceeding $25 million,

Elimination of the ability to carryback net operating losses arising in tax years after December 31, 2017 and deductions of carried forward net operating losses are limited to 80% of taxable income,

Repeal of the domestic production activities deduction (DPAD),

Elimination of deductions for entertainment expenses and revisions to deductions for business meals, and

Creation of a credit associated with certain family and medical leave wages paid to qualifying employees.

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