December 22, 2017
Written by Chetan Dogra, CPA
President Trump signed the tax overhaul bill on Friday, December 22, 2017. Under the new tax laws, there are significant tax breaks and which will require businesses and individuals to reassess their long-term tax strategies beginning with the 2018 tax year as well as consider immediate year-end tax planning strategies for the few remaining days of 2017. Here is the outline of the new tax laws.
Pass-Through Entities Tax
New law: The owners, partners and shareholders of S-corporations, LLCs and partnerships – who pay their share of the business’ taxes through their individual tax returns- can deduct 20% of their income tax free. However, the benefit is temporary and will expire after 2025. The 20% deduction would be prohibited for anyone in a service business including accounting firms, law firms, investment offices, and doctors unless their taxable income is less than $315,000 if married ($157,500 if single).
Current law: Pass-through businesses, which include partnerships, limited liability companies, S corporations and sole proprietorship, pass their income to their owners, who pay tax at their individual rates.
Pain point: Owner or partner salary in a pass-through business would be subject to ordinary income tax rates.
C Corporation Tax
New law: As expected, starting January 1, 2018, C Corporation tax rate will fall from 35% to 21%. The bill would also eliminate the alternative minimum tax on C corporations as well.
Current law: Maximum 35 % tax on C Corporation.
New law: Profits that big corporation are holding overseas would be repatriated at a rate 15.5% on cash assets and 8% on non-cash assets.
Current law: Corporation can defer taxes on those foreign earnings until they bring them back to the U.S.
New law: Beginning in 2019, Americans would no longer be required by law to buy health insurance or pay a penalty if they don’t buy it.
Current law: An individual who fails to buy health insurance must pay penalties of $695 (higher for families) or 2.5 percent of their household income – whichever is higher, but capped at the national average cost.
Individual Income Tax
New law: The final bill will keep the current seven tax brackets for individual income taxes, but the rates for each will be lower. The final rates will be 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Current law: Seven tax brackets, starting at 10 percent and reaching 39.6 percent for incomes above $418,401 for singles and $470,701 for married, joint filers.
Standard Deduction and Personal Exemptions
New law: For single filers, the bill increases the standard deduction to $12,000 and married couples filing jointly it increases to $24,000. The final bill has eliminated personal exemption for yourself, your spouse and each of your dependents.
Current law: $6,350 standard deduction for single taxpayers and $12,700 for married couples, filing jointly. Also, personal exemptions of $4,050 is allowed for each family member.
Medical Expense Deduction
Current law: Qualified medical expenses that exceed 10 percent of the taxpayer’s adjusted gross income are deductible.
New law: Qualified medical expenses that exceed 7.5% percent of the taxpayer’s adjusted gross income are deductible for 2017 and 2018.
Individual State and Local Tax Deductions
New law: Individuals can deduct no more than $10,000 worth of the deductions, which could include a combination of property taxes and either sales or income taxes. The move is widely viewed as a hammer to states such as New York, New Jersey and California.
Current law: Individuals can deduct the state and local taxes they pay, but the value is subject to certain limits for high earners.
Comment: Two days back, I was excited with the news that the final bill will preserve the state and local income tax deduction. However, I had no clue that GOP would combine all state taxes deductions.
Mortgage Interest Deduction
New law: If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change. The bill would no longer allow a deduction for the interest on home equity loans. Currently that’s allowed on loans up to $100,000.
Current law: Deductible mortgage interest is capped at loans of $1 million. In addition, interest on home equity loans can be deducted on loans up to $100,000.
Child Tax Credit
New law: The child tax credit would be doubled to $2,000 for children under 17. It also would be made available to high earners who are making up to $400,000 for married couples ($200,000 single parents).
Current law: A $1,000 credit for each child under 17. The credit begins phasing out for couples earning more than $110,000.
New law: You can inherit up to $22 million tax-free. The estate tax would remain part of the U.S. tax code, but far fewer families will pay it. Now first $11 million ($22 million for married couples) that people inherit in property, stocks and other assets won’t be taxed.
Current law: You pay 40 percent tax on estates worth more than $5.49 million for individuals and $10.98 million for couples.
What’s not going away?
The new law keeps in place the student loan deduction and and the graduate student tuition waivers.
Retirement accounts such as 401(k) plans stay the same. No changes to the tax-free amounts people are allowed to put into 401(k)s, IRAs and Roth IRAs.
Fewer families will have to pay the individual AMT. The House wanted to eliminate the AMT entirely, but in the end, the final GOP tax plan increases the threshold levels to $70,300 for singles and to $109,400 for married couples.
We can assist you in identifying and maximizing the potential tax savings. Please call our office to arrange an appointment.
Share This Article With Your Friends:
Disclaimer of Liability:
Our firm, DOGRA CPA LLC, provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for
consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.