The Tax Cuts and Jobs Act, as agreed to by the Joint Conference Committee and approved by Congress, has been signed by the President. Most provisions of the new law go into effect on January 1, 2018. All of the tax law changes applicable to individuals, including the new 20% pass-through deduction, generally expire or sunset after 2025.
Changes/Reductions in Income Tax Rates
- A top individual rate of 37%.
- A corporate tax flat rate of 21%.
- Income subject to the “kiddie tax” is now taxed at the (higher) marginal rate applicable to trusts.
- The corporate alternative minimum tax (AMT) is repealed.
- The individual AMT remains, but the exemption amount is increased.
The bill provides no reduction in capital gains or qualified dividend rates (which remain at 20% for most assets and taxpayers), and no repeal of the 3.8% net investment income tax (NIIT).
- The FIFO requirement previously in the Senate bill did not make it into the final legislation.
Changes/Elimination of Certain Deductions, Exemptions and Tax Credits for Individuals and Trusts
- The standard deduction is nearly doubled, and personal exemptions are “suspended.”
- The child tax credit increases to $2,000, with up to $1,400 refundable.
- Miscellaneous itemized deductions that are subject to the 2% floor are eliminated for individuals and for trusts.
- Deductions for expenses incurred in connection with the administration of a trust which would not have been incurred if the property were not held in trust (such as trustee commissions not allocable to investment management, attorneys’ fees, and accounting fees) remain intact.
- Deductions for non-business state and local income and property taxes are capped for individual taxpayers at $10,000 per year. Sales taxes may still be deducted in lieu of state and local income taxes.
- Taxpayers are expressly prohibited from prepaying state and local income taxes for years after 2017 before year-end, in an attempt to take advantage of the higher deduction available in 2017 before the new law goes into effect.
- The mortgage interest deduction is limited to $750,000 of acquisition indebtedness for loans incurred on or after December 15, 2017. The deduction for interest on home equity indebtedness is generally eliminated, to the extent the loan proceeds are not used to make improvements to the home.
- Various other itemized deductions that the original House bill would have eliminated remain in effect under the final bill, including the medical expense deduction, the student loan interest deduction, and the deduction for educators’ classroom expenses.
- The threshold for deducting medical expenses has been lowered from 10% to 7.5% of adjusted gross income (AGI) for years 2017 and 2018.
- The deduction (for the payor) and inclusion in income (for the payee) of alimony payments has been repealed for divorce and property settlement agreements executed after December 31, 2018.
Other Important Items of Note for Business Owners
- A 20% pass-through deduction will be allowable for qualified business/non-wage income of businesses operated as S corporations, partnerships, LLCs and sole proprietorships, including a last minute tweak that makes the deduction more beneficial for real estate investors. This deduction will also be available for trusts that own businesses. The deduction is limited/eliminated for owners of specified service businesses with taxable incomes above certain threshold amounts ($157,500 for single taxpayers, $315,000 for married filing jointly taxpayers).
- The deduction for business expenses related to “an activity generally considered to be entertainment, amusement, or recreation” is eliminated.
- The tax incentive for private employers that subsidize their employees’ transit, parking and commuting expenses has been eliminated, except for bicycle expenses.
Changes in the Estate, Gift and GST Tax Laws
- The estate/gift/generation-skipping transfer (GST) tax exemption doubles to $10MM (as indexed annually for inflation). As stated above, this change sunsets after 2025.
- The stepped-up basis as of the date of death for property acquired from a decedent remains in tact.
Other Notable Changes
- The ability to recharacterize Roth IRA conversions back to traditional IRAs has been eliminated for Roth conversions made after 12/31/17.
- 529 Plan funds can now be used tax-free for public and private elementary and secondary school expenses, up to $10,000 per student per year.
- Up to $15,000 per year can be rolled over from a 529 Plan account to an ABLE account for a disabled individual, provided the ABLE account is for the same beneficiary or for a member of the same family as the 529 Plan account holder.
Click here for the Conference Committee’s summary of highlights of the final bill, and here for the Joint Explanatory Statement Summary. CCH/Wolters Kluwer and financial planning expert Michael Kitces have also prepared helpful summaries.
Stay tuned for more details and analysis to come, as we continue to digest the text of the final legislation. We will also continue to post updates on our Facebook and LinkedIn pages. Don’t Worry, We’ve Got This!