Schutte & Hilgendorf, PLLC has been tracking the Tax Cuts & Jobs Act very closely. We believe your knowledge of these changes and how they affect you and/or your business is very important. Following are a few of the main components of the bill that may affect your tax returns. Most of the provisions of the bill go into effect for 2018 tax returns, but there are couple changes that will go into effect for 2017 tax returns.
Individual Tax Law Changes
The act removed (by reducing it to zero) the penalty for not obtaining qualified health insurance, effective after 2018.
A top individual tax bracket of 37%
The top tax bracket for individuals has been reduced from 39.6% to 37%. Many of the other brackets have been reduced as well.
Standard deduction: The act increased the standard deduction to $24,000 for joint returns and $12,000 for single individuals. The additional standard deduction for elderly and blind taxpayers was not changed by the act. The personal exemptions of $4,050 per person were repealed.
- Overall limitation: The act repealed the overall limitation on itemized deductions.
- Mortgage interest: The home mortgage interest deduction was modified to reduce the limit to $750,000 of acquisition debt (from the limit of $1 million) on mortgages created or modified after December 15th, 2017.
- Home-equity loans: The home-equity loan interest will no longer be deductible.
- State and local taxes: Individuals will only be allowed to deduct up to $10,000 in state and local income or property taxes.
- Miscellaneous itemized deductions: All miscellaneous itemized deductions subject to the 2% floor under current law will no longer be allowed, including common deductions like employee business expenses, tax preparation fees, investment fees, safe deposit box fees.
- Medical expenses: The threshold for deduction of medical expenses was reduced to 7.5% from 10% of adjusted gross income for 2017 and 2018.
Individual Alternative Minimum Tax (AMT)
The act increased the thresholds for when AMT will apply to individuals.
Child tax credit
The act increased the amount of the child tax credit to $2,000 per qualifying child. The maximum refundable amount of the credit is now $1,400. The act also created a new nonrefundable $500 credit for qualifying dependents who are not qualifying children. The threshold at which the credit begins to phase out was increased to $400,000 for joint returns and $200,000 for other taxpayers.
The act modifies Sec. 529 plans to allow them to distribute up to $10,000 in expenses for tuition at an elementary or secondary school. This limitation applies on a per-student basis, rather than on a per-account basis.
For any divorce or separation agreement executed or modified after Dec. 31, 2018, the act provides that alimony and separate maintenance payments are not deductible by the payer spouse. Payments to the recipient spouse are also no longer taxable.
Business Tax Law Changes
Corporate tax rate of 21%
The act replaced the prior-law graduated corporate tax rate, with a flat rate of 21%. The new rate took effect Jan. 1, 2018.
Pass-through income deduction
For tax years after 2017, individuals may be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income.
The deduction can be phased out based on W-2 wages above a threshold amount and for “specified service businesses” when the taxpayer has taxable income in excess of $315,000 for a joint return and $157,500 for single individuals.
The act extended and modified bonus depreciation, allowing businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service. It also removed the rule that made bonus depreciation available only for new property.
Sec. 179 expensing
The act increased the maximum amount a taxpayer may expense under Sec. 179 to $1 million and increased the phaseout threshold to $2.5 million. These amounts will be indexed for inflation after 2018.
Under the act, like-kind exchanges under Sec. 1031 will be limited to exchanges of real property that is not primarily held for sale. This will affect the trade in of company vehicles when purchasing a new company vehicle.
Domestic production activities
The act repealed the Sec. 199 domestic production activities deduction.
The act disallows a deduction for (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for 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.
Corporate Alternative Minimum Tax (AMT)
The act repealed the corporate AMT.
Employer credit for paid family or medical leave
The act allows eligible employers to claim a credit equal to 12.5% of the amount of wages paid to a qualifying employee during any period in which the employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account for any employee in any tax year is 12 weeks. However, the credit is only available in 2018 and 2019.
Schutte & Hilgendorf offers a broad range of professional accounting, tax, and audit services to individuals and businesses throughout Yavapai County and Northern Arizona. With over 40 years combined certified public accounting experience, we specialize in providing services to numerous industry specific areas, including non-profit organizations, homeowner’s associations and construction contracting. We also provide tax planning and preparation, sales tax and payroll tax return preparation, ongoing accounting/bookkeeping, live payroll, and QuickBooks setup and training (QuickBooks Proadvisors). Given our small size, we can still provide a personal touch with professional expertise. Come in and see us anytime at 2086 Willow Creek Road, Prescott, Arizona or call us at 928-778-0079.