The new tax reform legislation that was signed into law today was the largest change to the tax system in over 3 decades. The last time the U.S. tax code saw significant reforms was under President Reagan in 1986. Those reforms sought to simplify income tax, broaden the tax base and eliminate many tax shelters.

Under this new legislation, substantial changes have been made to both individual and corporate tax rates. While most of the corporate provisions are permanent, individual provisions technically expire by the end of 2025. This expiration date is causing speculation on whether a future Congress will uphold the Individual provisions.

The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. To help you prepare, we have highlighted a few of the most pertinent details below. Please keep in mind, the purpose of this article is to summarize the key provisions.

Much more detail can be found here

What’s Changing?

Tax Bracket Rates. While taxpayers will still fall into one of seven tax brackets based on their income, the rates have changed. Some of the brackets have been lowered. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Standard Deduction. The standard deduction has nearly doubled. For single filers, it has increased from $6,350 to $12,000; for married couples filing jointly, it’s increased from $12,700 to $24,000.

Personal Exemption. Under the prior tax code, a taxpayer could claim a $4,050 personal exemption for themselves, their spouse and each of their dependents, thus lowering their taxable income. Under the new tax code, the personal exemption has been eliminated. For some families, this will reduce or counter the tax relief they receive from other parts of the reform package.

State and Local Tax Deduction. The state and local tax deduction, or SALT, now has a cap. While it remains in place for those who itemize their taxes, it now has a $10,000 limit. This is a significant change, as filers could previously deduct an unlimited amount for state and local property taxes, plus income or sales taxes.

The Child Tax Credit. The child tax credit has been expanded, doubling to $2,000 for children under 17. It’s also available to more people. Single parents who make up to $200,000 and married couples who make up to $400,000 can claim the entire credit, in full.

Non-Child Dependents. A new tax credit is available for non-child dependents. Taxpayers, such as elderly parents, can claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.

Alternative Minimum Tax. Fewer taxpayers will be affected by the alternative minimum tax. The purpose of the AMT is to ensure those who receive a lot of tax breaks are still paying some level of federal income taxes. The exemption will rise to $70,300 for singles, and to $109,400 for married couples.

Mortgage Interest Deduction. Going forward, anyone purchasing a home will only be able to deduct the first $750,000 of their mortgage debt. Down from $1 million, this will likely only affect people buying homes in more expensive regions. Current homeowners will likely be unaffected.

529 Savings Accounts. In the past, 529 savings accounts were untaxed and could only be applied towards college expenses.  Under the new tax code, up to $10,000 can be distributed annually to cover the cost of sending a child to a public, private or religious elementary or secondary school.

Alimony Payment Tax Deduction. The tax deduction for alimony payments will be eliminated for couples who sign divorce or separation paperwork after December 31, 2018.

Moving Expenses Deduction. The tax deduction for moving expenses is also gone, but there may be exceptions for members of the military.

Tax Preparation Deduction. Taxpayers can no longer deduct the cost of having their taxes prepared by a professional or the money they may have spent on tax preparation software.

Disaster Deduction.  Under the prior tax code, losses sustained due to a fire, storm, shipwreck or theft that insurance did not cover and exceeded 10% of their adjusted gross income, were deductible. Effective under the new tax code, taxpayers can only claim the disaster deduction if they are affected by an official national disaster.

Estate Tax. Prior to the tax reform, a limited number of estates were subject to the estate tax, a tax which applies to the transfer of property after someone dies. Now, even fewer taxpayers will be affected. The amount of money exempt from the tax — previously set at $5.49 million for individuals, and at $10.98 million for married couples — has been doubled.

Health Insurance Mandate. The failure to repeal Obamacare earlier this year afforded the Republicans the opportunity to eliminate one of the health law’s key provisions with tax reform. Effective in 2019, the individual mandate, which penalized people who did not have health care coverage, was eliminated.

Corporate Tax Rate. Beginning in 2018, the corporate tax rate will be cut from 35% to 21%.

Pass-through Entities. The owners, partners, and shareholders of S-corporations, LLCs and partnerships will receive a tax break. Those who pay their share of the business’ taxes through their individual tax returns will have a 20% deduction.

To ensure business owners do not abuse the provision, the legislation has included additional terms to this provision.

Multinational Corporations. The new tax bill is a shift towards globalization, changing the way multinational corporations are taxed. Companies will no longer pay federal taxes on income they make overseas. These companies will be required to pay a one-time fee, 15.5% on cash assets and 8% on non-cash assets, on any existing offshore profits.

Nonprofit Organizations. There is a new 21% excise tax on nonprofit employers for salaries they pay out above $1 million.

Sexual Harassment Settlements. Companies can no longer deduct any settlements, payouts or attorney’s fees related to sexual harassment if the payments are subject to non-disclosure agreements.

Bonus Depreciation. The Bonus depreciation will increase from 50% to 100% for property placed in service after September 27, 2017, and before January 1, 2023, when a 20% phase-down schedule will begin. The previous rule that made bonus depreciation available only for new properties was also removed.

Vehicle Depreciation. The new tax bill raises the cap placed on depreciation write-offs of business-use vehicles. $10,000 for the first year a vehicle is placed in service; $16,000 for the second year; $9,600 for the third year; and $5,760 for each subsequent year until costs are fully recovered. The new limits only apply to vehicles placed in service after December 31, 2017.

 

What’s Staying the Same?

Student Loan Interest. You can still deduct Student Loan Interest – the deduction for this will remain max $2,500.

