Yesterday, Congress officially passed the Tax Cuts and Jobs Act (TCJA). President Trump is expected to sign the bill into law sometime between now and early January. The Act represents the largest overhaul of the Internal Revenue Code since 1986. As with any new legislation, additional interpretive guidance will ultimately be provided by the IRS and the courts in the coming months and years. Fully analyzing the Act will take some time, but we wanted to share a summary of what we currently know as well as some action items that may apply to you.
Nearly everything in the new law does not take effect until January 1, 2018. This creates a few year-end planning ideas that would need to be implemented during the few business days that remain in 2017. As always, each taxpayer’s facts and circumstances are unique and should always be considered before undertaking any particular strategy.
CHANGES FOR INDIVIDUALS:
– The Act lowers tax rates for nearly all individual taxpayers through a combination of the direct reduction of rates or the adjustment of tax brackets.
– The standard deduction will nearly double, meaning that many taxpayers who previously itemized deductions will no longer elect to do so.
– The Act eliminates personal exemptions, and eliminates or limits certain other deductions and credits.
– The child tax credit is doubled.
– Fewer taxpayers will now be subject to the alternative minimum tax (AMT), and those who are subject will have increased exemption amounts.
– The deduction for alimony payments and their inclusion in the income of the recipient has been repealed.
ACTION ITEMS FOR INDIVIDUALS:
Due to the increased standard deduction and limitations that will apply in 2018 and beyond, it may be advantageous to accelerate itemized deductions into 2017.
– Consider accelerating payment of property taxes due in January into December.
– If you expect to owe state and local income taxes for tax year 2017, consider paying your fourth quarter estimated taxes on or before December 31, 2017.
– For some taxpayers, accelerating payment of medical expenses or investment advisory fees into 2017 may be beneficial.
– Making additional charitable contributions this December may also be beneficial.
The benefits of accelerating certain itemized deductions may be limited for taxpayers whose itemized deductions are already limited under existing law. We are available to help you with these decisions.
CHANGES FOR BUSINESSES:
– The Act significantly reduces tax rates on most businesses regardless of structure:
– The tax rate on corporations is lowered from 35 percent to 21 percent, and the corporate AMT has been eliminated.
– For pass-through entities (businesses taxed as S corporations or partnerships), a new 20 percent deduction against certain income has been created. However, the benefit of this deduction will depend on several factors, including the industry in which the business operates, the amount of W-2 wages paid, and the original cost of the depreciable assets held by the business.
– Depreciation and expensing rules on fixed asset acquisitions have been enhanced. Bonus depreciation now applies to used assets and is increased to 100% on fixed assets placed in service after September 27, 2017. The maximum total cost of fixed assets that can be expensed has been increased for 2018 and beyond.
– The deduction for business interest expense will be limited in certain situations.
ACTION ITEMS FOR BUSINESSES:
Since the effective tax rate for most business income will decrease, the usual planning ideas to defer income and accelerate deductions (within the context of cash flow and general business strategy) becomes even more important this year.
– Cash method taxpayers could defer collections of receivables and accelerate payment of expenses, pay bonuses or commissions before year end, or prepay items that would be eligible for deductions in the current year.
– Consider accelerating acquisitions of fixed assets into December provided the assets can be placed in service this year.
Tax Changes as briefly as can be explained, compliments of CCH Incorporated
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Tax Cuts and Jobs Act