On December 22, the President signed the new tax bill, “Tax Cut and Jobs Act (2017).” The big question is “How will the reform affect me?”
As is the case with most tax issues, the answer is “It depends.”
Itemized deductions are changing for all taxpayers. Fewer deductions will be allowed, and there are limitations on the amount allowed. Mortgage interest is limited to the interest on a $750,000 mortgage balance (no home equity interest allowed), and state income and property taxes are limited to $10,000.
Standard deductions are increased, but personal exemptions are suspended. Other deductions that are modified or suspended include moving expenses and gambling losses. Net operating losses can no longer be carried back two years, but are carried forward indefinitely. Certain farming losses incurred may still be carried back two years.
To offset the loss of deductions for taxpayers, new tax rates are lower than current rates.
There are also new credits to help taxpayers lower the tax due. Credits are advantageous to taxpayers because they directly offset tax due dollar for dollar, as opposed to itemized deductions or personal exemptions which lower the total income that is taxable. The child tax credit increases to $2,000 per child and is refundable up to $1,400, subject to income phase-outs. There is also a new family credit and non-child dependent credit. Education credits are combined so that there is only one credit available, the American Opportunity Credit.
The individual mandate under the Affordable Care Act is repealed. For months after 12/31/2018 the Shared Responsibility Payments for taxpayers who lack health insurance is reduced to “0.”
For businesses, there are changes to lower taxable income as well. Rules are in place to allow expensing 100% of the cost of new and used equipment in the year purchased. More entities are able to use the cash method of accounting, as the gross receipts threshold is increased. New tax rates will lower the corporate rate from 35% to 21%. There are provisions to reduce taxation of income from pass through entities.
There are changes to suspend some current deductions and credits to offset the reduction in tax rates. For instance, deductions for entertainment expenses are disallowed as well as the deduction for domestic production activities. There are additional modifications and repeal of business credits.
The Alternative Minimum Tax is repealed for corporations but remains for individuals. The exemption amounts for AMT, however, are increased, so fewer individuals may be subject to AMT.
This article is a highlight of the provisions included in the tax act. There are more provisions for changes that Dillwood Burkel & Millar, LLP continues to review. We are especially looking to see how the legislation will impact you, our clients. We will continue to keep you abreast of the legislation and the impacts on taxpayers.