Many changes were enacted on Dec. 22, 2017 with the Tax Cuts and Jobs Act, and the legislation was passed quickly, without much study on what the effects and implementation would mean in practical terms. Keep in mind that some, even many, of the tax changes as applied to individuals ‘sunset’ out or expire in future years. What is true for 2018 won’t be true for 2023.
And yes, there have been changes since, but this was the biggest change in recent years.
Relevant tax changes include:
- The income level and tax rate for individual tax brackets were shifted, with most people paying lower taxes in 2018.
- Standard deduction nearly doubles from $12,700 MFJ to $24,000.
- Personal exemption is eliminated ($4,050)
- Child tax credit goes from $1000 to $2000 ($1400 refundable) and $500 for ‘other dependents’ and the phase-out has been raised considerably
- Mortgage interest deductions capped at $750,000 loans
- SALT (State and local income tax, sales tax, property tax) is capped at $10,000. Prepaying 2018 taxes in 2017 effectiveness varies by state. In NYS, as long as you had a bill (assessed) and paid it in 2017, you should have been able to deduct in 2017.
- No individual mandate for ACA
- Medical expense deduction floor lowered back from 10% to 7.5% for 2017 and 2018. Back to 10% for 2019.
- Casualty loss deduction limited to a federally-declared disaster area
- Alimony payments no longer deductible as expense or payments included in gross income
- Employment-related moving expenses no longer deductible except for military
- Miscellaneous itemized deductions (tax prep fees, employee expenses, etc.) eliminated
- AMT exemption level increased
- Bonus Depreciation of 100% through 2022.
- Meals and entertainment no longer deductible for businesses, except for bonafide business travel or employee celebrations
- Reduces pass-through taxes via a TEMPORARY (2018-2025) 20% deduction (after which 29.6% tax rate applies). This includes everything but C Corps.
- Currently small business owners of the above pay taxes at their individual rates. This varies from 10% to 39.6%
- No NOL over $250,000 is allowed for non-corporate owners in the current year. Any excess is carried forward to the next year.
- 20% of net income (qualified business income = net income except for reasonable compensation) is a new deduction
- S Corp: If you pay the owner no salary, reasonable compensation must be calculated and deducted from qualified business income.
- Phase-outs apply as total taxpayer gross income rises above $157.5/$315K for Single/MFJ, especially for ‘specified service businesses’ such as performing arts and accountants (no physical deliverable)
- The deduction is capped to the greater of: 50% of the W2 wages or 25% of W2 wages plus 2.5 % of qualified business property.
- You DON’T need to itemize to claim the deduction
- Deduction is limited to 20% of the household’s non-capital gains taxable income
- More information and examples: https://www.kitces.com/blog/pass-through-business-deduction-rules-qualified-business-income-qbi-limits/
- Corporate tax rate falls from 35% to 21%.
- Businesses making renovations or improvements must use 39 year depreciation rate instead of 15 year (due to drafting error)
Recommendations for changes:
Check your business structure. It may be more advantageous to move from sole proprietor to S corp or vice versa.
Check your withholding. It probably shifted in February due to the new laws, but if the laws change your tax situation to where you normally itemize and it’s better not to under the new laws (or vice versa) you don’t want to be unprepared at the end of the year with a big tax bill. Talk to your accountant about this!