Tax Cuts and Jobs Act Durham Chamber of Commerce Public Policy Meeting January 9, 2018
Tax Cuts in Billions Corporate/Business ($653) S-Corps/Partnership/Sole Proprietor ($414) International Tax Changes $324 Estate Tax Changes ($ 83) Remaining Individual Changes ($629) Total ($1,456)
Budget Reconciliation Process Streamlined Approach: Simple majority in Senate Rather than standard 60 votes Only if: Tax cuts < $1.5 trillion over 10 years Individual provision expires 12/31/2025 Business and Corporate cuts are permanent
Budget Reconciliation Process Most comprehensive tax overhaul since 1986. Passed without support of one democrat. Senate 51 48 House 227 203 12 Republicans voting against
Business Impact
Corporate Income Tax Reduces Corporate rate from 35% to 21% (flat rate). NC rate is 3%. AMT for Corporations repealed. Double taxation - prior law 10%: C-Corporations 50.47% (35% + (65% * 23.8%) S Corp / LLC 40.8% 39.6% + 1.2% itemized deduction phase out
Corporate Income Tax (cont.) Double taxation - new law 2.8% C Corporations 39.8% (21% * (79% * 23.8%) S Corps / LLC 37% Double taxation 10% after applying 20% qualified business income deduction C Corporations 39.8% S Corps / LLC 29.6% (37% * 80%)
20% Deduction Qualified Business Income Applies to S-Corps, Partnerships & Sole Proprietorships. Also applies to Trusts and Estates. Calculated as the LESSER OF: 20% of Qualified Business Income OR: GREATER OF: 50% of W-2 wages 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property
Qualified Business Income Definition is net ordinary income effectively connected with US trade or business. Does not include: W-2 wages Capital gains or losses Dividend income Interest income
Qualified Property Defined as any tangible property subject to depreciation. Qualified property does not include: Land Inventory Depreciable period can not end prior to end of the tax year. Depreciable period is LATER OF: 10 years or The assets regular depreciation period under MACRS
Qualified Property Fully depreciated assets prior to 2018 will not count. Unadjusted basis of qualified property: Cost is not reduced by depreciation.
Exception to Wage Limit The wage limit does not apply if taxable income is equal to or less than: $315,000 MFJ $157,500 Single Phased out over: $100,000 MFJ $50,000 Single Will be indexed for inflation starting 2019.
20% Deduction N/A to Service Trade or Businesses Service trade or businesses include: Fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services Any business where the principal assets is the reputation or skill of one or more of its employees. Exception: Architects and Engineers allowed 20% deduction 20% Deduction allowed up to taxable income limits $315,000 MFJ $157,500 Single
Interest Deduction Limitation Limited to 30% of Adjusted Taxable Income. Net business income plus: Interest expense Depreciation Amortization / Depletion Disallowed interest can be carried forward. Real estate businesses can elect out of these rules. Must use Alternative Depreciation System.
Other Business Changes Section 179 expense increased from $500,000 to $1M. Phase out begins at $2.5M 100% Expensing of assets life of < 20 years Property placed in service from September 28, 2017 December 31, 2022. Phased out 20% per year from 2023 through 2026. Can elect to reduce expense to 50%. Section 199, Production Deduction, eliminated.
Other Business Changes Cash basis allowed if average gross income < $25M: Can use cash basis of accounting, even with inventory. Not required to capitalize 263A costs. Interest limitation of 30% adjusted taxable income does not apply. Net Operating Losses No longer able to carryback, able to carryforward indefinitely. NOL carryforward will offset 80% of current year income. Business meals still 50% deductible. No deduction for entertainment or travel.
