I know that 2018 has begun with frigid temperatures for those of us in the Northeast, but I want you to get up from your desk, open up your office window and listen to what’s happening outside. That galloping sound you hear isn’t construction work, it isn’t local traffic, or planes flying above. It is the masses of divorcing couples, business owners, and retirement minded individuals running to their matrimonial, estate and corporate attorneys.
On December 22, 2017 Congress passed and President Trump signed into law The Tax Cuts and Jobs Act (hereafter, “the Act”).
The Act is the most significant change to the current tax law in three decades. In its most simplistic terms the Act (1) lowers individual and corporate tax rates, (2) eliminates multiple tax credits and deductions, (3) increases the child tax credit, and (4) repeals the healthcare individual mandate penalty.
Matrimonial and Family Law Attorneys should be aware that for those that separate and/or divorce after December 31, 2018 alimony payments will no longer be taxable to the recipient or deductible by the payer.
Gift and Estate Attorneys should note that the estate and gift tax exclusion amounts have doubled after December 31, 2017 and before January 1, 2016.
Corporate Attorneys should know that the corporate income tax rate has been simplified to a flat 21 percent and that owners of pass-through entities will be taxed at a 20 percent income reduction calculation.
So the question you may be asking is: Why is a boutique accounting firm that specializes in business valuation, forensic accounting and litigation support writing about the new tax law?
The simple answer is because the attorneys we work with have been calling our offices since returning from the New Year’s holiday and asking questions. The better answer is that we all need to be aware of these changes when working on matrimonial, corporate and estate/gift matters.
The following is a condensed outline of these changes that you need to be familiar with:
Key Changes For Individuals
• Reduces income tax brackets: The act retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent. The individual income brackets are also expanded to expose more income to lower rates (see charts below).
• Doubles standard deductions: The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.
• Limits itemized deductions: Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
• Caps state and local tax deductions: State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
• Caps mortgage interest deductions: For new acquisition indebtedness, mortgage interest will be deductible on indebtedness of no more than $750,000. Existing mortgages are unaffected by the new cap as the new limits go into place for acquisition indebtedness after Dec. 14, 2017. The act also suspends the deductibility of interest on home equity debt.
• Limit of theft and casualty losses: Deductions are now available only for federally declared disaster areas.
• No more 2 percent miscellaneous deductions: Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.
• Cuts some above-the-line deductions: Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.
• Weakens the alternative minimum tax (AMT): The act retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and increases the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
• Bumps up child tax credit, adds family tax credit: The child tax credit increases to $2,000 from $1,000, with $1,400 of it being refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
• Expands use of 529 education savings plans: Qualified distributions from 529 education savings plans, which are not subject to tax, now include tuition payments for students in K-12 private schools.
• Doubles estate tax exemption: Estate taxes will apply to even fewer people, with the exemption doubled to $11.2 million ($22.4 million for married couples).
• Kiddie tax: Effective 2018, the “kiddie tax” on children’s unearned income will use the estates and trusts tax rate structure, meaning it will be taxed anywhere from 10 percent to 37 percent.
In spite of these many changes there are still a number of aspects to the tax laws that stay the same for individuals.
These most significant items are:
• Itemized charitable deductions: Remain largely the same.
• Itemized medical expense deductions: Remain largely the same. The deduction threshold drops back to 7.5 percent of adjusted gross income for 2017 and 2018, but reverts to 10 percent in the following years.
• Some above-the-line deductions: Remain the same, including $250 of educator expenses and $2,500 of qualified student loan interest.
• Gift tax deduction: Remains and increases to $15,000 from $14,000 for 2018.
Key Changes For Small Businesses
• Cuts the corporate tax rate: Corporate tax gets cut and simplified to a flat 21 percent rate, changed from a multi-bracket structure with a 35 percent top rate.
• Reduces pass-through taxes: Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.
• Beefs up capital expensing: Through 2022, short-lived capital investments in such items as machinery and equipment may be fully expensed as soon as they are placed in service, using bonus depreciation. This now also applies to used items instead of only new ones; they just need to be placed in service for the first time in your business. After 2022, allowable bonus depreciation is then lowered incrementally over the next four years.
• Strengthens Section 179 deduction: Section 179 deduction limits get raised to enable expensing of up to $1 million, and the phase-out threshold increases to $2.5 million. Section 179 may now also be used on expenses related to improvements to nonresidential real estate.
• Nixes the corporate alternative minimum tax (AMT): The 20 percent corporate AMT applied to businesses goes away entirely.
• Expands use of cash-method accounting: Businesses with less than $25 million in gross receipts over the last three years may adopt the cash method of accounting.
• Reforms international taxation: Treatment of international income moves to the territorial system standard, in which foreign investments are generally only taxed in the place in which they operate. The new laws allow tax deductions for certain foreign-sourced dividends, reduced tax rates for foreign intangible income and reduced tax rates for repatriation of deferred foreign income.
• Repeals business entertainment deduction: Businesses will no longer be able to deduct 50 percent of the cost of entertainment, amusement or recreation directly related to their trade or business. The 50 percent deduction for business-related meals remains in place, however.
• Modifies several business credits: Several business credits are maintained but modified, including the orphan drug credit, the rehabilitation credit, the employer credit for paid family or medical leave and the research and experimentation credit.
• Boosts luxury automobile depreciation: Luxury automobiles placed in service after 2017 will have allowable depreciation of $10,000 for the first year, $16,000 the second, $9,600 the third and $5,760 for subsequent years.
Aside from its criticism that the Act is expected to increase the country’s deficit, there appears to be both winners and losers from these changes. However many of these changes (particularly those that apply to individuals) are temporary and will expire on a given date.
The effects of these changes for those divorcing, planning to retire and operating a business is yet to be determined. One thing that is clear, the planning and litigation discussions that you are accustom to have with your clients is about to change.
All this being said, there is also one important item that one should consider. There is likely to be a “technical corrections bill” to address elements that Congress and the Trump Administration will want to change. Technical correction bills are typically done behind closed doors with little fanfare. However, these changes can have big impact.
In other words, you can bet we are not done just yet.
If you need any further assistance in addressing these or other client issues please feel free to call our offices.
Mark S. Gottlieb CPA/ABV/CFF, CVA, CBA, MS-Tax can be reached by phone or at firstname.lastname@example.org. You can also schedule a free phone consultation by using the button on the top of this page.