The Tax Cuts and Jobs Act makes numerous changes to the tax law. Following are the most notable changes taking effect after December 31, 2017. Note that most of the changes to individuals are set to expire at the end of 2025.
- There are seven tax brackets for individual filers: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There are four tax brackets for trusts and estates: 10%, 24%, 35%, and 37%.
- The alternative minimum tax survives, but the corporation alternative minimum tax is repealed. Exemption amounts for the alternative minimum tax have risen to $70,330 for single taxpayers, $109,400 for married filing jointly and surviving spouses, and $54,700 for married filing separately taxpayers.
- The estate and gift tax exemption is doubled for estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026. The exemption will be indexed for inflation. The generation skipping transfer (GST) tax exemption is also doubled.
- The standard deduction will increase to $24,000 for married filing jointly filers, $18,000 for head of household filers, $12,000 for single and married filing separately filers.
- The personal exemption is repealed.
- The child tax credit will increase to $2,000 per qualifying child and will be refundable, subject to phase outs. A temporary $500 non-refundable credit is available for other dependents who are not qualifying children. Phase outs, which are not indexed for inflation, will begin with adjusted gross income of more than $400,000 for married taxpayers filing jointly, and more than $200,000 for all other taxpayers.
- Distributions of up to $10,000 per beneficiary can be used for tuition expenses for public, private, or religious elementary or secondary school.
- With the exception of state and local income taxes, mortgage interest, medical expenses, disaster losses, charitable contributions, and other deductions not subject to the 2% floor, all other itemized deductions are repealed. The overall limitation on itemized deductions for upper-income individuals is also repealed.
- Taxpayers can claim a deduction for a combination of state and local income tax, sales tax, or real property tax. The aggregate deduction is capped at $10,000. Foreign real property taxes at no longer deductible. An individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.
- For 2017 through 2018, medical expenses exceeding 7.5% of income are deductible; that percentage increases to 10% in 2019.
- The current charitable contribution limitation of 50% of adjusted gross income is increased to 60%. The standard mileage rate with regard to the use of a taxpayer’s automobile for charitable purposes is indexed for inflation in taxable years beginning after December 31, 2017.
- The mortgage interest deduction is capped at $750,000 of debt. The interest on home equity loans will no longer be deductible. Interest on up to $1,000,000 of acquisition debt for loans prior to December 15, 2017 is grandfathered.
- Casualty losses for unexpected losses to personal property are no longer deductible unless covered by specific Federal disaster declaration.
- The meaning of losses from wagering transactions is clarified to include other expenses incurred by the individual in connection with the conduct of that individual’s gambling activity, such as travel expenses to and from a casino.
- The exclusion from gross income and wages for qualified bicycle commuting reimbursements up to $20 is suspended.
- The exclusion for gross income and wages for qualified moving expense reimbursements is repealed, except in the case of a member of the Armed Forces on active duty who moves pursuant to a military order.
- Alimony – Beginning with new divorces in 2019, alimony payments to an ex-spouse are no longer deductible to the payer, and not taxable to the recipient.
- The penalty for failing to maintain minimum essential coverage for individuals under the Affordable Care Act (the individual mandate) is repealed beginning in 2019.
- The special rule allowing a contribution to one type of IRA to be re-characterized as a contribution to the other type of IRA no longer applies to a conversion contribution to a Roth IRA.
- The tax rate for corporation is reduced to 21% January 1, 2018 and is made permanent.
- The 80% and 70% dividends received deductions under current law are reduced to 65% and 50%, respectively.
- Non-corporate taxpayers, including trusts or estates, who have domestic qualified business income (QBI) for a partnership, S corporation, or sole proprietorship are allowed to deduct 20% of business-related income, subject to certain wage limits and exceptions. The 20% deduction is not allowed in computing adjusted gross income (AGI), but rather is allowed as a deduction for taxable income, and does not reduce income subject to self-employment tax. The deduction is limited for specified service trade or businesses (CPAs, for example). The deduction for specified service trade or businesses ratably phases out for joint filers between $315,000 and $415,000 and between $157,500 and $207,500 for others. This provision also provides an alternative limitation based on wages and capital. The limitation is the greater of 50% of wages paid or 25% of wages paid plus 2.5% of the unadjusted basis of the business’ capital assets. (This new code Section 199A is convoluted, and it is expected that technical corrections may be forthcoming).
- The holding period for long term capital gains is increased to three years with respect to certain partnership interests transferred in connection with the performance of services.
- The Domestic Production Activities Deduction (DPAD) is repealed effective for years beginning after December 31, 2017.
- The non-recognition of gain in the case of the like-kind exchange of property used in a trade or business or for investment is limited to real property only.
- Net operating losses are limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017. The two year carryback provisions are repealed except for losses incurred in the business of farming. Carryovers are allowed indefinitely.
- The maximum amount a taxpayer may expense under Section 179 increases to $1,000,000, and the phase out threshold increases to $2,500,000. The definition of Section 179 property is expanded to include certain depreciable tangible personal property used in connection with furnishing lodging, such as furniture and appliances. The definition of Section 179 also includes any of the following improvements to nonresidential real property place in service; roofs, heating and ventilation (HVAC) property, fire protection and alarm systems, and security systems.
- Additional first year (bonus) depreciation is now available to new and used property.
- The cap placed on vehicle depreciation write-offs of business use of vehicle is increased and indexed for inflation. The limits currently are $10,000 for the first year, $16,000 for the second year, $9,600 for the 3rd year, and $5,780 for all subsequent years, until the cost is fully recovered.
- No deduction is allow with respect to (1) and 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 purpose, or (3) a facility or portion thereof used in connection with any of the above items.
- Taxpayers may still deduct 50 percent of the food and beverage expenses associated with operating their trade or business. For amounts incurred between January 1, 2018 and December 31, 2025, the provision expands this 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 minimus fringes and for the convenience of the employer.