Federal Tax Law Changes Included in the Tax Cuts and Jobs Act
On December 22, 2017 the President signed into law the Tax Cuts and Jobs Act. This bill made many changes for individuals and businesses of which the vast majority of its provisions go into effect beginning in 2018. Most of the individual provisions are effective for the years 2018 – 2025 while most of the business provisions are permanent.
Below are the provisions of the Tax Cuts and Jobs Act. They are presented in the following sections:
ACA Penalty for Individuals not having Health Insurance
The penalty for not having health insurance will no longer be applicable beginning in 2019.
Therefore the penalty will still apply for 2017 and 2018.
Paid preparer due diligence requirement for head of household status
The bill directs the Secretary of the Treasury to promulgate due diligence requirements for paid preparers in determining eligibility for a taxpayer to file as head of household. A penalty of $500 is imposed for each failure to meet these requirements.
The following provisions are in effect from 2018 – 2025
The tax brackets have been reduced from eight to seven as follows: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
The standard deduction will be increased to $12,000 for single individuals, $24,000 for Married Filing Joint and $18,000 for Head of Household.
The exemptions for the taxpayer, spouse and dependents is eliminated.
Child Tax Credit and Family Credit
The child tax credit is increased to $2,000 per qualifying child. Of this amount $1,400 is eligible to be refundable.
The age limit for a qualifying child remains as it has been at under the age of 17.
There will be a $500 nonrefundable credit for children age 17, 18 or are full time students age 19-24 and other qualifying dependents.
The credit begins to phase out at $400,000 for joint filers and $200,000 for other taxpayers.
Also, any child must have a Social Security Number to be eligible for the child tax credit.
The earned income threshold for the refundable tax credit will be $2,500.
The AGI threshold for medical expenses on Schedule A will be 7.5% for 2017 and 2018. After 2018 the AGI threshold will increase to 10%.
There is a limit of $10,000 for the total of State and local income taxes and real estate taxes.
The new law also states that an itemized deduction is not allowed for prepayment of 2018 income tax in 2017 in order to avoid the limitation in 2018.
Only the interest on a home mortgage for an individual’s principal residence will be deductible.
The taxpayer may deduct the interest on up to $750,000 of principal residence acquisition indebtedness for loans incurred beginning on or after December 15, 2017. The limit is $1,000,000 for loans incurred before December 15, 2017.
Home equity loan interest is no longer deductible.
The new law does the following:
Casualty and Theft Losses
An individual may now only claim a personal casualty loss if the loss was incurred in a federally declared disaster area.
Miscellaneous itemized deductions subject to the two-percent floor
All job expenses and other miscellaneous itemized deductions that were subject to the 2% AGI floor are no longer deductible.
Limitation on Itemized Deductions
The overall limitation on itemized deductions for higher income individuals is no longer applicable.
Maximum Tax Rate on Capital Gains and Qualified Dividends
Retains the maximum rates for capital gains and qualified dividends of zero, 15% and 20%.
For 2018 the breakpoints for the 15% rate is $77,200 for joint returns, $51,700 for head of household and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns, $452,400 for head of household and $425,800 for other unmarried individuals.
The following provisions are no longer applicable:
Alternative Minimum Tax
The exemption amount for AMT is increased to $109,400 for married taxpayers filing a joint return and $70,300 for all other taxpayers for 2018.
The phase-out threshold was increased to $1,000,000 for MFJ filers and $500,000 for all other taxpayers.
Tax on unearned income of children
The tax on the unearned income of children (kiddie tax) has been changed by effectively applying the rates applicable to trusts to the net unearned income of a child. Specifically, the amount of taxable income taxed at a 12-percent rate may not exceed the amount of taxable income in excess of the net unearned income of the child
20% Deduction for Certain Pass-Through Income
For tax years 2018 – 2025 an individual may be able to deduct 20% of their domestic qualified business income from a partnership, S Corporation or sole proprietorship.
If an individual’s taxable income is below $157,500 ($315,000 for joint filers), the individual may take a deduction of the lesser of (1)20% of the income from their business or (2) 20% of their taxable income excluding capital gains.
When an individual’s income exceeds $157,500 ($315,000 for joint filers) then the deduction is limited as follows:
A specified service trade or business is a business in the fields of:
Sole proprietorship includes individuals who file Schedule C, E or F.
Limitation on Businesses losses for Individuals
For tax years 2018 – 2025, business losses of a taxpayer other than a corporation are limited for the year the loss occurs. Losses that are not allowed in the year of the loss can be carried forward indefinitely as a net operating loss. Net operating loss carryovers are allowed in subsequent years up to the lesser of the carryover amount or 90% (80% beginning in 2023) of the individual’s taxable income for that year.
A business loss for the taxable year is calculated as the total expenses of the taxpayer’s business over the sum of the gross income of the taxpayer’s business plus $250,000 ($500,000 for joint filers).
The following individual provision is permanent beginning in 2019:
Beginning in 2019, alimony and separate maintenance payments are not deductible by the payor spouse. Also, alimony and separate maintenance payments are no longer included in income of the receiving spouse.
