Tax Reform: What You Need To Know January 24, 2018 Presented by: Blake Harrison, CPA/PFS Senior Tax Manager LBMC
Disclaimer This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.
Objectives Understand the major provisions of: Individual tax reform Business tax reform
Tax Reform Framework Four principles Simple, fair, and easy to understand Give Americans pay raise by allowing them to keep more of what they make Make America a jobs magnet by leveling playing field for American business & workers Bring back trillions of dollars that are currently kept offshore to reinvest in the American economy
Tax reform timeline President Trump s Inauguration Congress agrees on a budget paving path for tax reform legislation House Ways and Means approves H.R.1 as amended. Senate Finance Committee releases policy highlights outlining their tax reform goals. January 20th September 27th October 26th November 2nd November 9th Trump administration releases Unified Framework for Fixing Our Broken Tax Code Tax Cuts and Jobs Act (H.R.1) released by the House Ways and Means Committee
Tax reform timeline cont d House bill Passes Senate Finance Committee approves Reconciliation process between the two bills begins President Trump signs the new tax bill into law November 16 November 29 December 6 December 19 December 22 Senate bill passes House and Senate pass revised bill
Tax Cuts and Jobs Act - Individual tax reform
Tax Brackets & Rates Current Law Rate GOP Tax Deal Rate Under $9,325 Single Under $18,650 MFJ 10% Under $9,525 Single Under $19,500 MFJ 10% $9,325 - $37,950 Single $18,650 - $75,900 MFJ $37,950 - $91,900 Single $75,900 - $153,100 MFJ $91,900 - $191,650 Single $153,100 - $233,350 MFJ $191,650 - $416,700 Single $233,350 - $416,700 MFJ $416,700 - $418,400 Single $416,700 - $470,700 MFJ Over $418,400 Single Over $470,700 MFJ 15% $9,525 - $38,700 Single $19,500 - $77,400 MFJ 25% $38,700 - $82,500 Single $77,401 - $165,000 MFJ 28% $82,500 - $157,500 Single $165,000 - $315,000 MFJ 33% $157,500 - $200,000 Single $315,0000 - $400,000 MFJ 35% $200,000 - $500,000 Single $400,000 - $600,000 MFJ 39.6% Over $500,000 Single Over $600,000 MFJ 12% 22% 24% 32% 35% 37%
Rates What Did Not Change? Number of tax brackets - 7 Capital gains and dividends rates 0%, 15%, 20% Net Investment Income Tax- 3.8% Other rates unchanged: Payroll, Section 1202 Stock, Recapture
Kiddie Tax Modified Rather than taxing a child s unearned income at the parents tax rates, under the new law, it is taxed at trust & estate rates.
Standard Deductions & Personal Exemptions Doubles (almost) the standard deduction Suspends the deduction for personal exemptions Additional Standard Deductions for those age 65+ or blind no change
Standard Deductions & Personal Exemptions Filing Status Current Law GOP Tax Deal Single $6,350 $12,000 HOH $9,350 $18,000 MFJ $12,700 $24,000 Personal Exemption $4,050 per person None
Itemized Deductions Medical Expenses Medical Expenses Current Law Amount in excess of 10% of AGI is deductible GOP Tax Deal For 2017 & 2018, deduction is expanded to amounts > 7.5% of AGI
Itemized Deductions State & Local Taxes Current Law GOP Tax Deal State & Local Taxes Fully deductible Up to $10,000 in combined income, sales and property tax is deductible
Itemized Deductions Mortgage Interest Deduction Current Law GOP Tax Deal Acquisition Debt Interest is deductible up to $1M Capped at $750k ($1M for debt incurred prior to 12/15/17) Home Equity Debt Interest is deductible up to $100k Deduction eliminated 2 nd Homes Interest is deductible Interest is deductible
Itemized Deductions Mortgage Interest Deduction Mortgage Interest Grandfathering Rules Apply Binding written contract in place by December 15, 2017 & home is purchased by April 1, 2018 Refinancing existing debt to the extent the amount does not increase
Itemized Deductions 2% Miscellaneous Deductions Repeals all deductions subject to the 2% AGI floor, including: Tax preparation Unreimbursed employee expenses Investment fees, etc.
