The House of Representatives and Senate have both passed the “Tax Cuts and Jobs Act.” And President Trump signed this legislation into law.
The compromise bill includes agreements on corporate and individual tax rates, the treatment of pass-through income, the estate tax, and itemized deductions such as those for mortgage interest and state and local taxes, among other areas.
These are among the major changes included in this legislation. Generally, individual tax changes “sunset” at the end of 2025. Generally, corporate tax changes are permanent.
- The corporate tax rate will be set at 21% for tax years beginning in 2018, as opposed to the current top rate of 35%.
- The highest individual tax rate will be reduced from 39.6% to 37% until 2026. The standard deduction will increase to $12,000 for single filers and $24,000 for joint filers, while the personal exemptions will be eliminated
- Individuals receiving pass-through income from entities such as partnerships and S corporations will be able to deduct 20% of this income from their taxable income. However, this deduction will be subject to various limitations and applicable to only certain income sources.
- The estate tax will remain in place; however, the lifetime exemption increases to roughly $11 million in 2018 (and will be indexed for inflation). The exemption returns to half the new amount in 2026.
- The alternative minimum tax for corporations will be repealed. The individual AMT will remain, but the exemption amount will increase.
- Residential mortgage interest will be deductible based on indebtedness up to $750,000 for any new mortgages beginning in 2018 compared to the current cap of $1,100,000.
- The itemized deductions for domestic income and property state and local tax will be capped at $10,000 (property tax plus choice of income tax or sales tax).
- All miscellaneous itemized deductions subject to the 2% floor will be eliminated. These include tax preparation fees, investment fees, ect
- The U.S. will tax U.S. corporations on a territorial basis, rather than on worldwide income.
Three Actions BEFORE January 1, 2018
Accelerate property and state tax payments. The new tax overhaul caps deductions of state and local income or sales and property taxes (SALT) at $10,000 per return
Defer pass-through income.The final bill allows so-called pass-through firms such as partnerships and S corporations to deduct 20% of certain business income. This benefit doesn’t apply to higher-earning service firms owned by doctors, lawyers, consultants, investment managers, and the like. Pass-through owners who would benefit from the new provision should consider deferring income into 2018.
Pay employee business expenses.Under current law, unreimbursed business expenses can only be deducted if they exceed 2% of a worker’s income. This write-off is being eliminated, so employees who take it should pay the expenses before year-end.
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