On Friday, December 15, the tax reform conference committee report was released, which gave detail on final proposed tax reform agreements. I opened the over 1,000-page document around 3am Saturday morning in hopes of putting me back to sleep, but became more intrigued reading, then my husband got up an hour later to go fishing, and the dog came in…and all hope for sleep was lost.
In my last post, I covered some of the few released details. Below are those, plus a few more of interest. Please note that most of these changes take effect for the 2018 tax year (not this 2017 upcoming filing, except for fixed asset expensing and medical expense deduction)
|Provision||Current Law||Proposed Law|
|Tax Rates||Seven brackets with top rate 39.6%||Seven brackets with top rate 37%, generally lower rates overall|
|Standard Deduction||$6,500 Single, $13,000 MFJ||$12,000 Single, $24,000 MFJ|
|Personal Exemptions||$4,050 per person||None|
|Moving Expense Deduction||Certain job related moving expense deductible||Repealed, except for military personnel|
|Student Loan Interest Deduction||$2,500 max deduction, subject to AGI limitations||Same as current|
|Alimony Payments||Deductible by payor, included in payee income||No longer deductible from or included in income for agreements made or modified after 12/31/18|
|Taxing of Grad Student Waivers||Not taxable||Same as current|
|Mortgage Interest Deduction||Interest on $1M principal loan balance plus $100k equity line cap||$750k principal loan balance cap, no more equity line interest deduction|
|Medical Expense Deduction||10% of AGI threshold||7.5% of AGI threshold for 2017 & 2018|
|State/Property Tax Deduction||Unlimited, except for high income earners||$10k max deduction on choice of property plus sales or income tax. Taxes paid for carrying on a trade or business are still deductible.|
|Charitable Contributions||Limited to 50% of AGI||Limited to 60% of AGI|
|Athletic Club Contributions for Athletic Ticket/Seating Rights||Deductible up to 80%||Not Deductible|
|All other itemized Deductions||Unreimbursed employee expenses, etc.||Repealed|
|Child Tax Credit||$1k credit per child, partially refundable||$2k credit per child, with more refundable and higher income phaseout|
|Alternative Minimum Tax||Exemptions of $54,300 single $84,500 MFJ||Exemptions increased to $70,300 single $109,400 MFJ (less people affected)|
|Individual Healthcare Mandate||If no health insurance, imposes a penalty of the greater of $695 or 2.5% of income||Repealed – no penalty, effective 2019|
|Estate Tax||40% tax on Estate assets over $5.49M single or $11M using a marital advantage||40% tax stays, but exemption amounts double|
|C Corporate Tax Rate||Graduated tax table based on income, top rate of 35%||Flat tax of 21% regardless of income level|
|Alternative Minimum Tax for C Corps||20% on alternate calculation of tax||Repealed|
|Passthrough Taxation||Taxed at owner’s individual rate||Taxed at owner’s individual rate, but now includes a 20% deduction from taxable income|
|Fixed Asset Expensing||50% bonus depreciation available, phased out over the next few years. New items only for bonus depreciation. Section 179 expensing max $500k, phaseout beginning at $2M||100% bonus depreciation through 2022, then phased out. New & Used items qualify, begins 9/27/17. Section 179 max of $1M, with $2.5M beginning phaseout beginning 2018.|
|Business Interest Expense||Full deduction allowed for interest paid.||Interest expense deduction capped at 30% of earnings, with carryforward of unused amounts. Exemption for businesses under $25M receipts.|
|Section 199 DPAD||Deduction for manufacturing type businesses||Repealed|
|Meals & Entertainment||50% Deduction for Business Meals & Entertainment, 100% deduction for onsite meals||No deduction for business entertainment, 50% for onsite meals until 2026 and then no deduction thereafter. 50% business meals remain.|
|Like-kind Exchanges||Allowed for tangible and real property||Allowed only for real property.|
|Cash Method of Accounting||Certain businesses with less than $5M in income may use||Increases to income limit to $25M|
|International Income||Worldwide system of taxation||Territorial system, with other modifications|
|Net Operating Losses (NOLs)||Carryback 2 yrs (5 if farming), Carryforward 20 yrs without limits on taxable income||Carryback zero yrs (2 if farming), Carryforward indefinite years. May only offset up to 80% of taxable income.|
I apologize if the above list seems long! That’s because the bill is the biggest sweeping tax overhaul in 30 years! And there are many other provisions in the proposed bill not listed above, I will try to cover more topics in future posts. In addition, some provisions add more complexity, rather than simplification. For example, the deduction for passthrough businesses:
- 20% deduction for passthrough businesses
- Based on a calculation involving the greater of owner share of 50% of the business’ W-2 wages paid, OR a combination of 25% of their share of W-2 wages plus 2.5% of the unadjusted basis of all “qualified property” (little more complexity to note here).
- Businesses can take this deduction regardless of above calculation, if their personal income is under $157,500 single/ $315,000 MFJ.
- Certain service businesses with income over $157,500 single/ $315,000 MFJ cannot take this deduction.
Also worth noting, the C Corporation rate at 21% means many smaller corporations will have a tax increase going from 15% on first $50,000 to 21%. In addition, most individuals will see a 2018 tax reduction with the help of the proposed lower tax rates and increased standard deduction, however, many of the individual provision changes end in 2025 and “sunset”, meaning reverts to what is today’s current law. Most business provisions are permanent.
Now that the bill has been reconciled, it must be approved in both House and Senate. It is speculated a vote will occur early this week and pass. If legislation passes Congress, the President has indicated he will sign. We will continue to keep you posted, and get more in depth on topics if legislation does pass.