Client Alert: Tax Reform Analysis
December 28, 2017
The Tax Cuts and Jobs Act tax reform legislation recently signed into law significantly changes the landscape for individuals beginning January 1, 2018. While much of the legislation applies only during the ensuing ten year period, with some provisions expiring earlier and others which will not apply until later in that period, the impacts may well continue for many years to come. For many taxpayers, the changes made by the legislation present a host of tax planning challenges and opportunities going forward.
Want to know more about how this law will impact you? Mark your calendars to join us for a tax seminar and economic update on January 31, 2018 in Raleigh. Manning Fulton attorneys will break down what the law means for you and your business. Event details to follow.
Actions to Consider:
Below is a summary of key actions to consider as 2017 comes to a close and a summary of the Act.
- Pay 2017 state and local taxes, and prepray taxes if already assessed, in 2017 so long as such payments do not create adverse Alernative Minimum Tax.
- Consider making lifetime gifts in 2018 using the increased individual gift and estate exemption amount of $11.2 million before this provision sunsets in 2025.
- Consider restricting mortgage debt if needed to avoid exceeding the new mortgage limits, in such a way that any excess debt relates to financing investment or trade and business expenses.
- Consider reorganizing a closely held business (i) to take advantage of the new pass-through entity deductions, or (ii) in certain instances to take advantage of lower corporate tax rates, the 100% capital expensing rules, and deductions unavailable to individuals (such as state and local taxes).
Highlights of Act:
Highlighted below are some of the more significant changes made by the reform legislation and possible challenges and opportunities to lower your tax bill for 2018 and beyond.
Corporate Rates – Corporate tax rate is cut to 21 percent (down from 35% prior rate) starting January 1, 2018. Corporate Alternative Minimum Tax (“AMT”) is eliminated.
Pass Through Taxation – Pass-through entity owners that meet certain conditions are eligible for a 20% deduction on their business income. Pass-through owners who file jointly and earn at least $315,000 in business profits are subject to limitations on the deduction.
Foreign Profits, Repatriation Tax – A one-time tax on accumulated foreign profits (“repatriation tax”) will be at a rate of 15.5% on liquid assets and 8% on illiquid assets (down from 35% rate. The competitive objective of these lower rates is to onshore capital that has been sheltered in foreign tax jurisdictions to spur U.S. capital investment and job creation, and generate a windfall for the U.S. Treasury from the one-time tax. The resulting new “territorial tax system” where future foreign profits generally are not taxed replaces our current “world-wide system”.
Lower Individual Tax Rates — The legislation creates lower individual income tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and lowers the top rate from 39.6% to 37%, respectively. (The current rates would be restored in 2026, i.e., 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, respectively).
Modification of the Alternative Minimum Tax (AMT) - The legislation retains the AMT for individuals but increases the exemption amount to taxpayers with income of $1 million dollars for married couples and phaseout thresholds so fewer people will pay it. The thresholds will be adjusted for inflation.
Increase in the Standard Deduction — Beginning in 2018, the standard deduction increases significantly from $12,700 to $24,000 for joint filers, from $9,350 to $18,000 for heads of households, and from $6,350 to $12,000 for singles.
Elimination of Personal Exemptions —Personal exemptions no longer may be claimed beginning in 2018.
Child and Dependent Credits — From 2018 through 2025, the reform legislation increases the value of the child tax credit to $2,000 per child under 17 from $1,000. As much as $1,400 of the credit will be refundable, thus allowing recipients to benefit even if they don't owe taxes. The legislation also expands eligibility for the credit by increasing the phaseout threshold to $400,000 of adjusted gross income for joint filers (up from $110,000 under current law), with a threshold for all other filers set at $200,000. A $500 nonrefundable credit for dependents other than children will be available through 2025.
$10,000 Cap on State and Local Tax Deduction —The legislation will allow individuals to deduct no more than $10,000 of any combination of the following taxes - state and local income taxes, state and local property taxes, and sales taxes.
Limits on Home Mortgage Interest Deduction — The Act reduces the amount of home mortgage indebtedness on which taxpayers may deduct interest to $750,000 for mortgages incurred after December 15, 2017. (The $1 million limitation remains for older debt.) Interest on your principal residence and a second home are deductible. Importantly, however, beginning in 2018, interest on home equity indebtedness no longer is deductible, regardless of when it was incurred.
Medical Expense Deduction — Individuals may continue to deduct medical expenses in 2018 and 2019 if the expenses exceed 7.5% of adjusted gross income. The threshold returns to 10% of adjusted gross income in 2019.
Elimination of Deduction for Unreimbursed Employee Business Expenses — The Act eliminates the deduction for miscellaneous itemized deductions through 2025. Thus deductions (subject to the 2% floor of adjusted gross income) for costs related to the production or collection of income, such as appraisal fees, investment fees, and safety deposit box rent are now non-deductible, and, importantly, expenses related to employment, such as uniforms, professional society dues, computer used for work, and job-hunting expenses also are non-deductible.
Alimony Deduction — The Act repeals the above-the-line deduction for alimony paid for divorces or separations executed after December 31, 2018. After that date, alimony payments will not be included in the recipient's income and the payments no longer will be deductible by the payor.
Estate and Gift Tax – The lifetime gift and estate tax exemption increases to $11.2 million per individual doubling the current exemption effective January 1, 2018. This amount is adjusted for inflation.
Many of these provisions are set to expire in 2025, and we expect technical corrections and regulations over the next several months. For questions or appointments to review how these tax provisions impact you and your business, contact Manning Fulton at 919-787-8880.
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