Congress passed the Tax Cuts and Jobs Act (TCJA) on Wednesday, December 20, 2017, with enactment appearing imminent after it hits President Trump’s desk for signoff. Once signed, it will be the most sweeping tax legislation since 1986.
The bill generally lowers income tax rates for individual taxpayers, significantly reduces the income tax rate for corporations, and eliminates the corporate alternative minimum tax (AMT). It also provides a large new tax deduction for most owners of pass-through entities and significantly increases individual AMT and estate tax exemptions. And it makes major changes related to the taxation of foreign income.
It’s not all good news for taxpayers, however. The TCJA also eliminates or limits many tax breaks, and much of the tax relief is only temporary.
Following is a quick rundown of some of the key changes affecting business and individual taxpayers. These changes are effective for tax years beginning after December 31, 2017, except where noted.
Key Changes for Businesses
- Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
- Repeal of the 20% corporate AMT
- New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, LLCs, and S corporations) and sole proprietorships—through 2025 (generally, no deduction is available for those owners in a specified service trade or business)
- Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets—effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
- Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
- New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (businesses with average annual gross receipts of $25 million or less are exempted from the limit)
- Expansion of the availability of simplified methods, such as the cash method and exemption from inventory and long-term contract methods, for taxpayers with gross receipts of less than $25 million
- New 80% limit on net operating loss deductions for losses generated in tax years beginning after December 31, 2017
- Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction—repealed for tax years beginning after December 31, 2017, for all taxpayers
- New rule limiting like-kind exchanges to real property that isn’t held primarily for sale
- New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation for amounts paid or incurred after December 31, 2017
- New tax credit for employer-paid family and medical leave—through 2019
- New limitations on excessive employee compensation
Key Changes for Individuals
- Drops of individual income tax rates generally ranging from zero to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35%, and 37% for married taxpayers; some single taxpayers will see a rate increase—through 2025
- Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and separate filers)—through 2025
- Elimination of personal exemptions—through 2025
- Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit—through 2025
- New $10,000 limit on deduction for state and local taxes on a combined basis for property and income (or sales) taxes ($5,000 for married taxpayers filing separately)—through 2025
- Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes—for 2017 and 2018
- Reduction to the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for married taxpayers filing separately)—through 2025
- Elimination of the deduction for interest on home equity debt—through 2025
- Elimination of personal casualty and theft loss deduction (with an exception for federally declared disasters)—through 2025
- Elimination of miscellaneous itemized deductions subject to the 2% floor, such as certain investment expenses, professional fees (including tax return preparation fees), and unreimbursed employee business expenses—through 2025
- Elimination of the AGI-based reduction of certain itemized deductions—through 2025
- Elimination of moving expense deduction with an exception for members of the military in certain circumstances—through 2025
- Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary or secondary expenses, up to a $10,000 per student per tax year
- Elimination of the penalty associated with the individual mandate under the Affordable Care Act required of taxpayers not covered by a qualifying health plan—effective for months beginning after December 31, 2018
- AMT exemption increase to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers—through 2025
- Doubling of the gift and estate tax exemptions to $10 million (expected to be $11.2 million for 2018 with inflation indexing)—through 2025
Next Steps: Year-End Opportunities
While there are additional rules and limits that apply to TCJA provisions, you may have some last-minute year-end 2017 tax-savings opportunities. However, quick action before January 1, 2018, will be needed.
We’re Here to Help
We’ll continue to send you more information about the specific provisions in the legislation and how they impact you or your business. In the meantime, if you’d like to learn more about how these and other tax law changes will affect you in 2018 and beyond, please contact your Moss Adams professional.