Tax Cuts & Jobs Act: Overview of Provisions
On December 22, 2017 President Trump signed into law major income tax reform, referred to as the Tax Cuts and Jobs Act (TCJA), which will significantly affect individual and business taxpayers. Most of the individual and business tax provisions are effective beginning after 2017. However, most of the individual provisions are temporary and will expire after 2025. Below is a summary of many of the TCJA provisions.
- The seven individual income tax brackets are changed from 10, 15, 25, 28, 33, 35, & 39.6 percent to 10, 12, 22, 24, 32, 35, and 37 percent.
- The five estate and trust income tax brackets are changed from 10, 25, 28, 33, & 39.6 percent to only four 10, 24, 35, and 37 percent.
- The “kiddie tax” is simplified by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child. Taxable earned income is taxed according to an unmarried taxpayers’ brackets and rates.
- Both the exemption amount and the exemption amount phase-out thresholds for the individual AMT will be increased and indexed annually for inflation. For 2018 - the AMT exemption amount is increased to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return), and $70,300 for all other taxpayers (other than estates and trusts). For 2018 - the phase-out thresholds are increased to $1,000,000 for married taxpayers filing a joint return, and $500,000 for all other taxpayers (other than estates and trusts).
- The estate and gift tax exemption for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026 is doubled. The basic exclusion amount is increased from $5 million to $10 million and will be indexed for inflation.
- The IRC §5000A individual responsibility payment (tax) for taxpayers that do not obtain minimum essential health insurance is reduced to zero for months beginning after 2018.
- The personal exemption deduction is suspended (i.e., amount is zero).
- The basic standard deduction will be temporarily increased for individuals across all filing statuses – $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers was not modified.
- For 2017 and 2018 the threshold for deducting medical expenses is reduced to 7.5 percent (from 10 percent) for all taxpayers. This threshold applies for purposes of the AMT in addition to the regular tax.
- Individuals may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for the aggregate of state and local income or property taxes not paid or accrued in carrying on a trade or business, or an activity described in §212.
- A taxpayer may treat no more than $750,000 as acquisition indebtedness ($375,000 in the case of married taxpayers filing separately). In the case of acquisition indebtedness incurred before December 15, 2017 this limitation is $1,000,000 ($500,000 in the case of married taxpayers filing separately). There is also a written binding contract exception for a taxpayer who entered into a contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases that residence before April 1, 2018. They will be considered to have incurred acquisition indebtedness prior to December 15, 2017, and thus eligible for the $1,000,000 limitation.
- The home equity indebtedness interest deduction is suspended.
- The 50 percent of AGI limit for certain charitable contributions by an individual taxpayer of cash to public charities and certain other organizations is temporarily increased to 60 percent. After 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.
- A taxpayer may claim a personal casualty loss only if such loss was attributable to a presidentially declared disaster area.
- All miscellaneous itemized deductions that are subject to the two percent floor are disallowed.
- The term wagering losses is temporarily changed to include any deduction otherwise allowable incurred in carrying on any wagering transaction.
- The moving expense deduction and exclusion is suspended except for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station.
- For divorce or separation instruments executed after 2018, alimony and separate maintenance payments are not deductible by the payor spouse and not included in income by the recipient spouse.
- The child tax credit (CTC) is increased to $2,000 per qualifying child. The maximum amount refundable may not exceed $1,400 per qualifying child (increased for inflation). The credit is further modified to temporarily provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. The credit begins to phase out for taxpayers with AGI in excess of $400,000 (in the case of married taxpayers filing a joint return) and $200,000 (for all other taxpayers).
- For taxable years beginning after December 31, 2017, and before January 1, 2026, an individual taxpayer may generally deduct 20 percent of qualified business income (QBI) from a partnership, S corporation, or sole proprietorship, as well as 20 percent of aggregate qualified REIT dividends and qualified publicly traded partnership income. The QBI deductible amount for each qualified trade or business is limited based on W-2 wages and capital investment phased-in above a threshold amount of taxable income (i.e., $157,500 and $315,000 for MFJ). A qualified trade or business means any trade or business other than a specified service trade or business and other than the trade or business of performing services as an employee. The disallowance of the deduction on income of specified service trades or businesses also phases in above the threshold amount of taxable income (i.e., $157,500 and $315,000 for MFJ).
- The C corporation tax rate was reduced to a flat 21 percent rate and the corporate AMT was repealed.
