As of right now, we are waiting for what is being advertised as a nearly definite passage of the Tax Cuts & Jobs Act (votes are planned for Tuesday, December 19, and Wednesday, December 20), which will present taxpayers with a dramatically changed federal income tax landscape.
The significant scope of these changes – most of which are effective as of 2018 – cannot be fully conveyed in a brief summary, but here is a quick, simplified listing of some – but certainly not all – of the major provisions.
Individuals will see a significantly changed landscape. The changes will include a lower set of tax brackets, but changes to available deductions are also being made. Some of the items to watch include:
- Individual tax rates are going down in almost every bracket, with the top bracket going to 37%.
- Individuals’ standard deductions nearly double; personal exemptions go away.
- Mortgage interest debt limit (new purchases) goes down to $750,000. Interest on home equity debt is no longer deductible.
- State and local income/sales tax and property tax deductions are limited: combined $10,000.
- 2% itemized deductions are being repealed.
- Child tax credit is increasing to $2,000 – partially refundable.
- Roth IRA contributions will not be able to be recharacterized as traditional.
- The estate exemption is being doubled.
Businesses are also seeing the most significant tax treatment changes in over 30 years. The longstanding wisdom that helped determine how businesses should be structured and should operate, both domestically and internationally, will change. Some of the major changes include:
- The corporate tax rate will be reduced and set at 21%.
- Corporate Alternative Minimum Tax is repealed.
- A 20% pass-through income deduction is created (to which caps and exclusions apply).
- Interest expense deduction limits are put in place, with an exemption for small businesses.
- Bonus depreciation is increased to 100% for qualifying purchases, and the original use requirement is repealed. Section 179 expensing is significantly expanded, also. Depreciation limits for vehicles raised.
- The Domestic Production Activities Deduction (Section 199) is repealed.
- Net operating loss carryover rules are significantly changed.
The breadth of these changes cannot be overstated, and the opportunity for proactive planning is always now, even as we await final voting and probable passage into law one of the most sweeping tax law changes in history.
Michael A. Carraway, Jr., CPA
Michael A. Carraway, Jr., is a partner with GranthamPoole PLLC and a recognized leader in the field of partnership and corporate taxation, having worked with many clients on entity and transaction structuring matters. He has also written, taught, and spoken on many topics in the area over the years and has served as a technical subject matter expert in several practices. Please contact Mike at firstname.lastname@example.org, www.linkedin.com/in/michaelcarraway, or 601-499-2400. CPA License # R2705
***The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.