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Tax Reform in a Nutshell

December 27, 2017 | By | No Comments

Early December 20th the House passed into law the “Tax Cuts and Jobs Act of 2017.” This was the largest tax bill to be passed into law since the mid-1980’s. Most Americans will be impacted by these changes, for some it will be significant and for others it will be less noticed. Some of these changes will take a while to be put into place, while other alterations could have an immediate effect on your current tax situation. In an effort to help you wrap your head around such a large overhaul, we have created a summary of the highlights, including a shift in the individual tax brackets, adjustments to the standard deduction and child tax credit, as well as a new flat tax-rate for corporations. Here is our summary:

Summary of Changes  
Individuals
ProvisionFormer 2018 Law2018 Enacted Law
Tax BracketsSingle IndividualsSingle Individuals
Taxable Income from: Tax RateTaxable Income from: Tax Rate
$0 to $9,525 10% $0 to $9,525 10%
$9,526 to $38,700 15% $9,526 to $38,700 12%
$38,701 to $93,700 25% $38,701 to $82,500 22%
$93,701 to $195,450 28% $82,501 to $157,500 24%
$195,451 to $424,950 33% $157,501 to $200,000 32%
$424,951 to $426,700 35% $200,001 to $500,000 35%
Over $426,700 39.6% Over $500,000 37%
Married Filing Joint (MFJ)Married Filing Joint (MFJ)
$0 to 19,050 10% $0 to $19,050 10%
$19,051 to $77,400 15% $19,051 to $77,400 12%
$77,401 to $156,150 25% $77,401 to $165,000 22%
$156,151 to $237,950 28% $165,001 to $315,000 24%
$237,951 to $424,950 33% $315,001 to $400,000 32%
$424,951 to $480,050 35% $400,001 to $600,000 35%
Over $480,050 39.6% Over $600,000 37%
Married Filing Separately (MFS)Married Filing Separately (MFS)
$0 to 9,525 10% $0 – 9,525 10%
9,526 to 38,700 15% 9,526 – 38,700 12%
38,701 to 78,075 25% 38,701 – 82,500 22%
78,076 to 118,975 28% 82,501 – 157,500 24%
118,976 to 212,475 33% 157,501 – 200,000 32%
212,476 to 240,025 35% 200,001 – 300,000 35%
Over 240,025 39.6% Over 300,000 37%
Head of Household (HOH)Head of Household (HOH)
$0 to 13,600 10% $0 – 13,600 10%
13,601 to 51,850 15% 13,601 – 51,800 12%
51,851 to 133,850 25% 51,801 – 82,500 22%
133,851 to 216,700 28% 82,501 – 157,500 24%
216,701 to 424,950 33% 157,501 – 200,000 32%
424,951 to 453,350 35% 200,001 – 500,000 35%
Over 453,350 39.6% Over 500,000 37%
Standard DeductionSingle: $6,500Single: $12,000
MFJ: $13,000MFJ: $24,000
MFS: $6,500MFS: $12,000
HOH: $9,550HOH: $18,000
Personal ExemptionExemption Amount: $4,150 subject to phaseoutPersonal exemption deduction is suspended for tax years beginning after 12/31/2017 and before 1/1/2026
Child Tax Credit$1,000 child tax credit, partially refundable. Phaseout beginning at AGI of $75,000 (Single) and $110,000 (MFJ)Increased to $2,000 ($1,400 maximum refundable) with an additional $500 nonrefundable credit also available for dependents other than qualifying children. Phaseout threshold increased to $200,000 (Single) and $400,000 (MFJ)
AlimonyDeductible to the payer and taxable to the recipientNo longer deductible to the payer nor taxable to the recipient (effective for tax years after 12/31/2018)
Itemized DeductionsLimited for taxpayers with Adjusted Gross Income over $266,700 (Single), $320,000 (MFJ), $160,000 (MFS), and $293,350 (HOH)Temporarily removes limit on itemized deductions for tax years beginning after 12/31/2017 and beginning before 1/1/2026.
Mortgage interest deduction threshold limitation is $1,000,000Mortgage interest deduction limitation lowered to $750,000 (for new purchases), but reverts back to $1,000,000 for tax years beginning after 12/31/2025
Home equity interest deduction limitation is $100,000Home equity interest no longer deductible
Taxes paid deduction allowed for state and local income taxes and property taxesTaxes paid deduction now capped at $10,000 for state/local sales, income, or property taxes
Medical expenses deductible in excess of threshold set at 10% of AGI (7.5% of AGI for 65 and older)Medical expense deduction floor lowered to 7.5% of AGI, for tax years 2017 and 2018 (returns to 10% after 2018)
Charitable contribution limit is 50% of AGI for cash contributionsCharitable contribution limit is increased to 60% of AGI for cash contributions
Miscellaneous deductions allowed for certain employee expenses, investment expenses, and tax preparation fees subject to the 2% AGI floorMiscellaneous deductions subject to the 2% AGI floor are suspended
Casualty & theft losses are allowed, with certain limitationsCasualty losses only allowed if a result of federally-declared disaster
Affordable Care Act Individual MandateIn general, imposes a penalty (shared individual responsibility payment), if taxpayer doesn't maintain health insurance coverage, equal to the higher of: $695 or 2.5% of Income Bill reduces penalty to $0 beginning after 12/31/2018, effectively repealing the provision