Medical Expenses. The deduction for medical expense was untouched. Rather, it was expanded by two years. Filers can deduct medical expenses that exceed 7.5% of their adjusted gross income.

Teachers. Teachers will continue to deduct up to $250 to offset what they spend on resources for the classroom.

Electric Car Credit. If you drive a plug-in electric vehicle, you can still claim a credit of up to $7,500.

Home Sellers. Homeowners that sell their house and make a profit can exclude up to $500,000 (or $250,000 for single filers) from capital gains. This still requires that it is their primary home and they have lived there for at least two of the past five years.

Tuition Waivers. Tuition Waivers, typically awarded to teaching and research assistants will remain tax free.

 

What Does All This Mean?

Although doubling the standard deduction will arguably simplify the process of filing taxes for individuals, it’s not true for all cases. There are still deductions and credits to consider. More so, filing for small businesses can potentially become more complicated. Each client scenario will be different and this has to be taken into account. The purpose of this article is to summarize the key provisions, much more detail can be found here. Depending on your situation, it may be beneficial to review your filing status as part of an overall tax planning strategy.

Again, please keep in mind that most of the items are effective January 1, 2018. The professionals in our office can answer questions you may have regarding the individual, estate and corporate tax provisions outlined in the Republican’s tax reform bill, contact your tax professional at Hamilton Tharp with any questions or email us at info@ht2cpa.com.

The IRS recently announced the 2018 cost-of-living adjustments for various retirement plan dollar limits.

The indexed amounts, and other commonly used limits, are listed below:

	2018	2017	2016
IRAs
IRA Contribution Limit	$5,500	$5,500	$5,500
IRA Catch-Up Contributions	1,000	1,000	1,000
IRA AGI Deduction Phase-out Starting at
Joint Return	101,000	99,000	98,000
Single or Head of Household	63,000	62,000	61,000
SEP
SEP Minimum Compensation	600	600	600
SEP Maximum Contribution	55,000	54,000	53,000
SEP Maximum Compensation	275,000	270,000	265,000
SIMPLE Plans
SIMPLE Maximum Contributions	12,500	12,500	12,500
Catch-up Contributions	3,000	3,000	3,000
401(k), 403(b), Profit-Sharing Plans, etc.
Annual Compensation	275,000	270,000	265,000
Elective Deferrals	18,500	18,000	18,000
Catch-up Contributions	6,000	6,000	6,000
Defined Contribution Limits	55,000	54,000	53,000
ESOP Limits	1,105,000 220,000	1,080,000 215,000	1,070,000 210,000
Other
HCE Threshold	120,000	120,000	120,000
Defined Benefit Limits	220,000	215,000	210,000
Key Employee	175,000	175,000	170,000
457 Elective Deferrals	18,500	18,000	18,000
Control Employee (board member or officer)	110,000	105,000	105,000
Control Employee (compensation-based)	220,000	215,000	215,000
Taxable Wage Base	128,400	127,200	118,500

The Internal Revenue Service recently issued the 2018 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

As of January 1, 2018, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

• 54.5 cents per mile for business miles driven, up 1 cent from 2017
• 18 cents per mile driven for medical or moving purposes, up 1 cent from 2017
• 14 cents per mile driven in service of charitable organizations

The mileage rate for service to a charitable organization is not alterable by the IRS. Instead, it must be changed by statute passed by Congress.

It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. For more information, please contact one of our professionals today.

As you know, tax reform is one topic you can’t escape these days. With proposals in both the House and the Senate, we thought it would be helpful to review some of the changes that could affect your business in 2018.

• Section 179 Deduction. For tax years beginning in 2018 through 2022, the House tax reform bill would increase the maximum Section 179 deduction to a whopping $5 million per year, adjusted for inflation. The maximum deduction would start to phase out at $20 million (adjusted for inflation). The Senate would increase the maximum annual Section 179 deduction to $1 million and increase the deduction phase-out threshold to $2.5 million (both numbers would be adjusted annually for inflation).
• Bonus Depreciation. Both the House and Senate tax reform bills would allow unlimited 100% first-year depreciation for qualified assets acquired and placed in service after 9/27/17 and before 1/1/23.
• Tax Rate on Pass-through Income. The House bill would install a maximum 25% federal income tax rate for income from a pass-through entity, subject to certain restrictions. The Senate bill would generally allow an individual taxpayer to deduct 17.4% of business income from a pass-through entity.
• Corporate Tax Rate. The House bill would tax C corporation income at a flat 20% rate for tax years beginning in 2018 and beyond. The rate for personal service corporations would be a flat 25%. The Senate bill would also install a flat 20% corporate rate, but it wouldn’t take effect until tax years beginning in 2019.
• Net Operating Losses (NOLs). Under both the House and Senate tax reform bills, taxpayers could generally use an NOL carryover to offset only 90% of taxable income (versus 100% under current law). Under both bills, NOLs couldn’t be carried back to earlier tax years but could be carried forward indefinitely.
• More Businesses Could Use Cash-method Accounting. The House tax reform bill would 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. The Senate bill would set the threshold at $15 million.
• Limits on Deducting Interest Expense. Under the House tax reform bill, 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). Under the Senate tax reform bill, business interest expense for tax years beginning in 2018 and beyond would be limited to the sum of business interest income plus 30% of adjusted taxable income.
• Deductions and Credits. Both the House and Senate bills would eliminate the domestic production activities deduction and certain tax credits.

Other important changes have been proposed as well.  Please let us know if you have any questions regarding recommendations for the year-end.