10/8/2018. First major tax reform since Signed into law by President Donald Trump on December 22, 2017.

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1 First major tax reform since Signed into law by President Donald Trump on December 22,

2 Introduction n Changes n Personal side: set to expire 12/31/2025 n Business side: mostly permanent n Guidance from IRS n Doing all they can, as fast as they can n Be careful until we get more guidelines n Still in process n Many items still needing regulations n Will be a really interesting tax year! Individual Tax Rates 10% % 15% % % % % % 39.6%

3 Standard Deductions & Personal Exemptions S & MFS $6,350 MFJ $12,700 HH * $9,350 NOTE: 2017 $4,050 exemption with phase-outs eliminated in * Filing Head of Household requires completing another form to verify eligibility. Failure to do so costs YOU (the tax preparer only) $500 per offense! Child & Family Tax Credit Child Tax Credit now $2,000 with up to $1,400 refundable Same rules as 2017 for children under 17 years of age Family Dependent Credit now $500 NOTE: Phase-out starts at $400,000 MFJ $200,000 all others 3

4 Kiddie Tax Passive income Tax rate* < $2,550 10% $2,550 - $9,150 35% $9,151 - $12,500 37% > $12,500 39% *Same as Estates and Trusts What ways can $$$ be passed on to heirs without being taxed? Capital Gains Rates remain the same: 0, 15, and 20% Based on income, not tax bracket. Adjusted yearly (C-CPI-U). Breakpoint for 15%: $77,200 MFJ $51,700 HH $38,600 S & MFS Breakpoint for 20%: $479,000 MFJ (1/2 MFS) $452,400 HH $425,800 S Breakpoints for Estates & Trusts: 15% $2,600 20% $12,700 4

5 Schedule A, changes Total S.A.L.T. allowed: $10,000 Be sure to pick what s best for TP; need to keep NIIT in mind Mortgage interest on new mortgages after 12/15/17 limited to $750K Equity debt interest not deductible Must trace mortgage if used for other purposes. Refinancing existing debt okay only if ACI is refianced. Schedule A, continued Charitable contributions up to 60% of AGI. Medical >7% of AGI (effective 2017). Casualty losses not deductible unless a federally declared disaster. No more misc. itemized deductions subject to the 2% haircut: Employee business expenses Hobby expenses Fees from brokers, attorneys and tax preparers! 5

6 Alimony For agreements entered into (or modified) after 12/31/2018 alimony is no longer deductible for the payer, nor included in the income of the recipient. Moving Expenses expenses No longer deductible for employees! (They went the way of employee business expenses.) Nor can employers deduct as reimbursements (To be fair, Congress also lost their $3,000 annual living expense.) 6

7 AMT With S.A.L.T. deductions limited, and 2% misc. deductions gone, we are seeing less of the AMT. But it is still with us. Current exemptions: $109,400 MFJ $54,700 All others Phase-outs (much higher): $1million MFJ $500K All others New Goodies Estate & gift tax exemption doubled to $10 million Healthcare mandate eliminated No more ACA individual penalties after Plan for Education Can use up to $10K/year for K-12 Can roll over to an ABLE account Federal (COD) student loan interest Canceled in cases of death or disability 7

8 NOLs Lots of exciting changes: too much to go into in this session. No more elections; must carry forward (like a gift card of tax deductions). Applies to individuals and corporations. Limited to 80% of AGI in carryover year. Unlimited carryover years until fully used. NEW: Excess business losses limited to $500K MFJ $250K All others Retirement Can no longer reverse an ROTH to an IRA after conversion. (Once created, it s permanent.) NEW: Loan offset can roll into an IRA up to the due date of the return, including extensions. 8

