On December 22, 2017, President Trump signed tax reform legislation that represents the most significant changes to the Internal Code since 1986. The tax reform bill affects both individual and business taxpayers; below please find a summary of the provisions we expect to most directly affect the majority of our clients. Please note that the legislation is quite complex and that the following summary is merely
bullets points of what we feel are the most relevant provisions. Unless otherwise noted, these provisions are effective for tax years beginning after December 31, 2017 (i.e. the 2018 calendar tax year). SUMMARY OF CHANGES FOR INDIVIDUALS Tax Rates Below please find a comparison of the 2017 tax rates to the 2018 rates under the new bill (click to enlarge). Standard Deduction and Personal Exemption Itemized Deductions – The combined amount of State and local income tax and property tax that may be deducted is limited to $10,000. State and Local taxes paid in 2017 for the 2018 tax year may not be deducted until 2018. – The deduction for mortgage interest is limited if the amount of the new mortgage indebtedness exceeds $750,000. No deduction will be allowed for interest on home equity indebtedness. The deductibility of home indebtedness interest paid on mortgages existing prior to December 15, 2017 continues to be subject to a limitation on the interest paid on $1 million of outstanding mortgage debt. – Miscellaneous itemized deductions subject to the 2% floor, such as investment fees and employee trade or business expenses, have been suspended. – Casualty losses in respect to property are limited to those losses incurred in a federally-declared disaster area. – In a benefit to taxpayers, the AGI limitation on cash charitable contributions has been increased from 50% to 60%. – Also a benefit, the floor for deducting medical expenses has been reduced from 10% of AGI to 7.5%. Alternative Minimum Tax (“AMT”) Affordable Care
Act Individual Mandate ESTATE AND GIFT – The unified estate and gift tax credit exclusion amount is almost doubled to $10 million (adjusted for inflation occurring after 2011) for tax years beginning after December 31, 2017 and before January 1, 2026. – The Generation-Skipping Transfer Tax (“GST”) exemption is also increased to $10 million. PASS-THROUGH ENTITIES Pass-Through Deduction
– The deduction reduces taxable income, not AGI. – If taxable income is in excess of a threshold amount, the deduction may not be taken for certain specified service businesses.
– The deduction is limited to half of the wages paid by the pass-through entity (or the sum of a quarter of the wages and a percentage of the cost basis of fixed assets if this computation is more beneficial). – Trusts and Estates are eligible for the 20% deduction. Carried Interest Losses Click here for some real-life scenarios illustrating how the new law will affect certain individual taxpayers. FOR MORE INFORMATION What happened to the personal exemption?The Tax Cuts and Jobs Act (TCJA) eliminated personal exemptions through at least 2025. Other ways to receive tax credit in lieu of personal exemptions include head-of-household credit, the child tax credit, child and dependent care credit, and earned income tax credit (EITC).
What did the TCJA eliminate?The TCJA got rid of certain deductions related to preparing taxes such as tax preparation fees. It also did away with deductions related to unreimbursed employee expenses and other miscellaneous deductions.
What does it mean to claim an exemption?An exemption is a dollar amount that can be deducted from an individual's total income, thereby reducing. the taxable income. Taxpayers may be able to claim two kinds of exemptions: • Personal exemptions generally allow taxpayers to claim themselves (and possibly their spouse)
How long will TCJA last?No significant TCJA provisions are set to expire in 2024, but 23 provisions are scheduled for expiration in 2025, most notably, the reduction in individual income tax rates and the 20 percent deduction on qualified business income for pass-throughs.
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