New U.S. Tax Bill – Everything You Need to Know in Simple English

I’ve completed my Review of the new U.S. tax bill, knows as the Tax Cuts and Jobs Act. Here’s a run-down of the most important items.

INDIVIDUALS

• Tax Cuts and Jobs Act = Title (TCJA)
• Effective Date: 1/1/18 – Expires 1/1/26.
• 7 Tax Brackets: 10%, 12%, 22%, 24%, 32% 35% and 37%.
• Property Taxes (U.S. Only) plus State & Local Income Taxes are Capped at $10,000 Per Year.
• Standard Deductions: Single: $12,000, Head of Household: $18,000, Married Filing Joint: $24,000.
  • Married couples 65 and older get an additional $1,250 per person.
  • Singles 65 and older get an additional $1,550.
• 2% Itemized Deductions No Longer Deductible:
  • Tax Preparation Fees.
  • Unreimbursed Business Expenses.
  • Continuing Education Expenses.
  • Licensing Fees.
  • Investment Expenses.
  • Hobby Expenses.
  • IRA Losses.
  • Safe Deposit Fees.
  • IRA Trustee Fees.
  • Professional Dues.
  • Home Office Expenses.
  • Depreciation on Computers.
  • Educator Expenses That Exceed the Allowed $250 Adjusted Gross Income Deduction Amount.
  • Job Search Costs.
  • Subscriptions.
  • Unreimbursed Business: Travel, Meals, Entertainment, Gifts, and Lodging.
  • Union Dues.
  • Unreimbursed Business Work Clothes.
  • Unreimbursed Business Tools & Supplies.
• Alimony – Alimony No Longer a Deduction to Paying Ex-Spouse and No Longer Income to Recipient Ex-Spouse, but Only for Those Who Divorce After 12/31/18.
• Mortgage Interest Deduction Limited to $750,000 for, Primary and Secondary Home, on New Mortgages Obtained After 12/14/17. The Limit is $1,000,000 for Old Mortgages Obtained Prior to 12/15/17.
• Home Equity Interest Deduction Not Allowed.
  • Note: Interest on Home Equity Debt Used to Acquire, Construct or Improve Your Primary Residence or Vacation Home is Still Allowed to the Extent it Does Not Exceed $750,000. This Applies to Home Equity Debt Obtained After 12/15/17 and Used to Acquire, Construct or Improve Your Primary Residence of Vacation Home. For Home Equity Debt Obtained Prior to 12/15/17, the Limitation is $1,000,000
• Moving Expense Deduction No Longer Allowed.
• Casualty Loss Deduction No Longer Allowed Except in Presidential Declared Disaster Areas.
• Medical Expense Deductions, Adjusted Gross Income Threshold, Reduced from 10% to 7.5% But Only For 2018 & 2019.
• Alternative Minimum Tax – The Exempt Income Thresholds are Increased From $54,300 (Single)/$84,500 (Married Filing Joint) to $70,300 (Single)/$109,400 (Married Filing Joint).
• Alternative Minimum Tax Exempt Income Phase-outs, Increased From $120,700 (Single)/$160,900 (Married Filing Joint) to $500,000 (Single)/$1 Million (Married Filing Joint).
  • Note: This means that if your income exceeds the $500,000 or $1 million phase-out amount, you are no longer eligible to exempt $70,300 or $109,400 from the Alternative Minimum Taxable Income.
• Child Tax Credit:
  • Increases From $1,000 to $2,000 Per Child, for Children Under Age 17. Also, This Credit is Refundable Up To $1,400 if You Quality (Meaning – You Meet the Low Income Tests).
  • Refundable portion ($1,400) is calculated as follows:
    1. 15% X Earned Income over $4,500 or
    2. $1,400
    3. Whichever of #1 or #2 is lower, that is the maximum amount of your Refundable Tax Credit.
  • Phase-out Increases from $75,000 (Single)/$110,000 (Married Filing Joint) to $200,000 (Single)/$400,000 (Married Filing Joint).
• Dependent Tax Credit $500 (Non-Refundable):
  • Applies to each non-child dependent (i.e. parent who = a dependent)
• 529 Plans Change – You Are Now Allowed to Use $10,000 Per Year to Pay For K-12 Education Tuition, Materials and Tutoring.
• Obamacare Penalty is Eliminated Effective 1/1/19.
• Marriage Penalty is Removed From All Tax Brackets, Except Highest Tax Bracket.
• Income Tax Brackets Will Now be Adjusted for Inflation Using a Much Slower Measure Called Chained Consumer Price Index For All Urban Consumers.
• Kiddie Tax – Unearned Income of children now taxed at the ordinary income and capital gains tax rates of Trusts and not their parents marginal tax rates.