Itemized Deduction Pease Limitation Limit on itemized deductions overall Current Law Reduces the itemized deductions allowed by the lessor of: 3% of AGI > threshold) x 3% or 80% of Nonexempt Itemized Deductions GOP Tax Deal Suspended Threshold: $261,500 Individual $313,800 MFJ
Itemized Deductions Gifts to Charity Current Law GOP Tax Deal AGI Limit on Cash Contributions 50% 60% Payments in exchange for the rights to purchase college athletics tickets 80% Not Deductible
Impact on Charitable Contributions What impact will tax reform have on charitable giving? Limitation on overall deductions increase to 60% of AGI, meaning more deductions in limited cases. Doubling of standard deduction is intended to reduce number of taxpayers itemizing to just 5%. Many will no longer get a tax benefit for charity donations. Education on the benefits of Donor Advised Funds could create tax benefit for some where direct contributions wouldn t provide.
Above the Line Deduction Current Law Educator Expenses Teachers can deduct up to $250 in supply expense. GOP Tax Deal No Change. Moving Expenses Alimony Student Loan Interest Deductible if move relates to a change in work. Subject to distance requirements. Payments are deductible by the payor. (Includable in recipient s income.) Up to $2,500 in interest on student loans. Subject to phaseout based on MAGI. Not deductible. Exception members of the armed services. Alimony is exempt from payee s income and is not deductible by the payor. Effective for divorces and legal separations after 2018. No Change.
Casualty & Theft Losses Itemized Deduction Current Law Uninsured losses are deductible (Fire, storm, shipwreck, or theft) GOP Tax Deal Limited to losses sustained from presidentially-declared disasters.
AMT for Individuals Minimum Tax Rate Current Law 26% up to$186,300 AMTI 28% AMTI > $186,300 GOP Tax Deal Same Exemption $54,300 Single $84,500 MFJ $70,300 Single $109,400 MFJ Phase-Out Thresholds $120,700 Single $150,900 MFJ $500,000 Single $1,000,000 MFJ
Child Tax Credit - Doubled Current Law GOP Tax Deal Up to $1,000 per child up to age 16 $2,000 per child up to age 16 The Additional Child Tax Credit is a 15% refundable credit after $3,000 in income Phases out at: $75,000 Single $110,000 MFJ Fully refundable up to $1,400 Phases out starting at $200,000 Single $400,000 MFJ
529 Plans for Private K-12 Tax-Free 529 Plans Current Law Only applies to qualified higher education expenses GOP Tax Deal Expanded to include up to $10k per year for K-12 private school.
Tax Cuts and Jobs Act - Business tax reform
Business tax reform highlights 20% pass through deduction. 21% rate for C corporations Expensing of capital expenditures Interest limitation rules New dividends received deduction (DRD) rates Like-kind exchanges limited to real property Section 199 repealed No deduction for entertainment expenses NOL use limitations
Pass-Through Income New Special 20% Deduction Section 199A Broad Strokes Individuals, trusts, and estates are eligible for a 20% deduction on certain pass-through income. Special limitations apply to specified service businesses. Cap on the amount eligible for the deduction based on W-2 wages, plus in some cases, the unadjusted basis of eligible property. Below-the-line deduction to taxable income.
