The Tax Cuts and Jobs Act — What’s in it for you?

On Dec. 22, 2017, President Donald Trump signed the legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA) into law. This law represents one of the most significant revisions to the Internal Revenue Code in more than 30 years. Many provisions included in the TCJA took effect Jan. 1, and affect virtually all U.S. taxpayers, including individuals, businesses, exempt organizations, and trusts and estates. However, a number of the individual income tax provisions in the bill sunset or expire after Dec. 31, 2025.

What follows is a high-level summary of relevant provisions of the TCJA that may affect you or your business. A deeper analysis of the changes made by the TCJA can be found at bkd.com/taxreform.

Individual provisions

Individual rates on ordinary income: The seven-bracket structure was retained but with new rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37% (from 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) as follows:

Note that the tax brackets will be adjusted for inflation using a chained measurement method of the U.S. Consumer Price Index.

Individual Alternative Minimum Tax (AMT): The individual AMT was retained but with increased exemption amounts of $70,300 for single filers ($109,400 for married filing jointly). The TCJA also increases phase-out amounts of this increased exemption amount to $500,000 for single filers ($1 million MFJ).

Standard deduction: The TCJA nearly doubles the standard deduction under previous law for single and married filers to $12,000 and $24,000, respectively.

Personal exemption: The personal exemption is consolidated into the larger standard deduction under the bill and repealed along with the deduction phase out. 

Child Tax Credit (CTC): The TCJA provides an increased CTC of $2,000, including an enhanced refundable amount of $1,400. In addition, the bill significantly increases the credit’s phase-out limit to begin at $200,000 for single filers ($400,000 MFJ).

Individual mandate: The TCJA effectively removes the individual shared responsibility payment under the Affordable Care Act by decreasing this additional tax to zero for months beginning after Dec. 31, 2018.

State and Local Income, Real Estate, and Personal Property Tax (SALT) expense1: The TCJA combines the deductions for SALT not paid or accrued in a trade or business and caps them at $10,000.

Home Mortgage Interest Expense1: Under the TCJA, the deduction for home mortgage interest expense for mortgages incurred after Dec. 15, 2017, is limited to interest paid on the first $750,000 of indebtedness. No deduction is allowed for interest paid on home equity loans effective Jan. 1.

Note that on Jan. 11, the IRS issued updated 2018 income tax withholding tables to reflect overall marginal individual tax rate reduction under the TCJA. Employers are required to use the updated withholding tables no later than Feb. 15, 2018. So, generally speaking, paychecks for many employees will increase in February 2018 as a result of the new law.

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Business provisions

Corporate tax rate: The TCJA provides for a 21% flat rate effective for tax years beginning after Dec. 31, 2017. For C corporations with substantial taxable income, this represents a significant reduction in income tax burden compared to the top rate of 35% under previous law. 

Corporate AMT: The corporate AMT was repealed, with the ability to recognize remaining AMT credit carryforwards over a four-year period.

Pass-through business deduction: Effective in 2018, the TCJA provides a deduction of 20% of domestic qualified business income (QBI) from a partnership, S corp or sole proprietorship. QBI doesn’t include a reasonable compensation to an S corp shareholder or guaranteed payments. Two limitations apply starting when the owner’s taxable income exceeds $157,500 for single filers ($315,000 MFJ). First, the deduction is limited to the greater of 50% of W-2 wages paid with respect to the business or 25% of W-2 wages paid plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property. Second, the deduction isn’t allowed for specified service trade or businesses once the owner’s income exceeds certain threshold amounts, which are indexed for inflation.

Excess loss limitation: The TCJA limits the amount of nonpassive losses from a pass-through entity an individual may deduct to $250,000 for single filers ($500,000 MFJ). Any excess loss is treated as part of the taxpayer’s net operating loss (NOL) carryforward to subsequent years.

Full and immediate capital asset expensing: The TCJA expands both the bonus depreciation and Section 179 expensing limitations. Under the TCJA, the eligible bonus percentage increases to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Dec. 31, 2022. For bonus depreciation purposes, the TCJA also expands the definition of “qualified property” to include used property. The TCJA also provides for $1 million of assets to be expensed under §179 (beginning in 2018) with a phase-out amount of $2.5 million.

Net business interest expense: For certain businesses, interest expense deductions are now limited to 30% of the entity’s adjusted taxable income. Any excess is eligible for carryover indefinitely.

Other notable provisions: Additional provisions that were repealed or modified under the TCJA include:

  • The domestic production activities deduction repealed after Dec. 31, 2017.
  • NOL carryovers limited to 80% of the taxpayer’s taxable income for losses arising in tax years beginning after Dec. 31, 2017. The TCJA generally only allows NOLs to be carried forward for losses arising in tax years ending after Dec. 31, 2017.
  • The deduction for entertainment, amusement, or recreation activities is repealed; however, the deduction for qualified meal expenses will remain, subject to the same 50% limitation. Meals provided for employees on employer premises also are subject to the 50% limitation.

As you can see, the TCJA contains significant modifications to the tax law. You should consult with your tax advisor to determine its specific effect on you, as circumstances are unique for every taxpayer.

1. Subject to phase out based on adjusted gross income under previous law, (i.e., the “Pease limitation”). The Pease limitation is repealed under the TCJA.

Jason Grosh is senior manager, tax for BKD CPAs & Advisors.

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