On December 22, 2017, President Trump signed H.R. 1, enacting a sweeping tax reform bill into law. In light of the many changes going into effect on January 1, 2018, taxpayers should consider, with their advisors, one or more of the following actions in the last week of 2017:
Accelerating deductions into 2017, including by paying charitable gifts, real property taxes, and estimated 2017 state and local income taxes before year-end. This is because the tax rate for most taxpayers will be higher in 2017 than in 2018, and because the threshold for claiming itemized deductions (as opposed to the standard deduction) will increase. In addition, for those who will continue to itemize, deductions for property taxes and for state and local income taxes will be capped at $10,000 per year, in the aggregate. Note: On December 27, the IRS announced that it intends to respect deductions for property taxes paid in 2017 only to the extent that they have been assessed by the county prior to year-end.
Deferring income recognition into 2018, because most taxpayers will pay a lower tax rate in 2018. This does not apply to capital gains, for which the tax rate will not change.
Deferring taxable gifts into 2018, because the unified credit will double.
Corporations should consider deferring acquisitions of depreciable property into 2018 or later, because they may be able to deduct the entire expense, rather than depreciating.
Many of the provisions of the new law are summarized below.
Individual and Fiduciary Income Tax
The individual and fiduciary income tax changes are numerous and wide-ranging, including:
The income tax brackets have been somewhat consolidated into seven, with a top marginal rate of 37%, with a threshold of $500,000 for single filers, $600,000 for married couples (whether filing separately or jointly), and $12,500 for estates and trusts.
Many deductions have been adjusted, limited, or repealed, including:
The standard deduction has increased to $12,000 for single filers and estates and trusts, $18,000 for heads of household, and $24,000 for married couples (again, whether filing separately or joint).
Personal exemptions have been repealed.
Real estate taxes and state and local income taxes are deductible only up to $10,000 per year, in the aggregate.
For new home purchases, acquisition mortgage interest is deductible only on debt up to $750,000. Interest on home equity lines of credit is no longer deductible.
Alimony paid under divorce settlements finalized after 12/31/18, or certain settlements modified after that date, will no longer be deductible by the payor, nor includible in the recipient’s income.
Items treated as miscellaneous itemized deductions subject to the 2% floor under the current tax law will no longer be deductible to any extent.
Contributions of cash to public charities are deductible up to 60% of adjusted gross income.
Medical expenses may be deducted to the extent they exceed 7.5% of the taxpayer’s adjusted gross income for tax years 2017 and 2018; after 2018, the threshold reverts to 10%.
The threshold for the alternative minimum tax has increased to $70,300 for individuals and $109,400 for married couples, phasing out at $500,000 and $1,000,000, respectively. The AMT is unchanged for estates and trusts.
The “individual mandate,” or the tax penalty for failure to carry health insurance, is repealed.
The child tax credit has doubled, to $2,000 per child, of which $1,400 is refundable, and phases out when income exceeds $400,000.
Funds from education savings accounts may be used for private elementary and high school tuition and related expenses.
Most of the individual income tax changes will sunset as of 12/31/2025.
Passthrough Income Tax
Taxpayers, including estates and trusts, who or which have domestic “qualified business income” from a passthrough entity or a sole proprietorship may deduct 20% of that income. This deduction is below the line, so it does not affect the taxpayer’s adjusted gross income, but it is not itemized, so it is available to any taxpayer regardless of their other deductions.
The deduction is limited to the greater of 1) 50% of the owner’s proportionate share of the W-2 wages paid by the entity and 2) the sum of 25% of the proportionate share of W-2 wages paid by the entity plus 2.5% of the proportionate share of the unadjusted basis of depreciable property owned and used by the business.
The deduction phases out for owners of specialized service businesses who have taxable income in excess of $157,500 (single) or $315,000 (married), and is fully phased out at $207,500 or $415,000, respectively. Specialized service businesses include health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial services.
This deduction will sunset as of 12/31/2025.
Estate and Gift Tax
The exemption from estate, gift, and GST doubles, and will equal $11.2 million per person in 2018.
The increased exemption amount will sunset as of 12/31/2025, and thereafter, the exemption amount will be $5 million per person in 2011 dollars, adjusted for inflation.
The Treasury Department is instructed to issue regulations concerning “clawback,” so that lifetime gifts which utilize the increased exemption amount should be given due credit in the donor’s eventual estate tax calculation, so that the benefit of the increased exemption is respected. The mechanism remains to be determined, however, so taxpayers should consult with their estate planning advisors.
Corporate Income Tax
The corporate income tax rate is decreased to 21%, from 35%.
The corporate alternative minimum tax is repealed.
Corporations will be able to deduct the cost of depreciable assets acquired in the year the asset was acquired, rather than depreciating them over time. This phases out between 2024 and 2027.
Interest expense deductions for large corporations are limited to 30% of taxable income, before depreciation, amortization, or depletion.
Net operating loss carrybacks are largely repealed, and carryforwards are limited to 80% of taxable income.
Entertainment expenses are no longer deductible (although meals remain deductible at 50% of the amount expended).
Foreign earnings and profits are subject to a one-time tax of 15.5% on liquid property and 8% on other types of property, which the corporation can pay over 8 years. Thereafter, foreign source dividends generally would not be subject to U.S. income tax, so long as the corporation owns at least 10% of the foreign entity.
The changes to the corporate income tax are permanent.
The “chained CPI” is implemented permanently as the measure of inflation for all items in the tax code which are subject to adjustment. This will have the effect of slowing the growth of each such item over time.