Congress Passes Tax Overhaul for 2018

Congress delivered on its promise to send a sweeping tax reform bill to President Donald Trump by Christmas. Although there was broad agreement between the House of Representatives and Senate going into deliberations, a number of changes were made during the reconciliation process. Nevertheless, it doesn’t change our view that for end-of-2017 planning, you should accelerate deductions and defer income in most cases. Of course, reach out to your wealth manager soon to be certain for your own situation.

Below is a summary of the final Tax Cuts and Jobs Act for individuals and corporations, which awaits the president’s signature.

FOR INDIVIDUALS

Tax rates

Tax Rate*SingleHead of HouseholdMarried Filing Jointly
10%$0-$9,525$0-$13,600$0-$19,050
12%$9,526-$38,700$13,601-$51,800$19,051-$77,400
22%$38,701-$82,500$51,801-$82,500$77,401-$165,000
24%$82,501-$157,500$82,501-$157,500$165,001-$315,000
32%$157,501-$200,000$157,501-$200,000$315,001-$400,000
35%$200,001-$500,000$200,001-$500,000$400,001-$600,000
37%$500,001+$500,001+$600,001+

Adjusted Gross Income (AGI) top rate

Above $500,000 for individuals and $600,000 married filing jointly.*

Affordable Care Act (ACA) individual mandate

Reduces penalty to $0.

Alternative minimum tax

Increases exemption to $70,300 (single) and $109,400 (MFJ) with phase-out at $500,000 (single) and $1 million (MFJ).*

Carried interest

Introduces three-year minimum holding period.

Child and family tax credits

Increases to $2,000 per qualifying child and $500 per non-qualifying child with phase-outs at $200,000 (single) and $400,000 (MFJ).*

Electric vehicle tax credit

No change to current law.

Estate tax

Doubles estate and gift tax exemption to $11 million. Maintains portability for surviving spouse. Retains step-up in basis and 40% tax rate.*

529 plans

Expands to include public, private and religious (K-12) primary and secondary schools, with a $10,000 per student annual limit.

Itemized deductions

  • Alimony
    Payments made no longer deductible and payments received would be taxable for divorces finalized after 2018.
  • Charitable contributions
    Increases cash contributions eligible for deductions to public charities to 60% of AGI.
  • Exclusion of gain from sale
    No change to current law.
  • Home equity interest
    Eliminates (unless used for acquisition indebtedness and subject to mortgage interest limits).*
  • Medical expenses
    Lowers threshold to 7.5% for 2017 and 2018.
  • Miscellaneous deductions
    Eliminates.
  • Mortgage interest
    Interest limited on loans after December 15, 2017, to $750,000 of debt principal. Existing loans grandfathered at $1 million. The limits apply to first and second homes. Refinancing of existing mortgage debt permitted, but only to current principal amount (cash-out portions is ineligible).*
  • State and local income taxes/Property taxes
    Caps deduction for state and local income taxes, sales taxes and property taxes at $10,000 combined. Precludes deduction of 2018 income tax liabilities paid at the end of 2017, but it’s okay to pre-pay 2017 estimated taxes prior to December 31, 2017. Restriction on prepayment only applies to state income taxes and not property taxes.
  • Student loan interest
    Income from discharge of debt due to death or disability no longer taxable. Student loan interest remains deductible.*
  • Pease limitation
    Eliminates.*

Pass-through income

Creates a deduction equal to 20% of qualified business income. The deduction cannot exceed the greater of (1) 50% of W-2 wages paid by the business or (2) 25% of those wages plus 2.5% of unadjusted basis of depreciable property. Personal service-related businesses, except for engineering and architecture, will generally not qualify for the deduction unless the taxpayer’s income is below certain taxable income thresholds ($157,500-$207,500 single, $315,000-$415,000 MFJ). Within those limited ranges, the deduction for the service-related business income will be phased out. The 50% and 25% wage limits are phased in over those same tax taxable income ranges.

Personal exemptions

Repeals.*

Retirement plans

Repeals ability to recharacterize Roth IRA conversions back to traditional IRAs.

Standard deduction

Doubles to $12,000/$24,000 (single/MFJ).*

Tax lot accounting

No change to current law.

CORPORATE

Tax rate

21% effective 2018.

Alternative minimum tax

Repeals.

Cash accounting

Increases eligibility from $5 million to $25 million.

Deferred foreign profits tax

15.5% of untaxed repatriated profits in liquid assets and 8.0% of untaxed repatriated profits in illiquid assets.

Depreciation

100% expensing of capital expenditures excluding utilities (phases out from 2023 to 2027). Qualified property must only be new to taxpayer and not new in general.

Entertainment expenses

Bars any deduction for any activity generally considered entertainment, amusement or recreation.

Interest deductibility

Limited to business interest income plus 30% of adjusted taxable income (ATI). Depreciation and amortization expenses are added back to ATI until 2021. Businesses with average annual gross receipts less than $25 million in prior three years are exempt.

International income

Territorial system (100% exemption).

Like-kind exchanges (1031)

Repeals for non-real estate transactions.

Private activity bonds

No change to current law.

 

Aspiriant’s wealth and investment managers will continue to analyze the tax changes and explain what they may mean for you in future articles. So be sure to check fathom regularly for more information.

*Changes expire at end of 2025.

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