Special Report: The Tax Cuts and Jobs Act
Today, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”). This Act represents the first major overhaul of the Internal Revenue Code since 1986.
The Act legislation contains over 1,000 pages. Although it is not possible to cover the entire Act in this post, we want to highlight the following key provisions:
- Individual Income Tax Rates. The Act maintains seven income tax brackets with some changes, including a reduction in the top tax rate from 39.6% to 37%. There was no change to preferential rates on qualified dividends or long-term capital gains. This provision is effective for tax years beginning after December 31, 2017 and before January 1, 2026.
- Deduction of State and Local Taxes. For tax years beginning after December 31, 2017 and before January 1, 2026, the itemized deduction for state and local taxes will be capped at $10,000. The Act specifically prohibits the prepayment of state and local income taxes for a future tax year in order to take a deduction in the year of payment. For example, you cannot take a deduction in 2017 for 2018 state and local income taxes prepaid before December 31, 2017. There is no mention in the Act of a prohibition against deducting the prepayment of property taxes. In fact, the Harris County (TX) tax assessor-collector has stated that they are currently accepting prepayments of 2018 property taxes. Of course, taxpayers that would benefit from prepaying their 2018 property taxes during 2017 should certainly contact their taxing authority to determine if prepayments of 2018 property taxes are allowed, and if so, how much is allowed.
- Repeal of the Miscellaneous Itemized Deductions. The Act suspends the deduction for all miscellaneous itemized deductions subject to the 2% floor under current law. This provision would be effective for tax years beginning after December 31, 2017.
- Charitable Contributions. The Act increases the percentage limitation for cash contributions to public charities from 50% of adjusted gross income (AGI) to 60% of AGI. This provision is effective for tax years beginning after December 31, 2017.
- Mortgage interest. The Act restricts the amount of deductible mortgage interest on future loans to $750,000, which is a decrease from the existing level of $1 million. This restriction applies to new mortgages obtained after December 15, 2017; therefore, it the restriction will not affect the deductibility of interest on existing loans. However, the Act suspends the deductibility of home equity loan interest that will apply to the existing loans.
- Special Section 199A Deduction for Owners of Pass-through Entities. An individual, estate, or a trust may deduct 20% of domestic qualified business income from a pass-through entity, such as a partnership, a limited liability company (LLC) treated as a partnership for income tax purposes, a sole proprietorship treated as a disregarded entity, and an S corporation. The new Section 199A deduction starts to phase out for business income from “specified service businesses” for taxpayers with taxable income beyond a threshold of $157,500 for single taxpayers and $315,000 for married taxpayers filing jointly. A “specified service business” means any trade or business activity involving the performance of services in the fields of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services, investment management, trading, dealing in securities, partnership interests or commodities, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its owners or employees. Engineering or architecture trades or businesses are not treated as specified service businesses. The final version of the Act offers that real estate investors may qualify for this special deduction. This provision is effective for tax years beginning after December 31, 2017 and before January 1, 2026.
- Estate Tax, Gift Tax, and Generation Skipping Transfer Tax (“GST Tax”) Exemptions. These taxes will remain in effect. However, the Act does increase the Estate/Gift Tax Exemption and the GST Tax Exemption for each taxpayer from $5.6 million to $11.2 million. Consequently, married couples will have a combined $22.4 million that they can transfer free of Estate/Gift Taxes and GST Tax. This provision is effective for individuals dying and gifts made after 2017 and before 2026. In 2026, these exemptions will revert back to $5 million, and the $5 million will be indexed for inflation from the base year of 2016.
- Corporate Income Tax and Alternative Minimum Tax (“AMT”). Corporations currently can be subjected to a maximum tax rate of 35%. For tax years beginning after December 31, 2017, corporations will be subject to a flat 21% tax rate, and the AMT for corporations will be repealed. Under the Act, this provision does not expire. For individual taxpayers, the Act will temporarily increase both the exemption amount and exemption amount phase-out thresholds for the individual AMT.
In closing, the above highlights are simply a sampling of the magnitude of the changes made by the Act. Should you have any questions about the Act and how it might impact you, please do not hesitate to contact a Linn Thurber tax professional.