2017 New Tax Law
POSSIBLE ACTIONS TO TAKE IN 2017
**Prepaying Real Estate Taxes– Due to the limitation on state and local taxes in 2018 of $10,000, you might benefit from prepaying some of your 2018 real estate taxes in 2017. If you are not subject to the alternative minimum tax, due to the addback of certain deductions, and your income level, pre-paying your real estate taxes should be considered.
**Charitable Contributions- If you will not benefit from itemized deductions in 2018, due to the increased standard deduction, you should consider making more charitable contributions before the end of this year. Also, you will receive a greater benefit by doing so this year, since the tax rate will generally be higher in 2017 than 2018, so it will help reduce your current taxes.
**Medical Expenses- If you will not benefit from itemized deductions in 2018, due to the increased standard deduction, you should consider paying any outstanding medical bills before the end of this year, IF you have enough medical expenses to claim, based on the threshold amounts. Also, you will receive a greater benefit by doing so this year, since the tax rate will generally be higher in 2017 than 2018, so it will help reduce your current taxes
The following is a summarization of some of the important changes for 2018 and beyond.
Tax Cuts and Jobs Act of 2017
We believe this new tax act will affect every taxpayer who has to file a return in at least one positive and at least one negative way. The impact on each taxpayer depends on that taxpayer’s particular situation. This Act affects more people than most tax acts we have had over the past 30 years. The media is telling everyone this Act benefits this group and hurts that group. The reality of it, as we see it, is that it will affect every taxpayer who has to file a tax return.
This communication contains the items that we feel you need to know in case you want to take some action before the end of this year. For example, the loss of many itemized deductions and the increase of the standard deduction may be a reason for taxpayers to make their 2018 contributions in 2017 instead of waiting for 2018.
Unless mentioned specifically, the following items are effective for tax years beginning after December 31, 2017.
** Individual Income Tax Rates – are generally going down. Effective with tax years beginning after December 31, 2017, the tax rates range from 10% to 37%, while the previous tax rates ranged between 10% and 39.6%.
** Kiddie Tax – Instead of using the parent’s tax rate, the unearned income of the child will use the trust tax rates. (Since capital gains are unearned income, 2017 may be a year for the child to sell investments and have the gains taxed under the current method (i.e., parent’s rate).) In 2018, the maximum tax rate of 37% applies to estates and trusts at $12,700.
** Alternative Minimum Tax for individuals is changed by increasing the exemption amount to $70,300 ($109,400 for MFJ). The phase out of the exemption amount starts at $500,000 AGI ($1,000,000 for MFJ).
** Personal exemptions no longer exist.
** Standard deductions are almost doubled. The amounts for 2018 are: $24,000 for Married Filing Jointly, $18,000 for Head of Household, and $12,000 for Single & Married Filing Separate. The extra standard deductions for taxpayers who are blind or age 65 or older continue as under current law.
** Itemized Deductions:
- State and local taxes will be limited to $10,000 ($5,000 for MFS) per year.
- - This includes the sum of:
1) State and local income taxes,
2) State and local real estate taxes,
3) State and local personal property taxes, and
4) State sales taxes.
Therefore, if you are going to be subject to the maximum state and local tax deduction of $10,000 and are not subject to the current AMT tax rules, you might benefit from pre-paying some of your 2018 real estate taxes now
- - Foreign taxes are still deductible and are NOT part of this $10,000 limit.
- - SPECIAL NOTE – Any amount of state and local INCOME taxes paid in a taxable year beginning before January 1, 2018, for a taxable year beginning after December 31, 2017, shall be treated as paid on the last day of the of the taxable year for which such tax is so imposed. In other words, prepaying the 2018 calendar year income tax returns in 2017 does NOT give a deduction on the 2017 income tax return.
- Medical expenses – The threshold for deducting medical expenses has been reduced, and therefore some or more of your medical expenses will come through. There could be some planning if you have outstanding medical bills due. For instance, if you will be subject to the increased standard deduction next year, and will lose the deductibility of your medical expenses, you might want to pay them now, and possibly receive a deduction for them now.
- Charitable contributions – Contributions to charities are still deductible
- Mortgage interest on Schedule A. Interest on Equity Line of Credit/Loans will no longer be deductible. All equity indebtedness will have to be traced to its usage in order to determine if the interest is deductible. The maximum amount of Acquisition Indebtedness on the first and second home will be reduced to $750,000. Although this lower Acquisition Indebtedness limit is effective for tax years beginning after December 31, 2017, December 15, 2017, is an important date going forward. The former $1,000,000 Acquisition Indebtedness limit will continue to apply for future years for any loans incurred before December 15, 2017.
- - CAUTION – The interest on the Equity Indebtedness is no longer deductible after 2017. This means if a taxpayer has a mixed loan (some Acquisition Indebtedness and some Equity Indebtedness), it is necessary to determine how much of that mixed loan is Acquisition Indebtedness.
- Casualty losses will no longer be deductible except for casualty losses attributed to a Federally declared disaster.