PASS THROUGH ENTITIES

• Effective Date: 1/1/18.
• Expires 1/1/26.
• U.S.-Based LLCS, S Corps, Partnerships and Sole Proprietors, Real Estate Investors, Trusts and Estates, REITs and Qualified Cooperatives.
• 20% Deduction Allowed on Individual Income Tax Return and Trust Tax Returns. This 20% is Applied to Your Share of the Qualified Taxable Income from a Pass Through Entity.
• Deduction is Phased Out if Your Income is Too High: Phase-out Begins at $157,500 (Single)/$315,000 (Married Filing Joint).
• Non-Professional Service Businesses Who Exceed the Income Phase-Out Amounts, Automatically Default to the Following Limitation:
  1. 50% x Wages Reported on Pass Through Business or
  2. 25% x Wages Reported on Pass Through Business Plus 2.5% x Tax Basis of Depreciable Property.
  3. Use the Greater Amount in #1 or #2 Above. Then Compare That Amount to the 20% Deduction Calculation. If the 20% Amount is Less, You Must Use the Lower 20% Amount.

 CORPORATIONS

• Effective 1/1/18.
• Permanent – Meaning No Expiration Date.
• 21% Flat Tax Replaces Graduated Tax Brackets.
• Territorial System Replaces World-Wide System
• All Foreign Profits of U.S.-Based Corporations are No Longer Taxed, Effective 1/1/18.
  • Note: US-Based Means: Incorporated and Headquartered in the U.S.
• Pre-1/1/18 Untaxed Foreign Taxable Profits of U.S.-Based Corporations (“Old Foreign Taxable Profits”) Automatically Subject to Two Separate Types of Corporate Tax, Even if Those Foreign Earnings Remain Held Oversees (Not Repatriated). Here are the Two Tax Rates on “Old Foreign Taxable Profits”:
  • 8% x Untaxed Foreign Taxable Profits, Invested in Illiquid Assets Plus
  • 15.5% x Untaxed Foreign Taxable Profits, Invested in Cash and Cash Equivalents.
• Tax on “Old Foreign Taxable Profits” may be paid over 8 years.
• Corporate Alternative Minimum Tax is eliminated.

ESTATE, TRUSTS & GIFT TAX

• Estate Exemption Increased from $5,490,000 (Single)/$10,980,000 (Married Couples) to $11,000,000 (Single)/$22,000,000 (Married Couples), Effective 1/1/18.
• Trust Tax Brackets: 10% up to $2,550, 24% $2,551 – $9,150, 35% $9,151 – $12,500 and 37% taxable income > $12,500.
• Gift Tax exemption = $15,000 per recipient donee effective 1/1/18.

NON-PROFITS

• 21% Excise Tax on Each Employee’s Compensation in Excess of $1,000,000.
• 80% Rule Eliminated – Charitable Donations Linked to College/University Sporting Event Ticket Rights No Longer Deductible.
• Unrelated Business Income/Loss of Two or More Unrelated Business Activities Can No Longer be Combined.
• 1.4% Excise Tax on Net Investment Income (Endowment Income) of Certain Colleges/Universities. Who Pays This Tax?
  • Colleges/Universities With 500 or More Full-Time Students and
  • Colleges/Universities With Endowments of $500,000 or More Per Student.

OTHER

• 50% Entertainment Deduction No Longer Allowed, Effective 1/1/18.
• Tax-Free Parking/Transit Subsidy No Longer Allowed, Effective 1/1/18.
• Bonus Depreciation Deduction Increased from 50% to 100%, for Certain Depreciable Property, Effective for Property Placed in Service After 9/27/17 and Before 1/1/23. Phased Out after 2022 – 20% each year (80% 2023, 60% 2024, 40% 2025, 30% 2026)
• First-Year Expensing of Certain Depreciable Property (Section 179 Property) Increased to $1,000,000. This $1,000,000 First Year Expensing is Reduced (Phased Out), Dollar for Dollar, for Purchases in Excess of $2,500,000.
• Depreciation of Luxury Autos Increased from $3,160 (1^st Year), $5,100 (2^nd Year), $3,050 (3^rd Year), $1,875 (Year 4 on) to: $10,000 (1^st Year), $16,000 (2^nd Year), $9,600 (3^rd Year), $5,760 (Year 4 on).
• Net Operating Losses Are Limited to 80% of Taxable Income. Also, the Previously Allowed Two-Year Carryback is No Longer Allowed for Net Operating Losses Incurred on or After 1/1/18.
• Excess Business Losses of Pass Through Entities, Incurred After 1/1/18, are Capped at $250,000 (Single)/$500,000 (Married Filing Joint), Per Year. Any Excess Above This $250,000/$500,000 Cap are Treated as Net Operating Loss Carry-Forwards, Which are Then, in Subsequent Years, Subject to the New 80% of Taxable Income Limitation. Suspended Passive Losses, Upon Disposition of the Passive Business Activity, Appear to be Subject to This 80% of Taxable Income Limitation.
• Charitable Contributions Maximum Deduction Cap is Increased from 50% of Adjusted Gross Income to 60% of Adjusted Gross Income.
• Can no longer reverse or undo a previous conversion of a traditional IRA to a Roth IRA.
• Business Interest Expense now limited to 39% of Adjusted Taxable Income. Disallowed Interest is Carried Forward. This Interest Limitation does not apply if the business gross receipts = $25 million or less.
• Like-Kind Exchanges limited to Real Estate.
• Companies that provide PAID Family Leave get a 12.5% Tax Credit of the amount of wages paid during the paid leave. This credit is available only for 2018 and 2019 tax years.

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