Individual AMT28% maximum AMT tax rate, with taxable income subject to certain adjustments and preferences where, for example, certain itemized deductions are disallowed. Exemptions:Certain AMT preferences, such as the medical expense deduction floor will follow the lower 7.5% of AGI set for the regular tax. Exemptions Increased to:
Single Taxpayer: $55,400 Single Taxpayer: $70,300
MFJ Taxpayer: $86,200MFJ Taxpayer: $109,400
MFS Taxpayer: $43,100MFS Taxpayer: $54,700
Phaseout begins at AMTI of:Phaseout begins at AMTI of:
Single Taxpayer: $123,100Single Taxpayer: $500,000
MFJ Taxpayer: $164,100MFJ Taxpayer: $1,000,000
MFS Taxpayer: $82,050MFS Taxpayer: $500,000
Estates & Gifts
ProvisionFormer 2018 Law2018 Enacted Law
Estate & Lifetime Gift Tax ExemptionExemption of $5,600,000 with inflation adjustmentsIncreases exemption to $10,000,000 with inflation adjustments for 2018 through 2025. The exemption reverts to the current level after 2025.
Businesses
ProvisionFormer 2018 Law2018 Enacted Law
Corporate Tax RateMultiple tax brackets, with a top tax rate of 35%Reduced to a flat-rate of 21% beginning 1/1/2018. Fiscal year taxpayers will likely be required to compute tax using a blended rate using a pro rata allocation based on days.
Pass-through Entity 20% DeductionDeduction not available in current lawTaxpayers who have "qualified business" income from a partnership, S corporation, or sole proprietorship can deduct 20% of their qualified business income. Deduction limitations apply if the taxpayer has taxable income exceeding $157,500 (Single) or $315,000 (MFJ).
A "qualified business" is generally a business other than a "specified service business."
A "specified service business" generally includes, the performance of services in certain professional fields, and any business in which the principal asset is the reputation or skill of owners or employees. Engineering and Architecture services are excluded.
Taxpayers with income from "specified service businesses" whose taxable income does not exceed $157,500 (Single) or $315,000 (MFJ) can also benefit from this deduction. Special income phaseout rules apply if taxable income is above these amounts.
The deduction applies to tax years beginning after 12/31/2017 and expires after December 31, 2025
Section 179Limit on deduction capped at $500,000, with phaseout threshold beginning at $2,000,000 of expendituresDeduction limit increased to $1,000,000, with phase-out threshold increased to $2,500,000 of expenditures. The availability of this deduction will be expanded for certain purchases for the improvement of nonresidential real property. Effective for property placed in service in tax years beginning after 2017.
Bonus DepreciationCan deduct 50% of cost for qualifying property, with phaseouts to 40% in 2018, 30% in 2019 and 0% thereafterCan deduct 100% of costs of qualifying property through 2022, then phase-out will begin for following 4 tax years
For new property onlyNo longer limited to new property
Applies to property acquired AND placed in service after 9/27/2017
Corporate AMT20% tax rate, with taxable income subject to certain adjustments and preferences where deductions such as depreciation, life insurance proceeds, and municipal bond interest are treated differentlyRepealed for tax years beginning after 12/31/2017
Business Interest DeductionGenerally, allows full deduction of interest paidIn general, limits the business interest deduction to 30% of adjusted taxable income. Adjusted Taxable Income, in general, is the Business's Taxable Income without deductions for interest, tax, depreciation, amortization, NOLs, and the 20% deduction for certain pass-through income for tax years beginning before 1/1/2022. After that, adjusted taxable income is modified to include deductions for depreciation and interest. Small businesses with average gross receipts of $25 million or less are exempt. Floor plan financing loans for car dealer inventory are also exempt.
Net Operating Losses (NOL)In general, the NOL can be carried back for 2 years and carried forward for 20 years to offset taxable incomeRemoves carrybacks and allows NOLs to be carried forward indefinitely. Limited to 80% of taxable income
Cash Accounting MethodEligibility ceiling was capped at $5,000,000 in gross receipts for corporations and partnerships with corporate partnersIncreases eligibility ceiling from $5,000,000 in gross receipts to $25,000,000

This is only a brief overview of the many changes that have been enacted in the new tax law. While this is one of the biggest overhauls in tax law that our country has seen in many decades, we want you to know that we are here to walk with you through the transition. As 2017 comes to a close, please reach out to your Delap tax advisor at (503) 679-4118 for any questions you may have and to discuss potential last-minute planning needs.