2017 Tax Proposals Still in Flux: Tax Cuts and Jobs Act
There has been a buzz throughout the accounting world concerning the new proposed tax laws. I have been scouring the newspapers, speaking to others at conferences and holiday parties and watching the nightly news to see who voted on what and how. What’s a person to do if these changes are implemented?
You can visit the following links to read the analysis’ that appeared in the NY Times and Journal of Accounting:
#1 Prepare to evaluate your tax situation- contact your accountant and/or take a look at your most recent tax returns. You can do this during 2018 as these are prospective tax changes and have not finalized yet.
#2 For estate and tax planning – continue to plan as there will most likely be “sunset” under parliamentary proceedings if a bill either reduces taxes or increases tax revenues. An opposing senator can make an objection. When this happens the changes are limited in years; they will end or “sunset” after 10 years.
#3 Read through the following list of general proposals. It appears that these changes will mean that deductions will be reduced drastically, tax rates will decrease slightly and in general the tax bill will aggressively provide incentives for investment in real estate and businesses.
New Proposals Still in Flux – House (H) Senate (S)
Individuals, Trusts and Estates
#1 Increase the Standard Deduction to $24,400 for married taxpayers, $18,300 for single filers (with a child), and $12,200 for single filers (no child) (H). The house also eliminates the additional standard deduction for taxpayers age 65 or older and/or blind.
Increase the Standard Deduction to $24,000 for married taxpayers, $18,000 for head of household, and $12,000 for single filers (S). The senate retains the additional standard deduction for taxpayers age 65 or older and/or blind.
#2 Capital gains rates will not change significantly so no need to hold off sales for reduced taxes.
#3 Eliminate personal and dependency exemptions in total (H) (S).
#4 There will be 4 tax brackets (H) 12%, 25%, 35%, 39.6%. There will be 7 tax brackets (S) 10%, 12%, 22.5%, 25%, 32.5%, 35%, 38.5%. Trusts and estates are still not favored tax vehicles as they go to a maximum rate of $12,150 (H).
#5 Alternative minimum tax (AMT) will be eliminated (H) or revised with higher exemption amounts AMT (S).
#6 Mortgage interest on loans of up to $500,000 and only for your principle residence (H) or $1,000,000 (S) are for acquisition interest only (& the refinance of acquisition interest).
#7 Real Estate taxes can be deducted up to $10,000 per year.
#8 Charitable deductions will be eligible for up to 60% of adjusted gross income and continue to have a 5 year carryforward.
#9 Sales of principal residence was: eligible exclusion of $250,000 of profit per person if you lived in the house for 2 out of the last 5 years. This is changing to an eligible exclusion of $250,000 of profit per person if you lived in the house for 5 out of the last 8 years, and you could not have used this in the last 5 years (H)(S).
#10 Medical expenses will no longer be deductible (H). They exceed 7.5% of adjusted gross income for 2017 and 2018 (S).
#11 State and local income taxes (W-2 taxes and estimated tax payments) will no longer be deductible.
#12 Casualty losses will no longer be deductible (H) unless they occur in a Federal disaster zone (S).
#13 The only miscellaneous itemized deduction that will remain are gambling losses and they will continue to be allowed to the extent of gambling winnings.
#14 Net Operating Loss (NOL) – unlimited carryforward (you will no longer be able to carryback) and they are limited to offset 90% of income. This will be deducted on the income recognition side as well.
#15 Alimony will no longer be able to be deducted (H) for prospective divorces.
#16 Like kind exchanges (1031) will be eligible for real estate. This will effect the 1031 exchanges for cost segregated properties.
#17 The $250 education deduction remains for educators K-12.
#18 The Estate Tax exclusion is increased to $11,200,000 through 12/31/2023 per person. Then beginning in 2024 the tax is eliminated (H). The Estate Tax exclusion is increased to $11,200,000 per person with a provision to increase with an inflation rate (S). The gift tax system will remain in place.
#19 The step up in basis for inherited assets will remain – code sec 1014 (H).
#20 There will be reduced tax rates for pass through entities (via K-1’s for partnerships & S corps). The house bill takes business income from pass through entities and applies a rate of 25% (oil & gas, real estate). For active business income there is also an election to take a 25% tax rate for 30% of earnings and regular business rates for 70% of those earnings. This does not apply to professional income. This means that professional businesses will endeavor to split off nonprofessional generated income. (ie business income that does not require a license. This would apply to income obtained from speaking engagements). There are also limitations for some types of pass through income: short term capital gains, interest from annuity payments and dividends are excluded.
The senate proposal is extremely complicated, however, follows similar lines.
#21 The moving deduction is eliminated in both bills.
#22 The self-employed health insurance deductions remains.
#23 The Qualified Production Deduction will be eliminated.
#1 Corp tax rates – flat rate of 20% and a higher limit for writing off assets (depreciation see note #11); Effective immediately (H) or beginning in 2019 (S).
#2 Personal service C corps will have a rate of 25% (H). Personal service C corps will have a rate of 20% (S).
#3 Alternative minimum tax (AMT) will be eliminated (H) or revised AMT (S).
#4 Dividend received deduction will change to:
>80% ownership the deduction will remain at a 100% deduction.
>20% <80% ownership deductions will change to 65% (was 70%).
<20% ownership the deduction will be 50% (was 70%).
#5 100% depreciation for equipment purchases through the year 2022 (with revised limitations for automobiles) under code Sec 179. The depreciation upper limits will then be modified to a maximum of: $5 million with a phase out beginning at $20,000,000 (H); $1 million phase out beginning at $2,500,000 (S).
#6 The automatic switch from cash to accrual will now be triggered at $25,000,000 of earnings.
#7 The Qualified Production Deduction will be eliminated (H), except for C corporations (S).
All in all, interesting reading. As we know if/when these tax laws are enacted, they may only last for 3, 7 or 9 more years with sunset!