Two main misconceptions concerning the new tax reform:
1. Repeal of Obama Care's health insurance requirement
Even though the new law eliminates the requirement to carry health insurance, the shared responsibility requirement starts in 2019. Therefore, for 2018, the minimum annual penalty for individuals who do not have the required health coverage is $695/adult ($347.50 for each child under 18). The maximum penalty applies for each month that the required coverage is not in place.
2. Alimony received being reported as income
In 2018 alimony received is included in income and alimony paid is a deduction, as always. For agreements executed after December 31, 2018, alimony will not be included in income by the recipient or deductible from income by the payor.
*If an agreement that was executed before December 31, 2018 is modified after that date, the new rules do not apply unless the modification expressly provides that the new rules apply.
Increased Standard Deduction
Filing Status 2017 2018
Single $6,350 $12,000
Household $9,350 $18,000
Filing Joint $12,700 $24,000
*Additional Standard Deduction for Elderly and Blind remains unchanged
Suspended for 2018-2025
· Code Section 151 Exemption Amount is Reduced to Zero
Does not alter provisions of the Code that refers to a taxpayer allowed deduction under Code Section 151
Application Example: Code Section 24(a) – Child Tax Credit
Mortgage Interest Deduction Limitation
· Deduction for Home Equity Interest is Suspended for 2018-2025
· Acquisition Debt Maximum is Lowered to $750,000 ($375,000 for married filing separately) for 2018-2025
· Debt incurred on or before December 15, 2017 is subject to $1,000,000 ($500,000 for married filing separately) acquisition debt limit
State & Local Tax Limitation
· Aggregate Deduction for State and Local Taxes is limited to $10,000
Does not apply to taxes paid or accrued in carrying on a trade or business or in an activity described in Code Section 212
· Foreign Real Property Taxes are not deductible
· Effective for 2018-2025
Miscellaneous Deductions Suspended
· Suspended effective 01/01/2018 through 12/31/2018
· Suspension applies to miscellaneous deductions subject to the 2% of adjusted gross income (AGI) rule
· Includes the following:
o Unreimbursed employee business expenses
o Unreimbursed vehicle expenses of rural mail carriers
o Investment expenses and expenses for the production or collection of income
o Tax determination expense
o Expenses allowed under the “hobby loss” rules
Miscellaneous Deductions NOT Suspended
· Suspension does not apply to the following deductions:
o Amortizable bond premium
o Estate tax on income in respect to a decedent (IRD)
o Impairment-related work expenses
o Repayments of more than $3,000 under a claim of right
Child Tax Credit
· Effective 2018, the credit is increased from $1,000/child to $2,000/child
· Previously subject to phase-out by $50 for each $1,000 of modified AGI over the limits
Filing Status New Limits Previous Limits
Single $200,000 $75,000
Filing Joint $400,000 $110,000
· New non-child dependent nonrefundable credit of $500/dependent
Alternative Minimum Tax
· No change in the tax rates of 26% (up to $175,000) and 28% (>$175,000)
· Exemption amounts increased effective January 1, 2018
Filing Status New Limits Previous Limits
Single $70,300 $54,300
Filing Joint $109,400 $84,500
· Threshold for phase-out of the exemption increased effective 01/01/2018
Filing Status New Limits Previous Limits
Single $500,000 $75,000
Filing Joint $1,000,000 $150,000
Alimony Income/Alimony Deduction
· Alimony income is included in income and alimony deduction allowed for the payor
· For agreements executed after December 31, 2018, alimony will not be includible in income or deductible from income
· If an agreement that was executed before December 31, 2018 is modified after that date, the new rules do not apply unless the modification expressly provides that the new rules apply
Corporate AMT Repealed
*For tax years beginning after December 31, 2017, the corporate AMT is repealed.
AMT credit carryforwards:
*For tax years beginning after 2017 and before 2022, a corporation can receive a refund of AMT credits equal to 50% of the amount by which the credit for the tax year exceeds the amount of the credit allowed against the regular tax liability for the year. Note that the refundable percentage increases to 100% for tax years beginning in 2021.