Pass-Through Income New Special 20% Deduction Section 199A Qualified Business Income QBI What it Is: net amount of qualified items of income, gain, deduction, and loss QBI What it Is NOT Reasonable compensation paid by the business Guaranteed payments Investment items, e.g. interest income, not properly allocable to the trade or business
Pass-Through Income New Special 20% Deduction W-2 Wage & Qualified Property Limitation Amount of qualified trade or business income eligible for the 199A deduction is the lesser of: 1. 20% of the QBI or 2. The greater of: 50% of W-2 wages or 25% of W-2 wages + 2.5% of the unadjusted basis immediately after acquisition of qualified property. *This limitation does not apply for taxpayers whose taxable income falls below the threshold ($157.5k Single; $315k MFJ). Limitation phased in over first $50K above threshold ($100K for MFJ).
Pass-Through Income New Special 20% Deduction Special Limitation for Specified Service Businesses The deduction does not apply to income from specified service businesses unless the taxpayer s income is below the thresholds. A specified service businesses is any trade or business activity involving performing services in accounting, actuarial services, law, health, financial service, brokerage services, investment management, performing arts, athletics, consulting Engineering and architecture businesses are NOT treated as service business.
Capital Expensing Bonus depreciation under 168(k) Extended through 2026 100% - Acquired and placed in service after 9/27/17 and before 1/1/23 80% - before 1/1/24 60% - before 1/1/25 40% - before 1/1/26 20% - before 1/1/27 Original use provision - Repealed Related party and carryover basis transactions retain previous rule
Capital Expensing cont d Expensing under 179 Limitation increased to $1M from $510,000 Phase-out increased to $2.5M from $2,030,000 Qualified real property includes Qualified leasehold improvement property Qualified restaurant property Qualified retail improvement property Roofs, HVAC, fire protection and alarms, security systems
Applicable Recovery Period for Real Property The Act maintains the present law general MACRS recovery periods of 39 and 27.5 years for nonresidential real and residential rental property, respectively. The Act provides a general 15-year MACRS recovery period for QIP.
Interest limitation rules - 163(j) Interest deduction limited to 30% of ATI Adjusted taxable income (ATI) Taxable income calculated without Any item of income, gain, deduction or loss that isn t properly allocated to a trade or business Business interest expense/income NOLs The new 199A deduction Depreciation, amortization, or depletion For tax years beginning before 1/1/22 Other deductions provided by the Secretary
Interest limitation rules cont d Will not apply to Annual gross receipts < $25M for previous three years Any farming business A real property trade or business under 469(c)(7)(C) Existing debt is not grandfathered in
Limitation on Losses for Taxpayers Other Than Corporations Amends 461 to add a new subsection (l) Excess business losses disallowed Must be carried-forward Applies to taxpayers with income exceeding $500,000 (MFJ) Applies at the partner or shareholder level New fourth tier:
Meals and entertainment 100% deduction Amounts included in compensation of employees Amounts included in income of non-employees Qualified reimbursed expenses Qualified employee recreation 50% deduction Business meals and beverages No deduction Entertainment, amusement/recreation, dues, and related facilities De minimis fringe benefits Currently 100% deductible 50% deductible after 12/31/2017 Non-deductible after 12/31/2025
NOL use limitations Indefinite carryforward (post 12/31/2017) No carrybacks (post 12/31/2017) Special rules for farming losses Limited to 80% of taxable income in carryover years.
Corporate AMT Repealed post 12/31/17 AMT credits can offset regular tax liability 50% refund of remaining credits (2018 2020) 100% refund of remaining credits (2021 2022)
Other changes DPAD ( 199) repealed Orphan drug credit decreased 5 year amortization of research/experimental expenses Cash method for <$25M gross receipts (3-year average) Unicap exemption for <$25M gross receipts (3-year average) Like-kind exchanges (LKEs) limited to real property Partnership technical termination rules repealed DRD changes 70% deduction reduced to 50% 80% deduction reduced to 65% Settlements and legal fees related to sexual harassment or sexual abuse are non-deductible if subject to a non-disclosure agreement
Items with no change R&D Credit Permanent WOTC Expires after 2019 New Market Tax Credits Expires after 2019
Questions? Contact info: Blake Harrison 615-309-2620 bharrison@lbmc.com