- The 2% Miscellaneous Itemized Deductions will no longer be deductible. These include tax return preparation fees, Form 2106 expenses, investment expenses, etc.
- The phase-out of itemized deductions will no longer exist.
** ROTH IRA ISSUES - Contributions and conversions to a Roth IRA. The ability to re-characterize a contribution to a Roth IRA as a contribution to a traditional IRA will remain in effect. The ability to re-characterize a conversion of a traditional IRA to a Roth IRA back to the traditional IRA will be REPEALED.
** Like-Kind exchange rules now ONLY apply to real estate. They no longer apply to other property such as personal property. Therefore any “exchange” of personal property will be treated as a “sale”.
** IRS is to change the withholding tables no later than 1/1/19. IRS has indicated it expects to issue new tables in mid-February 2018.
** Alimony paid will no longer be deductible and alimony received will no longer be taxable, effective for instruments executed AFTER December 31, 2018. This also applies to instruments modified after December 31, 2018, only if the modification expressly provides that this change applies to the modification.
** NONBUSINESS ITEMS
- Child Tax Credit – This increases from $1,000 per qualifying child to $2,000. In order to take advantage of the Child Tax Credit, the qualifying child must have a Social Security number which is issued no later than the due date for filing the tax return. The phase out will begin at $200,000 ($400,000 for MFJ).
- Additional Child Tax Credit – The amount of the Child Tax Credit that can be refundable cannot exceed $1,400 per qualifying child (up from $1,000). The earned income test for the refundable credit is $2,500 (down from the prior $3,000).
- Family Tax Credit – A new nonrefundable family credit of $500 is created. This is allowed for every dependent who is NOT eligible for the Child Tax Credit. A Social Security number is not required for this credit.
- Wagering losses will include wagering expenses. This means taxpayers with wagering (i.e., gambling) income can use their losses AND their expenses to offset the income. This means a nonprofessional gambler will have more losses to offset the income. This also means a professional gambler will no longer be able to claim a loss on the Schedule C.
- Student loans forgiven as a result of death or disability are nontaxable.
- Affordable Care Act – The penalty for not having insurance for the year is reduced to $0 (zero) effective for taxable years beginning after December 31, 2018.
- Tax exempt bonds – The interest on private activity bonds is now fully taxable.
** BUSINESS ITEMS
- Net Operating Loss – An NOL carried to another year can offset only 80% of the taxable income in that year. Generally an NOL can no longer be carried back but the NOL can be carried forward indefinitely.
- Lawsuit settlements, attorney fees, and other costs related to a lawsuit involving sexual abuse and sexual harassment are not deductible IF the settlement has a nondisclosure provision. Briefly this means if the parties want to keep the settlement quiet and not become public, the tax deductions are gone.
- The moving expense deduction no longer exists. Any reimbursement an employee receives from an employer for moving expenses is now taxable (with the exception of a member of the Armed Forces on activity duty moving pursuant to a military order and incident to a permanent change of station).
- The qualifying transportation and parking fringe benefits are no longer deductible by the employer but they remain nontaxable to the employee.
- A new credit is available for employers who continue to pay employees who are on family and medical leave. The credit is 12.5% of the wages paid to qualifying employees during the period they are on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to an employee. The credit is increased 0.25 percentage points (but not over 25%) for each percentage point by which the rate of payment exceeds 50%. (See new IRC Section 45S)
- Business meals on the employer’s premises that used to fall into the 100% deductible category are now subject to the 50% reduction.
- Inventories – Taxpayers can treat inventories as nonincidential supplies if their average gross receipts are $25,000,000 or below (previously $1,000,000).
- Long-term contract method of accounting can be used for taxpayers who have average gross receipts of up to $25,000,000 (previously $10,000,000).
- C corporations now have a flat tax of 21% starting with tax years beginning after December 31, 2017. (The provision to have a higher flat rate for qualified PSCs did NOT become part of the final Act.) This is a tax increase for those C corporations whose income was in the 15% bracket, but it is a tax reduction for those C corporations whose income was in the 25% or higher brackets.
- Alternative Minimum Tax for C corporations is repealed.
- C corporations - Cash method of accounting is now permitted for a C corporation which has average gross receipts of up to $25,000,000 (previously $5,000,000).
- Contributions to capital of a corporation by a non-shareholder in the past was exempt under Section 118 and the expenses paid with the money was nondeductible. Now this contribution is considered income to the corporation. The same rule applies to contributions to a partnership by non-partners.
- Nonprofits – Unrelated business income is now calculated separately for each trade or business activity. A loss from one activity CANNOT be used to reduce the profit from another activity. The loss from an activity is carried over to the following year(s), similar to an NOL, and reduces the income from that same activity in that following year(s).
- Estate, Gift, and Generation Skipping Transfers – The exemption amount increases to $10,000,000 (almost double the current amount). Assets inherited continue to receive a new basis as under current law.
Please contact our office with any questions you might have regarding the effect these changes will have on your own taxes. We will be happy to assist you with decisions regarding the impact these changes will have on your taxes as well as early tax planning for next year.