No doubt you have heard about the new tax law Congress passed in December. Most of the provisions contained in the Tax Cuts and Jobs Act — the most comprehensive revision of the Internal Revenue Code since the Reagan tax act of the mid-1980s — became effective on January 1, 2018.
A comprehensive review of all the provisions of the Tax Act would likely test the patience of most readers. Based on my perspective as a tax attorney, here is a selected review of provisions of the Tax Act that are important to business professionals. (In some cases, I’ve noted provisions of the tax law that ultimately didn’t change, even though there may have been proposals for changes.)
Individual tax brackets:
There are 7 brackets just like before, but slight reductions in rates for some brackets. New rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Increased for married filing jointly from $12,700 to $24,000.
Maximum capital gains/dividend tax rate:
Remained unchanged at 20%.
Alternative minimum tax [“AMT”]:
Still applies. The AMT is complicated, and the changes made by the Tax Act are too. However, the cumulative effect of the changes means that the number of filers impacted by the AMT will likely drop dramatically.
Limitation on Itemized deductions:
Under previous law, high-income taxpayers could be limited in the use of itemized deductions. Such limitations have been repealed.
Deduction of mortgage interest:
Interest on mortgages obtained after 12/31/2017 will be limited to total debt of $750,000 on up to 2 residences, down from the previous $1 million. Interest on new home equity debt is no longer deductible.
State and local tax deductions:
The deduction for state and local income, sales, and property taxes is limited to $10,000. This was previously unlimited.
Home sale exclusion:
The exclusion of up to $500,000 of gain from the sale of a personal residence [subject to certain ownership and use requirements] was not changed.
No changes. Individuals can generally contribute $18,000 per year, plus $6,000 catch-up contribution for those 50 and older.
The 3.8% tax on net investment income enacted as a part of Obamacare remains unchanged.
Estate and gift tax:
The estate and gift tax rates stay the same, but the exemption amounts [the amount of an estate or a gift below which the tax does not apply] increased significantly from $5.6 million to $11 million per person. Portability still applies — which means that the second spouse to die can use the unused portion of the first spouse to die’s exemption provided certain filing requirements are met. Beneficiaries of an estate [but not recipients of a gift] still get stepped-up basis in inherited assets for income tax purposes.
Corporate tax rates:
Reduced from 35% to 21%. The corporate alternative minimum tax (AMT) was repealed.
Deduction for business investments:
Previously, businesses could expense — rather than depreciate — certain newly purchased property up to $500,000 in amount. The Tax Act allows immediate expensing of qualified property acquired and placed in service up to $1 million.
Pass-through entity taxation:
Previously, income from pass-through entities [S Corps and partnerships] was not taxed at the entity level, but passed through to the individual owners and taxed at individual rates. That generally still applies, except a deduction is allowed of up to 20% of “qualified business income” from the pass-through entity [excluding most personal service entities like law, accounting, medicine, etc.].
Many of the provisions of the Tax Act are subject to sunset after 2025. The sunset requirements were generally imposed in order for the Tax Act to meet certain procedural and budgetary restraints calculated over a 10-year period. Congress can, and very likely will, make at least some of these changes permanent in future years.
From my viewpoint, the expansion of the standard deduction is the most significant provision for the individual taxpayer, as it will simplify their tax filing, since it will be more beneficial than claiming itemized deductions and make the recordkeeping burden of doing so unnecessary. The increase in the estate tax exemption is also significant for individuals. Very, very few people will now be subject to the estate tax.
Additionally, I believe that the reduction in the corporate tax rate and the increased deduction for business investments are the most significant business-related provisions of the Tax Act. Both will increase the profitability of businesses, promote increased investment in property and equipment, and lead to greater productivity by the American worker.
Here’s hoping that the Tax Act will reduce your taxes or, at the very least, make filing easier.
About the Author
John A. Cocklereece, Jr. is a director and attorney at the law firm of Bell, Davis & Pitt, P.A., with offices in Winston Salem and Charlotte. One of his principal areas of practice is the representation of property owners and counties in property tax appeals. Cocklereece is a former Chairman of the North Carolina Property Tax Commission.