New Tax Laws- Quick Update
In December 2017, the Tax Cuts and Jobs Act was signed into law. Succinctly, this is the biggest change to the Tax Code since the Tax Reform Act of 1986. The major overhaul included lowering the corporate tax rate to 21%, removing exemptions, increasing the standard deduction, removing the penalty for the individual health insurance mandate, and much more. This article presents the major changes to the tax code in two ways; individual changes and business changes. On a high level, these changes have simplified the tax code and many taxpayers will pay less tax. These rules will be in effect for 2018 tax returns.
The biggest individual change is the increase to the standard deduction. Married filing jointly couples will receive a $24,000 standard deduction (up from $12,700 in 2017). By an IRS estimate, nearly 90% of all taxpayers will now take the standard deduction. If a taxpayer’s itemized deduction do not exceed the standard deduction, they will no longer be able to take deductions such as real estate taxes, home mortgage interest, and charitable contributions.
Personal exemptions have been removed from Form 1040. To ensure taxpayer’s with many dependents do not see a big tax increase, the Child Tax Credit has been significantly increased. Alimony payments will no longer be taxable income to the payee or a deduction to the recipient. The Affordable Care Act required individuals not cover by health insurance to pay a penalty on their tax return. For months beginning after December 31, 2018, the amount of the individual shared responsibility payment will be reduced to zero. Lastly, student loans that are discharged due to death or disability are no longer included in gross income.
On the business (corporate) side, Internal Revenue Code (IRC) §199 was repealed and replaced by IRC §199A. This new law allows qualified pass-through business (S Corp’s, partnerships, Sole Proprietors) a deduction of 20% of their net income. The deduction is taken on the business owner’s personal return. The new law also includes relaxed accrual method accounting requirements. Any business having under $25 million in gross receipts for the past 3 years are allowed to use the cash basis of accounting and may treat inventory as incidental materials and supplies.
The corporate tax rate has been reduced to a flat tax of 21%. Corporate alternative minimum tax has also been repealed. Cost recovery standards have been simplified. Bonus depreciation has been increased to 100% and is now available on new or used assets purchased. Like kind exchanges have been modified to only allowing real property to have the gain deferred. All personal property like kind exchanges have been suspended and taxpayer’s must recognize gain in the year in which the asset is sold. The meals & entertainment deduction has also been limited. Now, only meals will be an allowable deduction (subject to the 50% limitation). Entertainment must now be treated as a non-deductible expense.
In summary, the Tax Cuts and Jobs Act made sweeping changes to the tax code as we know it. While this article points out the major changes to the tax code, there are many other smaller changes which may be noticed on 2018 tax returns. These changes are new to everyone and at the time of this article, there is not much guidance on these laws. Once the 2018 tax filing season is underway, be on the lookout for the IRS to release guidance on many of these new law changes.