2017 Tax Reform Summary of Major Provisions
1. The Act has seven tax brackets (ranging from 10% to 37%): 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
2. The 37% bracket would begin at: $600,000 for joint returns/surviving spouses (39.6% rate starts at $470,700 for 2017)
3. The 37% bracket would begin at: $500,000 for single and head of household (39.6% rate starts at $418,400 for 2017 for a single and $444,500 for head of household)
Observation: for 2017 $600,000 of taxable income for a joint filer/surviving spouse creates a federal income tax liability of $182,830. For 2018 $600,000 of taxable income for a joint filer/surviving spouse creates a federal income tax liability of $161,379. That is a tax savings in 2018 compared to 2017 of $21,451.
Caveat: The above comparison does not take into account the possible lost deductions for 2018 that may cause the 2018 taxable income of a joint filer/surviving spouse to have higher taxable income in 2018 compared to 2017 using the same facts.
Itemized Deduction Changes
1. The Act repeals the deduction for interest on home equity indebtedness.
2. The deduction for mortgage interest is limited to mortgage debt of up to $750,000 except that for acquisition indebtedness incurred before Dec. 15, 2017, the current limitation of $1,000,000 stays in place.
3. The Act would limit the deduction for State and local income, sales taxes, and property taxes to $10,000.
4. For any divorce or separation agreement executed after Dec. 31, 2018, alimony and separate maintenance payments are not deductible by the payor spouse, and are not included in the income of the payee spouse.
5. The Act repeals the overall limitation on itemized deductions.
6. Repealed deductions § All miscellaneous itemized deductions, that are subject to the 2% floor under current law § Personal casualty losses, except for personal casualty loss incurred in a Presidentially-declared disaster § Moving expenses
7. Modified rules for charitable contributions § – The act will increase the 50% limitation for cash contributions to public charities and certain private foundations to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward for up to 5 years. § – Repeals the current 80% deduction for contributions made for university athletic seating rights.
These itemized deduction changes will negatively impact many high income individuals who have large mortgage balances, pay large amounts of real estate taxes and state and county income taxes. Therefore, any of the above deductions repealed in 2018 should be paid, if possible, before the end of 2017.
Deduction from Certain Pass-Through Income
1. An individual taxpayer may deduct 20% of domestic qualified business income from a partnership, S Corporation, or sole proprietorship.
2. Qualified services businesses such as health, law and accounting are not allowed to utilize this provision unless under the threshold amount referenced below. Architectural and Engineering firms are allowed to utilize the provision regardless of threshold amount.
3. The amount of the deduction is limited to 50% of the W-2 wages of the taxpayer, or the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property” unless the taxable income of the affected individual is under the threshold limit referenced below. If under the threshold amount, then 20% deduction is allowed regardless of wages of the taxpayer.
4. The threshold amount for both the limitation on specified service business and the wage limit is $315,000 for married filing jointly and $157,500 for single. The total phase out would be $415,000 for married filing jointly, and $207,500 for single.
5. The 20% deduction is not allowed in computing adjusted gross income, but is instead allowed as a deduction for reducing taxable income, and is available to both itemizers and non-itemizers.
Unfortunately, most professional service corporations (PSCs) will not qualify except for architects and engineers. Some owners of PSCs that operate in a flow thru entity such as an S-Corporation, LLC, or partnership may qualify if such owner’s income is under the threshold amounts referenced above.
Real estate trade or business activities may qualify for this 20% deduction. If a flow thru entity, the owner must be deemed a material participant in the activity. A passive activity will not qualify for such deduction. If the real estate activity qualifies, the 20% deduction could very well be obtained even if over the threshold amounts due to the rule regarding the allowance of the deduction up to 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.” Qualifying property would include real estate in a real estate business which typically has a high cost and long depreciation life which makes the 20% deduction almost a sure thing for such taxpayers.
Estate & Generation-Skipping Transfer Tax changes
1. The Act would double the base exclusion amount under Code Sec. 2010 of $5 million (as indexed for inflation; $5.6 million for 2018 per taxpayer) to $11.2 million indexed for inflation, $22.4 million per married couple, effective for tax years beginning after Dec. 31, 2017.
All of the above provisions are a welcome change for very wealthy taxpayers who want to pass on their family wealth to kids and grandkids. The change effectively allows a husband and wife to pass on $22.4 million of assets to their beneficiaries without federal estate tax ramifications.