*Example: Assume Corporation C has unused AMT credits of $100 as of 12/31/17 and its 2018 regular income tax liability is $20. Corporation C may offset its entire 2018 regular tax liability of $20 with its AMT credit carryforwards.
Additionally, Corporation C also receives a refund of $40 of AMT credits on its 2018 tax return ($100 total AMT credits less $20 utilized against current year regular tax liability multiplied by 50%)
Bonus Depreciation Increased to 100%
*A 100% first year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.
*The additional first year depreciation is allowed for new and used property.
*A transition rule provides that for a taxpayer’s first taxable year ending after September 27, 2017, the taxpayer may elect to apply a 50% allowance instead of the 100% allowance.
*Taxpayers can still elect to not claim bonus depreciation for any class of property placed in service during the tax year. The election out of bonus depreciation is an annual election.
Code Sec. 179 Limitations Increased
*For property placed in service in tax years beginning after Dec.31, 2017 the maximum amount a taxpayer may expense under Code Sec. 179 is increased to $1 million, and the phase-out threshold amount is increased to $2.5 million.
*For tax years beginning after 2018, these amounts (as well as the $25,000 sport utility vehicle limitation) are indexed for inflation.
*Qualified real property eligible for Code Sec. 179 expensing is expanded to include the following improvements to nonresidential real property after the date such property was first placed in service: roofs, heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
*Any other building improvements to nonresidential real property that aren’t elevators or escalators, building enlargements or attributable to internal structural framework are Code Sec. 179 property.
Domestic Production Activities Deduction
*For tax years beginning after Dec.31, 2017, the Code Sec. 199 domestic production activities deduction (DPAD) is repealed.
Meals and Entertainment Expenses (Pre Tax Cut and Job Act)
*Pre Tax Cut and Jobs Act Law
*50% of Meals and Entertainment expenses are deductable
*Housing and meals provided for the convenience of the employer are excluded from the employee’s gross income
*Qualified transportation fringe benefits were deducted by employer and excluded from the employee’s gross income if:
· Commuter highway vehicle is specifically used for travel between employee’s residence and place of employment
· Employee purchases transit passes
· Employee opts for qualified parking
· Employee qualifies for bicycle commuting reimbursement
Meals and Entertainment Expenses (Post Tax Cut and Job Act)
*Tax Law Change
· 50% limit on meals expanded to include meals provided for the convenience of the employer
After 12/31/25 meals for the convenience of the employer are not deductable
· Entertainment expenses are no longer deductable
· Transportation fringe benefits are no longer deductable by the employer
Exclusion from employee’s income remains
· Commuter-type deductions are now disallowed unless provided for the safety of the employee
*Employers will need to take care in separating entertainment costs from meals beginning in 2018
· Example: Golf outing with business dinner - What is deductable and what is non-deductable?
Deduction of Business Interest 2017 vs. 2018
*Interest is generally deductible by the business
2018 Changes - For tax years beginning after 12/31/17 and before 1/1/2022
*Regardless of form, every business is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income
*Amount allowed as a deduction for business interest shall not exceed the sum of:
A. Business interest income;
B. 30% of adjusted taxable income (which cannot be less $0), plus
C. Floor plan financing interest
*Business interest does not include investment interest
Deduction of Business Interest (2018 Changes)
*Disallowance of a deduction for net interest expenses in excess of 30% of the business’s adjusted taxable income
*Determined at the tax filer’s level
· Special rule for pass-through entities (determination made at entity level)
*Disallowed business interest carried forward indefinitely
· Special rule for partnership (Code Sec. 163(j) as amended by Act Sec. 13301)
*Exceptions from disallowance of net interest expense deduction
· Average annual gross receipts for 3 year period ending with prior tax year that do not exceed $25M
· Real property trade or business who elect out of the provision and use ADS depreciation
· Farming businesses who elect out of the provisions and use ADS depreciation on property with a recovery period of 10 or more years
· Business interest related to floor plan financing