Complicated Tax Reform
Julie Strohlein, CPA
Alloy Silverstein Accountants and Advisors
Anyone who believes that the Tax Cuts and Jobs Act of 2017 will simplify our tax code should know that the full title of the law is “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” This complicated name hints at the complexity of the changes. Yes, some people’s tax returns will become simpler. For many others, however, the new rules will require even more convoluted calculations.
No matter how comfortable and familiar we become with the new law, it won’t last too long. Most of the provisions for individuals expire after 2025, which means we will need to apply the new rules for only eight years. After that, we will either get new legislation (which might extend the timeframe of the new law) or revert back to the 2017 rules.
For individuals, the tax rates have been reduced for almost all brackets. There are still seven brackets, but the rates are 1% to 4% lower in most. The size of the brackets varies, and taxpayers won’t hit the highest rate of 37% until taxable income is over $500,000 for a single taxpayer or $600,000 for a married couple.
The standard deduction is doubled to $24,000 for joint filers, $18,000 for heads-of-household, and $12,000 for everyone else. This is good news for taxpayers whose itemized deductions were below these amounts. Even those with deductions above these amounts may be using the standard deduction in 2018, however, because many deductions have been limited or eliminated.
Medical expenses will still be deductible, but only the amount that exceeds 7.5% of adjusted gross income. State and local income taxes and real estate taxes are deductible, but are capped at a total of $10,000. For many New Jersey residents, this cap will be filled up by real estate taxes alone and none of the state income tax will be deductible. Mortgage interest is still deductible, but interest on home equity loans is not. Interest on new mortgages will only be deductible on the first $750,000 of debt. Charitable contributions are still deductible. Most miscellaneous itemized deductions are no longer allowed. These include items like tax preparation fees, unreimbursed employee expenses, investment fees, moving expenses, and home office deductions.
Most education tax breaks and dependent care deductions remain the same. Casualty losses are disallowed unless incurred in a federally declared disaster. No longer will taxpayers be able to deduct other casualty losses such as theft or damage caused by a kitchen fire.
Personal exemptions are no longer allowed, but the child tax credit is increased to $2,000. Many more taxpayers will qualify for this credit since the income phase-out has been increased to $200,000 for single filers and $400,000 for joint filers.
The relatively new taxes created by the Affordable Care Act remain, which are the 0.9% additional Medicare tax on wages above a certain threshold and the 3.8% net investment income tax. Alternative minimum tax survives, but the phase-out threshold is significantly increased, so fewer taxpayers will be subject to it.
For taxpayers who get divorced in 2019 or later, alimony is no longer deductible. The recipient will not report it as taxable income, either. This provision does not apply to agreements finalized in 2018.
The estate tax exemption has doubled to over $11,000,000. Although not repealed entirely, this higher lifetime exemption means that fewer taxpayers will have to pay estate tax upon death.
The corporate income tax rate is now a flat 21%, and this is permanent, meaning it does not sunset after 2025. This only affects C-Corporations. Since many small businesses are organized as partnerships, LLCs, S-Corporations, or sole proprietorships, this tax rate decrease won’t help them. The huge change for these types of pass-through entities is the new 20% deduction. A business owner may end up paying income tax on only 80% of his business’s taxable income. If a taxpayer has taxable income from all sources in excess of $315,000 (for a married taxpayer), there are limits on the business deduction and special calculations need to be performed. Specified service businesses cannot take the deduction at all if the owner’s taxable income is in excess of $415,000 (for a married taxpayer). Service businesses include lawyers, accountants, doctors, and athletes, among others.
Business entertainment is no longer deductible. This means no more deductions for sports tickets, even if you take customers with you to the games. Meals are still 50% deductible for an employee who is traveling for work, or for meals with clients or customers. Meals provided to employees for the convenience of the employer are now only 50% deductible, and won’t be deductible at all after 2025.
There are several business-friendly changes to depreciation. For luxury automobiles, the maximum annual depreciation amount is almost tripled from the old law. Bonus depreciation has been expanded to include used property purchased. For the next five years, 100% bonus depreciation is available. This is more beneficial than Section 179 expensing because you can take bonus depreciation regardless of whether the company has a net loss or net income. The new bonus rules apply to property placed in service after September 27, 2017, so companies can take advantage of this on their 2017 tax returns if they purchased property in the fourth quarter.
This tax reform package includes numerous other provisions and details which could not be included in an article of this length. Every taxpayer should become aware of the implications the law will have on his particular situation. Conversations with your tax advisor are even more important this year than in the past.
Julie Strohlein, CPA
Alloy Silverstein Accountants and Advisors
Julie is a CPA and an Associate Partner at Alloy Silverstein with over 20 years experience in both public and private accounting. She represents varied clientele including the medical, legal, and real estate industries and trusts. Julie received her B.S. in Accounting from Rutgers University. Learn more about Julie and read her latest articles at http://bit.ly/juliecpa