By Kelly Brennan
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. The Act is the largest overhaul of the Internal Revenue Code in over 30 years, affecting every taxpayer. It includes reductions in the tax rates for both individual and businesses, the elimination or reduction of many deductions, exclusions and credits with the enhancement of other deductions and credits. The corporate tax rates are permanent, whereas the individual rates are set to expire in 2026.
Individual Income Taxes
There remain seven income tax brackets, however they are now at lower rates. The top individual rate will drop from 39.6% to 37%. The income levels in each bracket will be raised each year with inflation.
The Act also doubles the standard deduction but eliminates the personal exemption amounts and most itemized deductions such as unreimbursed business expenses for employees, home-equity loan interest, and tax preparer fees. Taxpayers are now limited to $10,000 in state and local tax deductions. The mortgage interest deduction becomes limited to the first $750,000 of the principal loan balance. The medical expense deduction is enhanced by lowering the threshold for the deduction from 10% to 7.5% of adjusted gross income.
The Act repeals the Obamacare tax on those without health insurance in 2019.
The Act increases the Child Tax Credit from $1,000 to $2,000. For parents who do not earn enough to pay taxes they can claim a credit of up to $1,400. There is also now a $500 credit allowed for each qualified non-child dependent. This credit will help those families caring for elderly parents.
Beginning in 2018, the Act lowers the maximum corporate tax rate from 35% to 21%, the lowest since 1939. Owners of pass-through businesses will be allowed a deduction in an amount equal to 20% of qualified income, subject to limitations and qualifications (which will end in 2025).
Corporations are now limited to deducting interest expense at 30% of their income. Exceptions would exist for small businesses, including an exemption for businesses with average gross receipts of $25 million or less.
Businesses will be allowed to deduct the cost of qualified business assets in one year instead of amortizing them over several years, referred to as 100% “bonus depreciation”. To qualify, assets must be purchased after September 27, 2017 and before January 1, 2023. This does not apply for structures.
The Act eliminates corporate AMT. The Corporate AMT had a 20 percent tax rate that kicked in if tax credits pushed a firm’s effective tax rate below that level. Elimination of the corporate AMT adds $40 billion to the deficit.
The tax plan helps businesses more than individuals. Business tax cuts are permanent, while the individual cuts expire in 2025. Tax rates are lowered for everyone, but they are lowered more for the highest-income taxpayers.
If you have questions regarding the new tax reform, please contact your McClintock & Associates tax advisor to assist you.