Breaking Down Tax Reform: The 2017 Tax Cuts and Jobs Act

By Robert Kiss, Esq.

The Tax Cuts and Jobs Act of 2017 is the most significant tax reform legislation in a generation. Unfortunately, like all tax legislation, compliance with these new provisions will still require taxpayers to seek guidance from their advisors since the goal of achieving simplicity in our tax code does not appear to have been attained.

To understand the full impact of this new legislation, it’s important for us to break down how it will affect two groups: individuals and businesses.

The Impact on Individuals

Because these are changes that affect us all, let’s begin with what’s new and what has changed in the tax code for individual taxpayers. The changes, which went into effect January 1, 2018, include:

• Lower tax rates in general
• An increase in the standard deduction to $12,000 for individual filings and $24,000 for joint filings
• The elimination of personal exemptions
• Retention of the alternative minimum tax, or AMT, for individuals but with an increased threshold so fewer taxpayers will pay it—exemption amounts are $109,400 for joint filers and $70,300 for single filers

While these items are fairly simple, not all changes resulting from the Tax Cuts and Jobs Act of 2017 can be as easily defined. The following are new items or revisions to existing code that require a bit more explanation.

Individuals’ Itemized Deductions of Non-Business Taxes

There are new limitations in place regarding itemized deductions of non-business taxes for individuals—specifically, how they relate to the taxpayer’s ability to use various state, local and foreign real and personal property taxes and income/profit taxes as itemized deductions. Deductions for state and local taxes paid by individual taxpayers are now capped at $10,000. Limitations do not apply to businesses.

Changes to Tax Treatment of Alimony

The new tax law features significant changes to the tax treatment of alimony. For divorces and legal separations executed after 2018, the alimony-paying spouse will no longer be able to deduct the payments, and the alimony-receiving spouse will not include payments in gross income. These rules do not apply to existing divorces and separations, unless parties agree otherwise and the court approves.

Changes to Deductions for Interest on a Home Mortgage

There are new changes to deductions for interest on home mortgages. The limit on qualifying acquisition debt on a principal residence or second home is reduced from $1 million to $750,000. This reduced limit does not apply to debt refinanced before 2018. The deduction for interest on home equity debt has been eliminated, and this is applicable regardless of when the home equity debt was incurred.

Child Tax Credit and New Credit for Other Dependents

The Child Tax Credit has been doubled to $2,000 per qualifying child under the age of 17. The refundable portion has also been increased to $1,400 per qualifying child. The phase-out threshold of adjusted gross income, or AGI, has been raised as well, from $110,000 to $400,000 for qualifying taxpayers identified as married filing jointly. The threshold is $200,000 for all other qualifying taxpayers. In order to claim the credit for a qualifying child, the child’s social security number must be included on the tax return.

529 Accounts Used for Elementary or Secondary School Tuition

A 529 plan distribution is tax-free if it is used to pay qualified higher education expenses of the beneficiary, which is the student. Prior to the new law, tuition for elementary or secondary schools wasn’t a qualified higher education expense. The changes provide that qualified higher education expenses now include expenses for tuition at an elementary or secondary public, private or religious school. There is a $10,000 limit on the amount of tax-free distribution from a 529 plan for these newly qualified expenses.

Changes to the Estate and Gift Tax Exemption

Modifications to the estate and gift tax exemption will result in fewer estates being subject to the 40 percent tax and larger estates owing less tax. The base estate and gift tax exemption is doubled from $5 million to $10 million and indexed for inflation.

New tax rates resulting from this legislation did not affect Calendar Year 2017 returns but immediately affected the amount of wage withholding and the amount, if any, of estimated tax individuals will pay in 2018. Capital gains rates and brackets will generally remain the same.

The Impact on Businesses

As with individuals, there are now significant new rules in place for businesses, including:

• The reduction of the corporate tax rate from 35 percent to 21 percent
• The entire repeal of the alternative minimum tax for corporations
• The creation of new fringe benefit rules, including no deduction for business-related entertainment purposes

Also important to businesses is the fact that now net operating losses arising after 2017 can only be carried forward, not back, and are limited to 80 percent of taxable income. However, two-year carryback and unlimited carry forward are allowed for certain farming losses.

The following two items are changes that directly affect businesses and are meant to help support economic growth.

Qualified Business Income Deduction

This new deduction is designed to decrease taxes for pass-through entities like partnerships, limited liability companies (LLCs) and corporations, which elect to be taxed like partnerships, and is perhaps the central economic catalyst hoped for from the new tax legislation. This is a significant new tax deduction, equal to 20 percent of qualified business income, or QBI, from a partnership, including LLCs, S corps and sole proprietorships (IRC §199A). The parameters for this deduction are as follows:

• Business must be conducted within the U.S. to qualify.
• Investment-related items, such as capital gains or losses, dividends and interest income, are not included.
• The QBI deduction does not apply to the wages or salary of an employee—even if that employee is also a shareholder—or guaranteed payment to a partner.
• Phase-out and limitations for services include health, law, accounting and financial.
• All others phase out at higher amounts than service businesses.

Rules Eased for Bonus Depreciation, Code Sec. 179 Expensing and Regular Depreciation

Another central hope for an economic boost from the new federal tax legislation is the relaxing of rules for bonus depreciation provisions, Code Sec. 179 expensing and regular depreciation. This includes favorable new rules for real property depreciation if placed in service after 2017. Annual dollar caps on depreciation—and Code Sec. 179 expensing—of passenger automobiles and small vans/trucks has been tripled, computer or peripheral equipment placed in service after 2017 is not treated as listed property, and the depreciation for most farming equipment and machinery has been shortened.

In addition to the reforms described above, the new tax package includes changes related to tax exemptions, employee benefits and compensation for high-end employees.

The additions and revisions resulting from the Tax Cuts and Jobs Act of 2017 are, in fact, historic and sweeping changes. The economic impacts from some provisions will be immediately noticeable while others will only reveal themselves over time.