The real deal on how Trump’s tax cuts may affect you
The Tax Cuts and Jobs Act (H.R. 1) has been approved by Congress and was signed by President Trump in December 2017.
H.R. 1, as approved by Congress, impacts virtually every individual and business on a level not seen in over 30 years. As with any tax bill, however, there will be “winners” and “losers.”
This historic bill calls for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, enhancing the child tax credit, boosting business expensing, and more.
Here are some of the highlights of what to expect:
One of the biggest changes for individuals is the new income ranges for their respective tax brackets.
H.R. 1 nearly doubles the standard deduction. It increases the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers and $12,000 for all other individuals.
The new law eliminates the deduction for personal exemptions and the personal exemption phase-out through 2025. That repeal, as scored by the Joint Committee on Taxation, will raise $1.22 trillion in revenue over the next 10 years.
* An enhanced child and family tax credit is positioned to make up some of the difference for certain families.
Deductions and Credits
Mortgage interest deduction. The new law limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), in the case of tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026. For acquisition indebtedness incurred before Dec. 15, 2017, the new law allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately).
The new law also allows taxpayers to continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.
State and local taxes
The new law limits annual itemized deductions for all nonbusiness state and local taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayer filing a separate return). Sales taxes may be included as an alternative to claiming state and local income taxes.
The new law temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child. Up to $1,400 of that amount would be refundable. It also raises the adjusted gross income phaseout thresholds, starting at adjusted gross income of $400,000 for joint filers ($200,000 for all others).
The child tax credit is further modified to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children.
The new law retains the student loan interest deduction. It also modifies section 529 plans and ABLE accounts. It does not overhaul the American Opportunity Tax Credit, as proposed in the original House bill. The new law also does not repeal the exclusion for interest on U.S. savings bonds used for higher education, as proposed in the House bill.
The new law repeals the deduction for alimony payments and their inclusion in the income of the recipient.
Download the complete brief for the rest of the tax information re:
- Federal Estate Tax
- Alternative Minimum Tax
- Affordable Care Act
H.R. 1 calls for a 21-percent corporate tax rate beginning in 2018. The new law makes the new rate permanent.
Deductions and Credits
The new law leaves the research and development credit in place, but requires five-year amortization of research and development expenditures. It also creates a temporary credit for employers paying employees who are on family and medical leave.
Currently, up to the end of 2017, owners of partnerships, S corporations, and sole proprietorships – as “pass-through” entities – pay tax at the individual rates, with the highest rate at 39.6 percent. The original House bill proposed a 25 percent tax rate for certain pass-through income after 2017, with a 9 percent rate for certain small businesses.
The original Senate bill generally would have allowed a temporary deduction in an amount equal to 23 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications.
H.R. 1 generally follows the Senate’s approach to the tax treatment of pass-through income, but with some changes, including a reduction in the percentage of the deduction allowable under the provision to 20 percent (not 23 percent), a reduction in the threshold amount above which both the limitation on specified service businesses and the wage limit are phased in, and a modification in the wage limit applicable to taxpayers with taxable income above certain threshold amounts.
The new law contains rules that will prevent pass-through owners — particularly service providers such as accountants, doctors, lawyers, etc. — from converting their compensation income taxed at higher rates into profits taxed at the lower rate.
The original House bill called for repealing many current energy tax incentives, including the credit for plug-in electric vehicles. Other energy tax preferences, such as the residential energy efficient property credit, would have been modified.
The new law retains the credit for plug-in electric vehicles and did not adopt any of the other repeals of or modifications to energy credits from the House bill.
The new law does not modify or repeal the so-called “Johnson Amendment.” This provision generally restricts Code Sec. 501(c)(3) organizations from political campaign activity.
H.R. 1 extends from nine months to two years the period for bringing a civil action for wrongful levy. The new law does not prohibit increases in IRS user fees, as proposed by the original Senate bill.
The new law moves the United States to a territorial system. It creates a dividend-exemption system for taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when the earnings are distributed.
The foreign tax credit rules are modified, as are the Subpart F rules. The look-through rule for related controlled foreign corporations are made permanent, among other changes.
The lower corporate tax rate may also provide an incentive for businesses to not shift operations overseas in the future.
BeachFleischman, one of Arizona’s largest locally-owned CPA firms, provides services that help Phoenix and Tucson Arizona business owners save taxes, preserve wealth, improve accountability, enhance profitability and achieve compliance. If you are interested in learning more about how their team of certified public accountants can help your business, please contact BeachFleischman.com or call Tracy Hughes, CPA at (602) 265-7011.