Tax Relief for 2016 Federal Disaster Areas
The following provisions apply to federal disasters in 2016:
Uncompensated personal casualty losses that occurred in a Presidentially declared disaster zone in 2016:
Distributions from Eligible Retirement Plans
A qualified 2016 disaster distribution is a distribution from an eligible retirement plan made on or after January 1, 2016, and before January 1, 2018, to an individual whose principal place of abode at any time during calendar year 2016 was located in a 2016 disaster area and who has sustained an economic loss by reason of the events giving rise to the Presidential disaster declaration. The following apply to these distributions up to $100,000:
Provisions Applicable to Individuals and Corporations
With the exception of the bonus depreciation, all of the following provisions are permanent.
A deduction will no longer be allowed for:
In addition deductions for expenses associated with providing any qualified transportation fringe to employees of the taxpayer are no longer allowed. The only exception is for transportation that is necessary for ensuring the safety of an employee, any expense incurred for providing transportation for commuting between the employee’s residence and place of employment.
Temporary 100% Bonus Depreciation
Allows bonus depreciation for qualifying new or used property purchased in the following timeframe:
The bill includes a transition rule that allows the business to elect to apply the existing 50% bonus rate (instead of the 100% rate) for a taxpayer’s first taxable year ending after September 27, 2017.
This provision maintains the Section 280F increase amount of $8,000 for passenger automobiles placed in service after December 31, 2017.
Depreciation Limits for Luxury Automobiles and Personal Use Property (Listed Property)
The yearly limitations for passenger autos placed in service after December 31, 2017 will be:
Also, removes computer and peripheral equipment from the definition of listed property.
Section 179 Business Asset Expensing
The following changes were made to the Section 179 expensing rules:
Depreciation of Farm Property
Shortens the recovery period from 7 to 5 years for any machinery or equipment (other than grain bin, cotton ginning asset, fence or other land improvement) used in a farming business. For qualifying property placed in service beginning in 2018.
The provision also repeals the required use of the 150-percent declining balance method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property). The 150-percent declining balance method will continue to apply to any 15-year or 20-year property used in the farming business to which the straight line method does not apply, or to property for which the taxpayer elects the use of the 150-percent declining balance method.
Depreciation of Real Property
The new law eliminates the separate definitions of qualified leasehold improvement, qualified restaurant and qualified retail improvement property. It replaced these separate definitions with a qualified improvement property category with a general 15 year MACRS recovery period.
Like-Kind Exchange Rule
The non-recognition of gain in the case of like-kind exchanges now applies only to real property that is not held primarily for sale.
This is effective for all sales of like-kind property that occur after December 31, 2017.
Section 199 Deduction
The deduction for income attributable to domestic production activities was repealed.
This provision is effective for non-corporate taxpayers for taxable years beginning after December 31, 2017.
This provision is effective for C corporations for taxable years beginning after December 31, 2018.
All of following changes are permanent and go into effect beginning on January 1, 2018.
Corporate Tax Rate
Eliminates the graduated corporate rate structure and replaces it with a single rate of 21%.
Corporate Alternative Minimum Tax
The corporate alternative minimum tax is eliminated beginning with taxable years beginning after December 31, 2017.
Limitation on Deduction for Interest
For businesses with average annual gross receipts for the past three taxable years that exceed $25 million a deduction for business interest will now be limited to the sum of business interest income plus 30% of the adjusted taxable income for the taxable year.
The amount of disallowed interest expense may be carried forward indefinitely.
Corporate Net Operating Loss
All net operating losses can be carried forward indefinitely. Net operating losses can no longer be carried back.
The NOL deduction that is carried forward can only be used to offset 80% of taxable income for losses arising after December 31, 2017.
Credit for Paid Family and Medical Leave
New credit that is available for tax years 2018 – 2019.
Eligible employers may claim a credit equal to 12.5% of wages paid to a qualifying employee during any period in which the employee is on family or medical leave if the rate of payment under the program is 50% of the wages normally paid to the employee. The credit is increased by .25 percentage points (limited to a maximum of 25%) for each percentage point by which the rate exceeds 50%. The maximum length of leave that can be taken into account is 12 weeks for any tax year.
Modified the Orphan Drug Credit
Percentage was reduced to 25% of expenses related to clinical testing of drugs for rare diseases of conditions.
Modified the Rehabilitation Credit
Repealed the credit for per-1936 buildings. Retained the 20% credit for certified historic structures. The credit must be claimed over a five year period.
Important Reminders for the Upcoming 2019 Filing Season
November 28, 2018
2018 Changes to Form 8867 (Preparer Due Diligence Checklist)
November 9, 2018
2018 Depreciation Changes
October 18, 2018
2018 Tax Law Changes that are Directly Reported on Form 1040
October 3, 2018
IRS Tax Transcripts Changes
September 27, 2018
Revised 2018 Schedule A due to Tax Cuts and Jobs Act Changes to Itemized Deductions
August 29, 2018