Other Business Changes Repatriation of Deferred Foreign Profits 15.5% on cash and cash equivalents 8% on illiquid assets
Individual Impact
Individual Impact Rates and brackets modified 2018-2025 7 Brackets remain, range expanded, rates lowered. 2017 Married filing Joint: If taxable income is: 2018 Married filing Joint: If taxable income is: Over but not over The tax is: Of the amount over- Over but not over The tax is: Of the amount over- $ 0 $18,650 10% $0 18,650 75,900 $1,865.00 + 15% 18,650 75,900 153,100 10,452.50+ 25% 75,900 153,100 233,350 29,752.50+ 28% 153,100 233.350 416,700 52,222.50 + 33% 233,350 416,700 470,700 112,728.00 + 35% 416,700 470,700 131,628.00 + 39.6% 470,700 $ 0 $19,050 10% $0 19,050 77,400 $1,905 + 12% 19,050 77,400 165,000 8,907 + 22% 77,400 165,000 315,000 28,179 + 24% 165,000 315,000 400,000 64,179 + 32% 315,000 400,000 600,000 91,379 + 35% 400,000 600,000 161,379 + 37% 600,000
Kiddie Tax Kiddie tax. A "kiddie tax" is imposed on the net unearned income of a child. Generally, these rules apply to a child if: the child is required to file a tax return; the child does not file a joint return for the tax year; the child's investment income is more than $2,100 (for 2018); either of the child s parents is alive at the end of the year; and at the end of the tax year, the child is either: (a) under the age of 18; (b) under the age of 19 and does not provide more than half of his or her own support with earned income; or (c) under the age of 24, a full-time student, and does not provide more than half of his or her own support with earned income. 2018 CHANGE- Child is no longer affected by parent s higher tax rate. Rather, they are taxed at the ordinary and capital gains rates applicable to trusts. Earned income of child taxed at single individual brackets and rates. Unearned income brackets for Kiddie Tax using Trust and Estates Brackets Over -- But Not Over- The tax is: Of the amount over -- $ 0 2,550 10% $0 2,550 9,150 $255 + 24% 2,550 9,150 12,500 1,839 + 35% 9,150 12,500 3,011.50 + 37% 12,500
Maximum Capital Gains Rates Capital Gains Taxable Income Thresholds SINGLE MFJ and SURVIVING SPOUSE ESTATES and TRUSTS CAPITAL GAINS RATE $0 - $38,600 $ 0 - $77,200 $0 - $2,600 0% $38,600-$425,800 $77,200-$479,000 $2,600 - $12,700 15% > $425,800 > $479,000 > $12,700 20% NOTES: Additional 3.8% Net Investment Income tax still in effect when AGI over $200K (Single) or $250K (Married) Unrecaptured 1250 gain still taxed at max 25%
Alternative Minimum Tax AMT exemptions increased for individuals: FILING STATUS 2017 EXEMPTION 2018 EXEMPTION EXEMPTION INCREASE 2018 EXEMPTION PHASEOUT MFJ, SS $84,500 $109,400 $24,900 $1,000,000 SINGLE, HH $54,300 $ 70,300 $16,000 $ 500,000 MFS $42,250 $ 54,700 $12,450 $ 500,000 ESTATES, TRUSTS $24,100 $24,600 $500 $ 82,050 NOTE: AMT REPEALED FOR CORPORATIONS FOR TAX YEARS BEGINNING AFTER 12/31/17
Deductions Standard Deduction Increases Standard Deduction Single and MFS Head of Household MFJ and Surviving Spouses 2017 $ 6,350 $ 9,350 $12,700 2018 $12,000 $18,000 $24,000 Personal and Dependency Exemptions repealed IRS is working to develop withholding guidance to implement the tax reform bill. Guidance expected by February 2018. Until then, employers use existing withholding tables. Itemized Deduction Changes: State and local taxes paid by an individual capped at $10,000 (MFJ) or $5,000 (MFS) Limitation does not apply to real and personal property taxes connected to a trade or business (deducted on Schedules C, E or F) Mortgage Interest Deduction: Limited to acquisition debt up to $750K ($375K MFS) for acquisitions after 12/15/17. Grandfathered $1.0M debt limit remains for home prior to 12/15/17. No mortgage interest deductions on home equity loans. Deduction for second home still in place.
