Tax Cuts and Jobs Act 2017

Richard B. Dawson, CPA Craig M. Pike, CPA
David E. Smith, CPA Patricia S. Hodgdon, CPA
Eric A. Purvis, CPA/ABV, MST, CVA Jeremy S. Handlon, CPA
Joel H. Bassett, CPA/PFS, CMA, CIA Michael P. Kelly, CPA
Kirk J. Purvis, CPA, CFERyan W. Dawson, CPA
William H. Souter, CPA, MSTJeffery W. Hicklin, CPA
Adam P. Johnson, CPA

December 21, 2017

Dear Clients and Other Friends,

The Tax Cuts and Jobs Act has now been passed by both houses of Congress and is awaiting the President’s signature.  Most of the provisions will take effect as of January 1, 2018, so they will be applicable to tax returns filed in 2019.  Following is a summary of some of the significant changes contained in this sweeping overhaul of the tax code.

INDIVIDUAL TAXPAYERS

1.   Tax Rate Reduction – The current seven tax brackets (10, 15, 25, 28, 33, 35,    and 39.6%) have been reduced and compressed.  In general, it may therefore work well to accelerate deductions into 2017 and defer receipt of income into 2018 where possible.  The new brackets are as follows:

Single Married filing joint
10% $ 0 – 9,525 $ 0 – 19,050
12% $ 9,525 – 38,700 $ 19,050 – 77,400
22% $ 38,700 – 82,500 $ 77,400 – 165,000
24% $ 82,500 – 157,500 $ 165,000 – 315,000
32% $ 157,500 – 200,000 $ 315,000 – 400,000
35% $ 200,000 – 500,000 $ 400,000 – 600,000
37% $ 500,000 + $ 600,000 +

 

2.   Personal Exemptions – The provision for personal exemptions (currently $4,050 per person for taxpayer, spouse, and dependents) has been suspended.

3.   Standard Deduction – The standard deduction has been nearly doubled to $12,000 for singles (currently $6,350) and $24,000 for married filing jointly (currently $12,700).

The higher standard deduction, combined with the new limitations on certain deductions discussed in the next section, will result in many taxpayers receiving a better tax benefit from the standard deduction than from itemizing.  In that situation, you should consider accelerating deductions (such as charitable donations) into 2017, in order to benefit from the itemized deduction.  If you are unsure whether you will take the standard deduction in 2018, we can help with the analysis.

4.   Itemized Deductions – There are many changes to the itemized deductions available to individual taxpayers.

a.   The floor for medical expenses has been reduced to 7.5% of income.  This lower floor is available for the 2017 and 2018 tax years.

b.   The deduction for state and local income, sales, property, and/or excise taxes will be limited to a total of $10,000 beginning in 2018.  The limit is the same for both singles and married taxpayers.

If you are not subject to the Alternative Minimum Tax (AMT), you should ensure that all 2017 state income taxes are paid by December 31, 2017, either via withholdings or estimated tax payments.  In addition, you might consider pre-paying your spring property tax bill, if you have already received the bill from your city or town.  State and local taxes are not deductible in computing the AMT.  Accordingly, these planning steps would not be beneficial for those who are subject to the AMT.  If you are unsure of your status with respect to the AMT, please contact us.

c.   Mortgage interest will be limited to acquisition debt up to $750,000, down from the current $1,000,000.  The deduction will continue to apply to debt related to both a primary and a second residence.  The new limitation is applicable to loans made after December 15, 2017.  No deduction for home equity interest will be allowed.

d.   Most miscellaneous itemized deductions, which were previously subject to a 2% gross income floor, have been suspended.  These include such items as unreimbursed employee business expenses, tax preparation fees, and investment fees.

e.   Cash charitable contributions are currently deductible up to 50% of adjusted gross income.  The new law increases this limitation to 60%.

5.   Child Tax Credit – The child tax credit, currently $1,000 per child, has been increased to $2,000.  The refundable portion is limited to $1,400 per child.  This credit is currently phased out for taxpayers with gross income over $230,000 for married taxpayers, and $115,000 for all others.  The phase-out has been increased to $400,000 for married and $200,000 for all others.  In addition, the new law provides for a non-refundable $500 credit for non-child dependents.

6.   Moving Expenses – The deduction for moving expenses and the exclusion for employer paid moving expenses have been suspended.

7.   Alternative Minimum Tax (AMT) – The AMT exemption amounts have been increased to $70,300 for single taxpayers and $109,400 for married filing jointly taxpayers.  Because of this increase and certain changes to itemized deductions, far fewer taxpayers are expected to be subject to the AMT in 2018.

BUSINESS-RELATED PROVISIONS

1.   Corporate Rate Reduction – The current corporate tax rate, which ranges from 15-35%, has been reduced to a flat 21% rate.

2.   Pass-through Entities – Owners of certain eligible businesses taxed as pass-through entities (partnerships and S-corporations) and sole proprietors may be eligible for a deduction of up to 20% of business income.

3.   Domestic Production Activities Deduction – The 9% deduction for domestic production activities has been repealed

4.   Fixed Asset Expensing – Beginning in 2018, up to $1,000,000 (increased from $500,000 currently) may be expensed under Section 179.  The types of assets eligible for Section 179 expensing has been expanded.

5.   Bonus Depreciation – Bonus depreciation has been set at 50% for the past several years.  This will be increased to 100% for property placed in service after September 27, 2017, although taxpayers have the option of continuing with 50% for the remainder of 2017.  Beginning in 2023, the bonus depreciation percentage is scheduled to be reduced by 20% each year.

6.   Qualified Improvement Property – This new category of property replaces qualified leasehold improvements, such that improvements to owner occupied buildings will now generally be eligible for the shorter 15 year (rather than 39 year) depreciation period.

7.   Interest Expenses – For businesses with gross receipts above $25,000,000, the deduction for interest expense will be limited to 30% of adjusted taxable income.  A corporation can elect to deduct 100% of interest expense if it also uses an alternative depreciation system for fixed asset depreciation.

8.   Net Operating Losses – Beginning in 2018, the deduction for a net operating loss carryover will be limited to 80% of taxable income.  In addition, for losses arising in 2018 or later, the loss may no longer be carried back, but may be carried forward indefinitely.

9.   Like-kind Exchanges – Currently like-kind exchanges are available for all types of like-property and allow for the deferral of gain when exchanging properties.  The new law limits like-kind exchanges to only real estate properties.

10.  Meals and Entertainment – Currently 50% of meals and entertainment expenses are deductible.  The new law eliminates the deduction for entertainment expenses, but continues to allow for a 50% deduction for business-related food and beverage expenses, such as meals while traveling and meals provided to employees for the convenience of the employer.

11.  Transportation Benefits – The legislation disallows the deduction for qualified transportation fringe benefits, including parking.  Under the new rules for 2018, this will be a nondeductible expense.

12.  New Credit for Paid Family and Medical Leave – Employers who provide paid time off for family and medical leave may be eligible for a credit equal to up to 25% of the wages paid.  At least 50% or more of an employee’s normal wage must be paid to be eligible for the credit.

We appreciate the opportunity to serve you and stand ready to address any questions or concerns you may have.

                                                                        Very truly yours,

 

15 Casco Street, Portland, ME 04101-2902
Tel: 207-874-0355 Fax: 207-874-0865
www.dspbcpa.com