Congress has passed and the President has signed the largest tax reform act in over 30 years. This bill will make fundamental changes in the way individuals and businesses determine tax liabilities beginning in 2018. I will try and highlight some of the changes enacted. Business changes are permanent while individual changes will expire in 2025.
· Individual tax rates have been reduced. The maximum tax rate has been reduced from 39.7% to 37%.
· Personal exemptions are eliminated.
· Standard deduction has been increased to $ 24,000 for married filing joint taxpayers, $18,000 for Head of Household taxpayers and $12,000 for all other taxpayers.
· The child tax credit has been increased to $ 2,000 and other changes have been made to the phase-out and refund ability of the credit.
· The method to calculate annual cost of living increases is being changed. This will reduce the annual inflationary cost of living increases.
· The method of calculating the tax on children’s income is amended.
· State and Local taxes and real estate taxes are capped at $ 10,000 deduction. Anything paid in excess will be nondeductible.
· Home equity loan interest deduction is suspended.
· Mortgage interest expense is limited to mortgage indebtness of $ 750,000 for mortgages acquired after December 15, 2017. The new law does not apply to mortgage indebtness incurred on or before December 15, 2017. A taxpayer who has entered into a binding written contract before Dec. 15, 2017 to
close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before Apr.1, 2018, shall be considered to incur acquisition indebtedness prior to Dec. 15, 2017.
· The deduction for medical expenses is reduced to 7.5% of Adjusted Gross Income (AGI) for tax years 2018 and 2019.
· For contributions made in tax years beginning after Dec. 31, 2017 the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60% of AGI.
· The deduction for miscellaneous itemized deductions that are subject to the 2% of AGI is suspended.
· The phase out of itemized deductions is suspended.
· The deduction for moving expenses is suspended except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.
· The Affordable Care Mandate has been repealed.
· The Act does leave intact the 3.8% net investment income tax and the 0.9% additional Medicare tax.
· The Alternate Minimum Tax (AMT) exemption has been increased which reduces the number of taxpayers subject to AMT tax.
· Taxpayers can now make distributions from 529B for the payment of elementary or secondary public, private, or religious schools up to a limit of $10,000 per tax year. In the past 529b distributions could only be used for the payment of qualified higher education expenses.
· You will be prohibited to recharacterize a conversion contribution to a Roth IRA.
· Like-Kind exchanges will be limited to only real estate property.
· The estate tax exclusion is being doubled. It is expected to increase to $ 11.2 million in 2018.
· The corporate tax rate is reduced to 21%.
· Business will be able to fully deduct the cost of certain equipment purchased instead of depreciating.
· Pass through entities which include partnerships, LLCs, Subchapter S shareholders, and sole proprietors will be able to apply a reduced tax rate on a portion of their earnings subject to limitations.
These are some of the changes being enacted by the Tax Cuts and Jobs Act recently passed.