Tax Cuts and Jobs Act of 2017: What You Need to KnowFebruary 15, 2018
By: Edward Rigby, CPA
Most of the new tax law went into effect January 1, 2018, impacting business owners and individuals for the 2018 tax year. This article focuses on educating our clients and helping them understand how the changes will affect them and their tax services. Here are the key provisions:
Major Corporate Tax Reduction
Most notable is the reduction in the corporate tax rate. Under prior law, the corporate tax rate was on a graduated schedule with the top rate set at 35%. The TCJA drops the corporate tax rate down to 21% across the board.
Individual Tax Rate Reduction
The new tax law retains seven progressive tax brackets with a reduction of the top tax bracket. The top individual tax rate has been lowered from 39.6% to 37%. For a married couple filing a joint return, the 37% tax bracket begins at taxable income over $600,000 ($500,000 for a single taxpayer). The new law generally retains the tax rates applicable to long term capital gains and qualified dividends. Under the new law, a married taxpayer filing jointly shall have a standard deduction of $24,000 ($12,000 for single taxpayers).
Pass Through Income Deduction
The new law allows individual taxpayers with pass through income from sole proprietorships, partnerships (including LLCs) and S corporations to claim a 20% deduction from taxable income. Under the general rule,
the income must be from a domestic, non-service business. The new law allows taxpayers below certain taxable income thresholds ($315,000 for a married joint filer and $157,500 for single filers) to claim the deduction regardless of whether the pass through income is associated with a service business or the W-2 wage and capital limitation requirements. This is a complex tax law change which should be discussed in detail with a tax advisor.
Individual Tax Deductions
The new law eliminates many longstanding deductions for individual taxpayers. First, personal exemption deductions have been repealed. There is a $10,000 limit on deductions for state and local taxes not paid or incurred in a trade or business. There is a new limit on mortgage interest for acquisition indebtedness (the mortgage amount has been lowered from $1 million to $750,000 subject to certain “grandfather rules”) and home equity loan interest has been repealed.
Other Key Changes
The new law repeals the alternative minimum tax (AMT) for corporations but retains the tax for individual taxpayers with enhanced exemption amounts (and exemption phaseout amounts). Also, federal estate, gift
and generation skipping tax exemptions have been doubled from prior law amounts. For business owners, there are enhanced deductions available for capital investments in eligible business property.
Additional Business Highlights
There are many more pieces of the TCJA to be aware of. For deeper insight on the TCJA as it relates to your specific business and/or individual taxes, contact The Curchin Group at 732-747-0500.