Overview Of The Tax Cuts And Jobs Act

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Image of desk with notebook, business charts, and calculator - business colleagues are pointing to changes in Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act was passed on December 22, 2017 and brings some of the most substantial changes to the tax code in more than 30 years. Here’s an overview of the changes within the Tax Cuts and Jobs Act, effective January 1, 2018.

Businesses

New tax rate

The income tax rate for C corporations is lowered to a flat 21% from a maximum rate of 35%. In addition, the 80% and 70% dividends received deductions are reduced to 65% and 50%, respectively.

QBI deduction

A 20% deduction is allowed for taxpayers who have certain domestic qualified business income from a partnership, S corporation, or sole proprietorship. Also known as pass-through income, it used to be subject to individual income tax rates and brackets.

Trusts and estates are also eligible for this deduction.

The deduction is limited to either 50% of wage income or 25% of wage income plus 2.5% of the cost of tangible depreciable property for qualifying businesses, whichever is greater. Certain conditions must be met to receive this benefit.

Accounting method changes

The average gross receipts threshold for the cash method of accounting increases to $25 million, regardless of industry or entity type.

Entities with average gross receipts less than $25 million in the previous three years are required to apply for an accounting method change in order to implement the cash method.

Taxpayers with average gross receipts for the previous three tax years are not required to account for certain costs in inventories and are exempt from the UNICAP rules.

Both of these accounting method changes have potential to relieve taxpayers from record-keeping requirements associated with inventories. The IRS requires a filed accounting method in order to implement these changes.

Section 179 deduction

The Section 179 deduction increases to $1 million with the phaseout threshold starting at $2.5 million. These amounts will be indexed for inflation beginning after 2018.

Alternative minimum tax

The alternative minimum tax (AMT) is repealed for corporations only.

Domestic production activities deduction

The domestic production activities deduction is repealed.

Long-term contracts

The average gross receipts exception to the requirement to use the percentage-of-completion accounting method for long-term contracts increases to $25 million for contracts entered into after 2017.

Businesses that meet this exception will be permitted to use the completed-contract method.

 

Individuals

Tax rates

Seven tax brackets remain, but rates are reduced. The new tax code reduces the top rate from 39.6% to 37%, and in some cases, income subject to the new rates is lower.

Tax RateSingleHead Of HouseholdMarried Filing Jointly
10%$0$0$0
12%$9,525$13,600$19,050
22%$38,700$51,800$77,400
24%$82,500$82,500$165,000
32%$157,500$157,500$315,000
35%$200,000$200,000$400,000
37%$500,000$500,000$600,000

The standard deduction increases to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers.

Personal exemption deduction

The personal exemption deduction is eliminated. In 2017, the personal exemption was $4,050.

Child tax credit

The child tax credit doubles to $2,000 per qualifying child – $1,400 of which is refundable.

Alternative minimum tax exemption

The AMT exemption increases to $109,400 for joint filers, $70,300 for individuals, and $54,700 for married filing separately.

Individual mandate

The health insurance mandate penalty lowers to $0, repealing the individual mandate, and is effective January 1, 2019.

Student loan interest deduction

The maximum student loan interest deduction stays at $2,500.

State and local taxes

The itemized deduction for state and local property taxes, and state and local income taxes, is limited to $10,000 for joint filers.

“Pease” limitation

The “Pease” limitation – which decreased available itemized deductions for higher income taxpayers – has been suspended.

Charitable contributions

The adjusted gross income (AGI) limitation on cash charitable contributions has increased to 60%. The 80% deduction for contributions made for university athletic seating rights has been repealed.

Itemized deductions

All miscellaneous itemized deductions subject to the 2% floor are suspended.

 

Trusts & estates

The estate tax unified credit exclusion doubles to $10 million and will adjust for inflation.

The estate and gift generation-skipping transfer exemption increases to $10 million and will adjust for inflation.

 

This outline is meant to provide a broad overview of some key items included in the Tax Cuts and Jobs Act that may impact you and/or your business. There is much more to consider for your 2018 tax strategy and for future planning.

 

Have questions about tax reform? Let’s talk!