- The C Corporation dividends received deduction (DRD) was reduced from 70 percent to 50 percent (for a less than 20 percent ownership interest) and from 80 percent to 65 percent (for a more than 20 percent and less than 80 percent ownership interest).
- The partnership technical termination rule was repealed where within a 12-month period there was a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.
- The TCJA modified the definition of a substantial built-in loss for purposes of §743(d), affecting transfers of partnership interests. Under the provision, in addition to the present-law definition, a substantial built-in loss also exists if the transferee would be allocated a net loss in excess of $250,000 upon a hypothetical disposition by the partnership of all partnership’s assets in a fully taxable transaction for cash equal to the assets’ fair market value, immediately after the transfer of the partnership interest.
- New IRC §1061 (i.e., carried interests) provides for a three-year holding period in the case of certain net long-term capital gain with respect to any applicable partnership interest held by the taxpayer.
- Bonus deprecation (under §168(k)) is increased to 100 percent of eligible property placed in service before 2023 and then phased down by 20 percent per year thereafter. The definition of eligible property was modified to include “used” property.
- IRC §179 expense amount was increased to $1 million and the phase-out range was increased to begin at $2.5 million. These amounts will be indexed for inflation after 2018.
- The definition of eligible §179 property was also expanded to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging and qualified real property eligible now includes nonresidential real property improvements to the roofs, HVAC property, fire protection and alarm systems, and security systems.
- The §280F (i.e., luxury automobile) limitations are increased for passenger automobiles placed in service after 2017 and for which the AFYD deduction under §168(k) is not claimed. The maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period. These amounts will be adjusted annually for inflation.
- The separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated and replaced with a 15-year recovery period (20-year ADS) for qualified improvement property.
- IRC §172 is modified to limit the net operating loss (NOL) deduction to 80 percent of taxable income (determined without regard to the deduction) for losses. Carryovers to other years are adjusted to take account of this limitation and may be carried forward indefinitely. The two-year carryback and special NOL carryback provisions were repealed. However, farming businesses are still allowed a two-year NOL carryback. Property and casualty insurance companies are not subject to the 80 percent-of-taxable-income limit and losses will be carried back two years and carried over 20 years.
- For taxable years beginning after December 31, 2017 and before January 1, 2026, excess business losses of a taxpayer other than a corporation are not allowed for the taxable year and are carried forward as part of the taxpayer’s NOL carryforward in subsequent taxable years. An excess business loss for the taxable year is the excess of aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer (determined without regard to the limitation of the provision), over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a taxable year is $250,000 (or $500,000 in the case of a joint return). The threshold amount is indexed for inflation. In the case of a partnership or S corporation, the provision applies at the partner or shareholder level.
- The §199 domestic production activities deduction was repealed for all taxpayers for taxable years beginning after December 31, 2017.
- The deduction for business interest is limited to every taxpayer (with limited exemptions) to the sum of (1) business interest income; (2) 30 percent of the adjusted taxable income of the taxpayer for the taxable year; and (3) the floor plan financing interest of the taxpayer for the taxable year. In general, the limitation applies at the taxpayer level. However, for pass-through entities it applies at the entity level. The amount of any business interest not allowed as a deduction for any taxable year may be carried forward indefinitely (with certain limitations to partnerships).
- §1031 like-kind exchanges (non-recognition of gain) will only apply to real property (not personal property) that is not held primarily for sale.
- No deduction is allowed for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment. The employee exclusion from wages will still apply except for qualified bicycle commuting reimbursements.
- No deduction is allowed with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items.
- Taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business. For amounts incurred and paid after 2017 and prior to 2026, the provision expands the 50 percent limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after December 31, 2025 are not deductible.
- The list of small businesses that can use the cash method of accounting has been expanded to those taxpayers that have average annual gross receipts of $25 million or less in the three prior tax years. Taxpayers that meet the gross receipts test are also eligible to use simplified methods of accounting that exempt them from the requirements to capitalize costs including certain home construction contracts, Uniform Capitalization (i.e., UNICAP), certain long-term construction or defense contracts, and maintenance of inventories.
Pat Garverick is a CPA who currently lives in Phoenix, Ariz. He began his career in public accounting in 1988 after obtaining his BSBA in accounting from The Ohio State University. After receiving his MT degree from Arizona State University in 1992, Mr. Garverick began operating his own tax and financial planning business. He also started writing, reviewing, and teaching tax and financial planning continuing professional education courses around the country.