On Friday, December 22, the President signed the Tax Cuts and Jobs Act (TCJA) of 2017 into law. We have separated the tax discussion into four major parts: individual provisions, pass-through provisions, corporate provisions, and estate provisions. These items are effective for the 2018 tax year.

Individual Provisions

Most individuals will see a tax decrease with the passing of the TCJA. The number of tax brackets will stay the same, but the rates will be generally be lower for all individual taxpayers. Also, the standard deduction will be nearly doubled, while personal exemptions will be repealed. Also, if a taxpayer does itemize their deductions, they will only be able to deduct a combined $10,000 of state income tax and property taxes. However, the changes that are described in the table below are only applicable through the 2025 tax year. Starting with the 2026 tax year, the rules will revert to the rules as they stand currently.

Issue Current Law Tax Cuts and Jobs Act
Tax Brackets (See Charts Below) 7 Tax Brackets (10%, 15%, 25%, 28%, 33%, 35%, 39.6%) 7 Tax Brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%)
Preferential Tax Rates on Investment Income Dividends and Long-Term Capital Gains are subject to 0%, 15%, of 20% rates depending on income Retains the 0%, 15%, or 20% tax rate on long term capital gains and qualified dividend income
Net Investment Income Tax 3.8% of Net Investment Income Retained
Personal Exemptions $4,050 per individual Repealed
Standard Deduction $6,350 – Single Filers$9,350 – Head of Household$12,700 – Joint Filers $12,000 – Single Filers$18,000 – Head of Household$24,000 – Joint Filers
Itemized Deductions: Itemized deductions are limited if a MFJ filer has more than $311,300 of AGI. Limitation on itemized deductions is eliminated.
Medical Expenses Deduction for unreimbursed medical expenses greater than 10% of adjusted gross income. Deduction for unreimbursed medical expenses greater than 7.5% of adjusted gross income.
State and Local Income Tax and Property Tax Able to deduct state income tax and property tax. $10,000 limit on state income tax and property tax deduction
Home Mortgage Interest Able to deduct home mortgage interest for primary and secondary home and interest on home equity lines of credit on loans up to $1M and $100K respectively. Able to deduct home mortgage interest for primary and secondary home on new loans up to $750K. Suspends the HELOC interest deduction.
Charitable Contributions Deduction allowed up to 50% of AGI. Contributions for the right to purchase seating at athletic events are 80% deductible. Increases overall charitable deduction to 60% of adjusted gross income. No deduction for the right to purchase seats at athletic events is allowed.
2% Floor Itemized Deductions (Unreimbursed Employee Expenses,Tax Preparation Fees, Investment Expenses) Deductions are allowed if they total more than 2% of AGI. Repealed
Alternative Minimum Tax AMT is calculated under current law. AMT is retained but the exemption amount is increased.
Child and Family Tax Credits $1,000 per qualifying child. Increases child tax credit to $2,000 with phaseout beginning at $400,000 for joint filers.

Tax Brackets

Current Law

Single Heads of Household Joint
10% >$0 >$0 >$0
15% >$9,525 >$13,600 >$19,050
25% >$38,700 >$51,800 >$77,400
28% >$93,700 >$133,850 >$156,150
33% >$195,450 >$216,700 >$237,950
35% >$424,950 >$424,950 >$424,950
39.6% >$426,700 >$453,350 >$480,051

Tax Cuts and Jobs Act

Single Heads of Household Joint
10% >$0 >$0 >$0
12% >$9,525 >$13,600 >$19,050
22% >$38,700 >$51,800 >$77,400
24% >$82,500 >$82,500 >$165,000
32% >$157,500 >$157,500 >$315,000
35% >$200,000 >$200,000 >$400,000
37% >$500,000 >$500,000 >$600,000

Pass-Through Provisions

The pass-through provisions might be the most complicated change of the TCJA. Pass-through businesses include partnerships, S corporations, trusts, estates, and sole proprietorships. Currently, pass-through income is passed through to shareholders and ultimately reported on the shareholders’ returns. That will not change with the TCJA, but there will be an additional deduction that will be allowed for certain taxpayers with pass-through businesses that have income. There are a lot of limitations that will be applied and it remains to be seen how exactly these will be calculated. The table below describes the high-level changes to pass-through income and also discusses technical terminations.

