January 2, 2018

Key Details of the New Tax Law

Tax reform has finally arrived! It significantly changes how both individuals and businesses will calculate and pay taxes. Officially known as the Tax Cuts and Jobs Act of 2017, the bill was signed into law by President Trump just before the holidays. Most of the changes in the new law go into effect on January 1, 2018, and are the most significant in decades. Key changes include a sharp reduction in the corporate tax rate, formation of new, lower tax brackets and the elimination of certain deductions and credits. Considering this, new tax planning strategies will also need to be formulated in the coming months. To help clients, prospects and others understand the new tax law and how it will impact them, Wilson Lewis has provided a summary of key changes below.

Key Business Tax Changes

• Corporate Tax Rate – The corporate tax rate will be reduced from 35% to 21% for tax years beginning after December 31, 2017.
• Alternative Minimum Tax (AMT) – The corporate AMT is eliminated for tax years beginning after December 31, 2017.
• Pass-Through Entity Taxation – Owners of pass through entities such as S-corporations and partnerships currently pay tax on company earnings based on their personal tax rates. This means that the highest earners can pay a top rate of 39.6%. The law creates a 20% deduction for pass-through income. It’s important to note that entities operating in health, law and financial services are exempt from this deduction unless taxable income is below $157,500 for single filers or $315,000 for joint returns. There is also a process in place designed to prevent high-income earners from changing wage income to pass-through income to obtain the lower tax rate.
• Foreign Earnings – Foreign earnings repatriated to the U.S. will be taxed at a rate of 15.5% for cash or cash equivalents and 8% for reinvested earnings. This change will allow companies to repatriate profits domestically at a much lower rate than previously anticipated.
• Immediate Expensing – The law permits the full expensing of capital investments for the next five years and then phases out the benefit 20% each year over the following five years. This will give companies the opportunity to immediately expense capital purchases that previously needed to be depreciated over a several year period (five years or longer), resulting in an immediate tax benefit.
• Section 179d Expensing – Under the new law, the small business expensing limitation has been increased to $1M with the phase out also increasing to $2.5M.
• Deductions for Meals & Entertainment – Deductions for entertainment expenses have been eliminated, but 50% of food and beverage expenses for qualifying business meals associated with normal business operations (employee meals while travelling for work) is still deductible.
• Domestic Production Deduction – This popular deduction for qualifying production activities, currently set at 9%, is repealed for tax years beginning after December 31, 2017.

Individual Tax Provisions

• New Tax Brackets – Despite efforts to reduce the number of individual tax brackets, the law will keep seven, but most taxpayers will experience a reduction in overall taxes. The new brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The last bracket, down from 39.6%, will be for single taxpayers with income above $500,000 and couples with income above $600,000. It’s important to note that the brackets will expire in 2025 when Congress will have to act to extend them.
• Standard Deduction – The standard deduction will almost double and will be set to change according to inflation beginning in 2018. The new deduction will be $24,000 for married filing jointly, $18,000 for head-of-household and $12,000 for all other individuals. The increased standard deduction is designed to make it easier for taxpayers to receive a tax benefit without itemizing.
• Personal Exemption – The personal exemption is repealed starting in 2018. This means that taxpayers can no longer claim exemptions for themselves, dependents or others. The repeal is set to expire at the end of 2025.
• AMT Changes – There will be changes to both the AMT exemption and phase-out amounts beginning in 2018. The exemption amounts change to $109,400 for married taxpayers filing jointly, $70,300 for single taxpayers and $54,700 for married taxpayers filing separately. Phase-out amounts change to $1,000,000 for married filing jointly, $500,00 for single filers and $500,00 for married filing separately.
• Expansion of Child Tax Credit – This credit will be increased from its current value of $1,000 to $2,000 per child with $1,400 of that amount being refundable.
• Mortgage Interest Deduction – Interest on mortgages up to $750,000 is deductible in the new legislation, which is a reduction from the current $1M cap. It’s important to note that loans entered into before December 15, 2017 are subject to the existing $1M cap.
• Charitable Contributions – The adjusted gross income limitation on cash contributions to charities and foundations is increased from 50% to 60%. This change is effective beginning in 2018 and is currently scheduled to phase out after 2025.
• Child & Family Tax Credit – The Child Tax Credit is increased to $2,000 per child, with $1,400 of this amount being refundable. It also calls for a $500 nonrefundable credit for non-child dependents. This change is effective after December 31, 2017 and is currently scheduled to phase out in 2026.
• Alimony Payments – These payments are no longer deductible starting in 2018.
• Estate Tax Repeal – While there won’t be a repeal of the estate tax as originally proposed, there have been changes. Under the new law, the estate tax of 40% will only impact the wealthiest taxpayers. The exemption will double, allowing $11M per individual – up from $5.5M – to be passed on without taxation.

Contact Us

Tax reform means significant changes for taxpayers including lower taxes and reduction/elimination of incentives such as tax credits and deductions. Given the magnitude of change implemented by the new law, it’s important to review your situation to ensure you’re properly positioned. If you have questions about the new law or need assistance with tax planning, Wilson Lewis can help. For additional information please call us at 770-476-1004, or click here to contact us. We look forward to working with you soon.