The Tax Cuts and Jobs Act became Public Law No. 115-97 on December 23, 2017 when it was signed into law by President Trump. The Act amends the Internal Revenue Code of 1986 and is biggest change to US tax law since the 1986 law was passed. The Act makes substantial changes to tax law for both individual and corporations. Allison & Mosby-Scott has prepared this summary to help our clients understand the changes in the Act that impact our clients. The entire text of the Act can be found online at: https://legiscan.com/US/text/HB1/2017.
First, most of the provisions of the Act are effective January 1, 2018 and therefore will not be effective for tax year 2017. Also, while most provisions of the Act for corporate taxpayers are permanent, the provisions of the Act for individual taxpayers expire at the end of 2025. As such, if Congress doesn’t act to make the provisions permanent or to extend the expiration date, the 2017 law applicable to individuals taxpayers will again be the law commencing in 2026.
Changes with respect to individual taxpayers
- The Act creates new tax brackets and rates as follows:
Single
2017 Law Tax Cuts and Jobs Act
Rate Income bracket Rate Income bracket
10% $0–$9,525 10% $0–$9,525
15% $9,525–$38,700 12% $9,525–$38,700
25% $38,700–$93,700 22% $38,700–$82,50
28% $93,700–$195,450 24% $82,500–$157,500
33% $195,450–$424,950 32% $157,500–$200,000
35% $424,950–$426,700 35% $200,000–$500,000
39.6% $426,700 and up 37% $500,000 and up
Married filing jointly
2017 Law Tax Cuts and Jobs Act
Rate Income bracket Rate Income bracket
10% $0–$19,050 10% $0–$19,050
15% $19,050–$77,400 12% $19,050–$77,400
25% $77,400–$156,150 22% $77,400–$165,000
28% $156,150–$237,950 24% $165,000–$315,000
33% $237,950–$424,950 32% $315,000–$400,000
35% $424,950–$480,050 35% $400,000–$600,000
39.6% $480,050 and up 37% $600,000 and up
- The Act increases the standard deduction. For single filers, it has increased from $6,350 to $12,000. For married filing jointly, it has increased from $12,700 to $24,000. For head of household it increased from $9,550 to $18,000.
- The Act repeals the deduction for personal exemptions. Beginning in 2018 there will be no personal exemptions.
- The Act establishes a 20% deduction for income from pass-through businesses after which a maximum rate of 29.6% applies. The deduction is limited above $157,500 for single filers and $315,000 for married filing jointly. The deduction is also limited for personal service income, such as income from law firms, health providers, accountants and consultants. Previously this income was taxed at an individual’s ordinary income rates.
- The Act increases the child tax credit and establishes a new family tax credit. The child tax credit has been doubled to $2,000 for children under 17, $500 for other dependents. Also, single parents who make up to $200,000, and married couples who make up to $400,000 can now claim the full credit and the credits are phased out over those amounts.
- The Act repeals the overall limitation on itemized deductions.
- The Act limits the mortgage interest deduction to the first $750,000 of mortgage debt (currently $1 million).
- The Act caps the deduction for state and local taxes at $10,000. Previously deduction for state and local taxes was not limited.
- The Act makes out of pocket medical expenses in excess of 7.5% of AGI deductible in 2017 and 2018. In 2019, it reverts to 10% of AGI.
- The Act changes 529 saving accounts. Previously, 529 savings accounts were untaxed and could only be applied towards college expenses. Under the new tax code, up to $10,000 can be distributed annually to cover the cost of sending a child to a public, private or religious elementary or secondary school.
- The Act modifies the Alternative Minimum Tax by increasing the exemption to $70,300 for those filing single, and to $109,400 for those filing married filing jointly. The phase out has also been increased to $500,000 for singles and $1,000,000 for couples.
- The Act makes estates below $11.2M and $22.4M for couples not taxable.
- The Act repeals the deduction for alimony paid beginning January 1, 2019, for divorces effective January 1, 2019 and after.
- The Act repeals the deduction for moving expenses, but there may be exceptions for members of the military.
- The Act repeals the tax preparation deduction.
- The Act modifies casualty deductions. Previously losses caused by fire, storm, shipwreck or theft that insurance did not cover and exceeded 10% of AGI were deductible. Now only losses caused by an official national disaster are deductible.
- The Act eliminates the health insurance individual mandate, effective 2019.
Changes with respect to corporate taxpayers
- The Act reduces the corporate tax rate from a maximum of 35% to 21%.
- The Act repeals the corporate Alternative Minimum Tax.
- The Act allows increased expensing of the costs of certain property. Section 179 expensing is increased to $1,000,000. Bonus depreciation is 100% until 2023 when it starts phasing down 20% per year.
- The Act limits the deductibility of net interest expenses to 30% of the business’s income.
- The Act modifies the taxation of foreign income. The Act implements a modified territorial system with base erosion provisions. The act also imposes a one-time tax on unrepatriated foreign earnings of 15.5% on cash assets and 8% on non-cash assets.
- The Act imposes an excise tax on certain payments from domestic corporations to related foreign corporations.
- The Act imposes a new 21% excise tax on nonprofit employers for salaries they pay out above $1 million.
- The Act disallows deduction on any settlements, payouts or attorney’s fees related to sexual harassment if the payments are subject to non-disclosure agreements.
What didn’t change
- Capital gains tax rates did not change
- Student loan interest is still deductible, with a maximum deduction of $2,500.
- Teachers can continue to deduct up to $250 to offset what they spend on resources for the classroom.
- There is still a credit of up to $7,500 for driving a plug-in electric vehicle.
- Homeowners can still exclude up to $500,000 ($250,000 for single filers) of capital gain on their primary residence.
- Tuition waivers will still remain tax free.
If you have any questions regarding how the Act may impact your business or you personally, please contact the attorneys at Allison & Mosby-Scott at 309-662-5084.