Issue

Current Law

Tax Cuts and Jobs Act

Pass-Through Income Subject to individual’s ordinary tax rates Still subject to individual’s ordinary tax rates. However, there is a 20% deduction of pass-through income subject to:

  1. 50% of partner’s share of W-2 wages or
  2. 25% of W-2 wages paid plus 2.5% of the partner’s unadjusted basis of all qualified property

The above does not apply to service corporations unless taxable income is less than $315,000 for MFJ. Service corporations no longer includes Architecture or Engineering.   

Terminations Technical termination rules apply. Repeals the technical termination rules.

Corporate Provisions

The corporate tax provisions changed in the TCJA were the biggest tax cut included in the overall bill. Included in this bill was a drop in the corporate rate. Currently, the corporate rate is a maximum 35% with a lower rate for lower income corporations. With the passing of the TCJA, the corporate tax rate will now be a flat 21%. There were also many other things changed, such as alternative minimum tax being repealed, the depreciation expensing of assets, interest expense, and net operating losses. The table below discusses the current law as it applies and how the TCJA changed certain items.  

Issue

Current Law

Tax Cuts and Jobs Act

Tax Rate Graduated rate with a maximum 35% rate Flat 21% (Fiscal-Year Filers would apply a blended rate for the year straddling January 1, 2018)
Alternative Minimum Tax Corporations with gross receipts greater than $7.5M must calculate AMT. Repealed
Dividends Received Deduction 80% DRD for 20% owned corporations. 70% for less than 20% owned corporations. 65% for 20% owned corporations and 50% for less than 20% owned corporations.
Capital Investment – Bonus Depreciation 50% bonus depreciation in 2017, 40% in 2018, and 30% in 2019. 0% after 2019. 100% bonus depreciation on qualified property acquired and placed in service after September 27, 2017, but before January 1, 2023. Phases out from 2022-2026.
Capital Investment – Section 179 Expensing $500,000 limit up to $2M of assets placed in service Limits deduction to $1M. Phaseout begins at $2.5M
Interest Expense Deduction Deductible Generally limited to amount of interest income plus 30% of taxpayer’s earnings before interest, taxes, depreciation, and amortization (businesses with less than $25M of receipts are not subject to this provision). Formula is changed to earnings before interest and taxes starting in 2022.
Net Operating Losses 2-year Carryback, 20-year Carryforward. Able to offset 100% of taxable income, 90% of Alternative Minimum Taxable Income. No Carryback. Unlimited Carryforward period. Able to offset 80% of taxable income.
Like Kind Exchanges Available for both real and personal property. Repealed for personal property but retained for real property.
Domestic Production Activities Deduction (Section 199) Available Repealed
Cash Method of Accounting & UNICAP Rules Eligible for businesses with less than $5M of receipts for cash method of accounting and $10M for UNICAP. Eligible for business with less than $25M of gross receipts.
Business Credits All credits mentioned in the proposed law are available for years 2017 and earlier. Modifies the following:

  • Rehabilitation Credit
  • Orphan Drug Tax Credit
  • Retains the following:
  • Research and Development Credit  
  • Low Income Housing Credit  
  • Work Opportunity
  • Tax Credit  
  • New Markets Tax Credit

 

Estate Tax Provisions

The only change worth noting with respect to estate tax is the threshold for whether a taxpayer is subject to the estate tax nearly doubled from $5.49M to $10M. Just like the individual tax provisions, this change only applies through 2025.

Issue Current Law Tax Cuts and Jobs Act
Threshold $5.49M $10M
Step-Up in Basis Yes Retained
Eventual Repeal of Estate Tax Retains the Estate Tax

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