9 Section 199 A (Qualified Business Income Deduction) This is a class in itself. What follows is a brief overview of what we know so far without specific IRS guidance: Eligible taxpayers are individuals, partners, S-Corp shareholders, trusts and estates. Not all businesses qualify. (See specified service businesses.) In general, the deduction is 20% of all TP s qualifying business income. Wages earned are not considered business income. Rentals appear to qualify but caution must materially participate. 199A Threshold Income of less than $315,000 MFJ (or $157,500 all others) (end of the 24% marginal tax bracket) No phase-out Over $415,000 MFJ (or $207,500 for all others) no deduction if specified trade or business If not in such business may still be able to get benefit 9

10 If over the threshold, the following businesses Specified Service Businesses will not qualify: Law Health Actuarial Consulting Athletics or performing arts Financial and broker services Accounting including tax preparers Also any business where the principle asset is the skill or reputation of one or more employees 199A Qualified Business Income (QBI) QBI must be from domestic sources, and be calculated independently for each trade or business although grouping may be done. 10

11 W-2 wage limitation on deduction * Whichever is greater: 50% of wages paid, or The sum of 25% of wages paid + 2.5% of the unadjusted basis of the business assets Look for this information on your K-1s and put it on the K-1s you are preparing. * Phased in if over the threshold Corporations Flat tax = 21% No distinction for PSCs; all corporations pay the same rate. Reduction in the dividends-received deduction: From 80% down to 20% From 70% down to 50% No more corporate AMT. Credits become refundable. Entire current tax + 50% of remaining AMT credit Continue taking the 50% as a refundable credit until used up 11

12 Depreciation Bonus depreciation is now (Will phase out starting in 100%! 2022.) Qualifying property includes: Connected with lodging Used and/or placed in service or later Section 179 Increased to $1million with phase-out starting at $2.5million to be adjusted annually for inflation Qualified Real Property Now Qualified Restaurant, Qualified Retail, and Qualified Leasehold Improvement Property are all defined as Qualified Real Property. Due to a mistake on Congress writing, these properties are not considered 15-year, so they are not eligible for bonus depreciation. NOTE: This will need a legislative correction, as the IRS cannot provide such regulations. Still eligible for Section

13 Listed property Congress finally realized luxury cars are not Corollas, and has increased the amount we can deduct for 100% biz use: * (My attorney s Tesla) * *NOTE: Computers and peripheral equipment are no longer on the list. Meals & Entertainment No more entertainment expenses allowed. (Yes, this includes football games as well as the symphony.) No more meals at entertainment venues either. (per recently released guidance meals are OK unless part of the price of admission ) Business and travel meals still 50% deductible. Employer-provided de minimus meals now 50% deductible (down from 100%); (Will no longer be deductible after 12/31/25.) 13

14 Other Deductions Employee service awards must be tangible property; no gift cards allowed. (Make mine the white convertible.) No more deduction for Domestic activities production Local lobbying expenses Sexual harassment expenses if nondisclosure agreement exists No more amortization of research and experimental expenses 5 years domestic 15 years offshore (Starts midyear of year placed in service.) Like Kind Exchanges Only real property is allowed. Cost segregation studies may be an issue. Car and equipment trade-ins will now have to recognize gain. 14

15 Self-Created Property Patents, inventions, model or design, and secret formulas are no longer capital assets. Gains or losses are now ordinary income or loss. If created by owner, the same applies to those who obtain it from creator. Credits Modifications to Rehabilitation Credit (See code section 47.) Orphan Drug Credit (See code sections 48C & 48D.) Employer Family Leave Credit available for 2018 and

16 Accounting method Small business now defined as less than $25 million. Changes across the board, regardless of entity type, will: pertain to UNICAP rules elevate need to use code section 471 for inventory when under the amount affect other provisions (some not covered in this material) New Partnership Rules Repeal the technical termination when 50% or more of a partnership changes. BIG ISSUE California will not conform. A profits interest acquired for services provided has a 3-year holding period to be treated as long-term gain on sale this provision looks back to

17 Thank you for flying! 3 big take-aways from 30,000 feet: 1) Tax simplification means many new forms. (YES, we need a lot more training!) 2) The TCJA contains huge benefits for Tax Payers. 3) There are a lot more things that we need clarification on from the IRS Alan Pinck, EA (408)