Alternative Minimum Tax changes
1. The Act would NOT repeal the AMT, however, the exemption amounts have increased.
2. AMT exemption amounts are as follows: § Joint returns and surviving spouses: $109,400 § Single Taxpayers: $70,300 § Married Filing Separately: $54,700
The final bill does not repeal the AMT, which differs from the House and the Senate’s original proposal. The exemption amounts referenced above start phasing out at $1,000,000 of alternative taxable income for joint returns and surviving spouses; $500,000 for other taxpayers. These phase-out levels started at much lower income amounts in the past. In addition, the elimination of most of the state and local income tax deductions and the complete elimination of miscellaneous itemized deductions will mean less addbacks for AMT making the likelihood of a taxpayer paying AMT in 2018 very unlikely.
Depreciation/Section 179 Expensing
1. Under the Act, instead of bonus depreciation for qualified property, taxpayers will be able to fully and immediately expense 100% of the cost of qualified property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. It is allowed for new and used property which was not the case prior to the Act.
2. A transition rule would provide that, for a taxpayer’s first tax year ending after Sept. 27, 2017, the taxpayer may elect to apply a 50% allowance.
This provision will allow businesses to expense practically all of its Fixed Asset additions. Also, since the provision is effective for assets placed in service after September 27, 2017, this provision will apply favorably to taxpayers with December 31, 2017 year-ends.
3. Under the Act, for purposes of Code Sec. 179 small business expensing, the limitation on the amount that can be expensed will be increased to $1 million (from the current $500,000), and the phase-out amount will be increased to $2.5 million (from the current $2 million), effective for tax years beginning after 2017.
4. Both amounts will be indexed for inflation. The definition of section 179 property will also include qualified energy efficient heating and air-conditioning, fire protection and alarm systems; and security systems.
This provision should allow most businesses that are not able to expense their fixed assets per the rule above to expense such property under this 179 provision. These expensing provisions provide great tax benefit in the year of acquisition. The only issue of concern for taxpayers is that in future years, if taxpayer cuts back on its Fixed Asset additions, then a significant tax liability could result given no depreciation to take since all Fixed Asset additions have been previously expensed in year of acquisition.
NOL Deduction Limited
Under the Act, taxpayers will be able to deduct a net operating loss (NOL) carryover only to the extent of 80% of the taxpayer’s taxable income (determined without regard to the NOL deduction). The Act generally repeals all carrybacks, but provides a special two-year carryback for small businesses and farms in the case of certain casualty and disaster
losses. This provision generally will be effective for losses arising in tax years beginning after 2017. Carryovers to other years would be adjusted to take account of the NOL deduction limitation and would be able to be carried forward indefinitely.
The bad news is that a net operating loss carryforward under the new law would be limited to 80% of regular taxable income causing some tax to be paid by a business or its owners. Plus, no carryback to earlier profitable years to get a quick refund.
Entertainment and Other Expenses
1. Under the Act, no deduction will be allowed for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes. In addition, no deduction will be allowed for transportation fringe benefits, benefits in the form of on-premises gyms and other athletic facilities, or for amenities provided to an employee that are primarily personal in nature and that involve property or services not directly related to the employer’s trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee).
2. The 50% limitation under current law also will apply only to expenses for food or beverages and to qualifying business meals under the Act provision, with no deduction allowed for other entertainment expenses.
3. Effective date. The provision would be effective for amounts paid or incurred after 2017.
This provision basically takes away any deduction related to non-food or non-beverage activities of a taxpayer. For many businesses, this could be a significant tax cost as sporting event tickets, arts and cultural events, etc., would no longer be deductible under the 50% rule. If there is a renewal opportunity for such events before the end of the year, such amounts should be paid before the end of 2017 to have an argument that the deduction still applies for 2017 under the 50% rule even if some of the events paid for occur in 2018. In 2018 and beyond, amounts business spend in the community may need to be more in the form of sponsorships for name recognition that is considered advertising which is 100% deductible versus entertainment or amusement. The complicated aspect of such an argument is how is the deduction determined for such sponsorships if tickets/seats to the events are included as part of the sponsorship.
2017 Tax Reform Summary of Major Provisions
2017 Tax Reform Summary of Major Provisions