Deductions (cont.) Medical Deduction- Reduced Phase-out Threshold Reduced from 10% to 7.5% Adjusted Gross Income. Effective for years beginning 1/1/2017 to 12/31/2018. Charitable Contributions Increase limitation on charitable contributions to 60% of Adjusted Gross Income. 5 year carryforward on unused contributions. Deductions for college athletic seating rights repealed. Need contemporaneous written acknowledgement from donee organization for contributions of $250 or more to claim the deduction. Personal Casualty losses limited to federally declared disaster areas Miscellaneous Itemized Deductions (2% of AGI) repealed Impact: Broker fees and other expenses related to portfolio income not deductible. Overall limitation (phase-out) on itemized deductions repealed Alimony and separation payments repealed Repeal of deduction and income inclusion for divorce or separation agreements executed or modified after 2018. Moving Expense deduction repealed Exception applies to Armed Forces members.
Credits and ACA Mandate Child tax credit for dependents under age 17 Increased to $2,000; Refundable portion is $1,400 per qualifying child. Modified AGI Phase-out at $400K (MFJ) or $200K. $500 nonrefundable credit for dependent not a qualifying child (qualifying relative). Health Insurance Effective for months beginning after 12/31/18, the amount of shared responsibility payment (aka the penalty ) mandated by individual health insurance coverage is zero. No other Affordable Care Act provision is affected.
Compensation, Retirement & Education Compensation Stock Options Taxation Property (stock) issued in connection with performance of services (IRC Code 83) is usually taxed either when the property vests 83(a) or when it is received 83(b) New Code 83(i) offers election to defer taxation income inclusion for up to 5 years from the date stock is transferable or not subject to substantial risk of forfeiture. Qualified Moving Expense reimbursements are included in compensation and subject to income and employment taxes. Exception for U.S. Armed Forces personnel. Retirement - Recharacterization of Roth IRA Contributions No longer allows recharacterization to unwind a Roth IRA conversion. Recharacterizations under prior law allowed taxpayers to unwind a transaction depending on the increase or decrease in the market value of the IRA. Taxpayers still allowed to contribute to Roth IRA and recharacterize to Traditional IRA before due date of return. Taxpayers still allowed to contribute to traditional IRA and convert to a Roth IRA, but can no longer unwind that transaction through recharacterization. Education Section 529 plans now allow up to $10,000 tuition expenses at public, private or religious elementary or secondary school. Limitation applies on per student, not per account, basis.
Transfer Taxes Estate, Gift, and GST Taxes Lifetime Exclusion doubled from $5.6M per person to $11.2M per person for estates after 12/31/2017 and before 1/1/2026. Married exclusion $22.4M. Spousal portability remains for estate taxes. Effective minimum rate remains at 40%. 2018 Annual gift exclusion increased to $15,000 per person. Step up in basis in assets to FMV at date of death remains. EXAMPLE 1: Bruce Payne, a wealthy single individual dies in 2018 leaving a taxable estate of $10 million. His estate will owe no federal estate taxes. Instead, if he had died in 2017, the estate tax payable would have been $1,804,000. EXAMPLE 2: Carol Cologne, a wealthy widow dies in 2018 leaving a taxable estate of $20 million. Her late husband died earlier in 2018 having used only $2 million of his available estate tax exclusion amount. Her estate will owe no federal estate tax. However, if the couple had died under the same circumstances in 2017, the estate tax payable would have been $4,408,000. PLANNING OPPORTUNITY: Because the doubling of the estate and gift tax exclusion amount will expire for decedents dying and gifts made after December 31, 2025, the next several years present a tremendous opportunity for wealthy individuals and married couples to make large gifts, including those that leverage the amount of the available exclusion, such as those to grantor retained annuity trusts (GRATs)