Time to Revisit Some Key Provisions of the Tax Cuts and Jobs Act10/24/18 | By: David N. Milner, Esq. | GDB 2018 Fall Newsletter
As we approach the first anniversary of the passage of the Tax Cuts and Jobs Act, I thought it might be appropriate to revisit some of the Act’s provisions and see how the changes may affect the preparation of income tax returns for the first tax year directly impacted by the Act. Except as indicated, these changes apply to income tax returns filed for the 2018 through 2025 tax years.
BUSINESS TAX CHANGES:
Corporate Income Tax Rate – Permanently reduced to 21%.
Section 199A Deduction – This new section provides for a deduction equal to 20% of an individual’s “Qualified Business Income” which includes income earned by taxpayers who are self-employed, partners in partnerships, members of LLCs and shareholders of corporations that have elected to be taxed as Subchapter S corporations, but excludes W-2 wages. There are several limitations which apply to individuals filing a joint tax return that have taxable income greater than $315,000 ($157,500 for single individuals) and income earned by certain professionals, including lawyers, accountants, doctors and most other licensed professions.
Partnership Terminations – The former rule that treated partnerships where greater than 50% of the interests in the partnership’s capital or profits were sold or exchanged within a 12-month period as having been technically terminated, has been repealed. This is a permanent change.
Business Interest Deduction – Now only allowed to the extent of 30% of EBITDA for the 2018 through 2021 tax years and to 30% of EBIT for subsequent years.
Carried Interests – Gains from carried interests (a defined term) held for less than 3 years will be treated as short term capital gains rather than long term capital gains.
Business Losses – Business losses of non-corporate taxpayers can only be used to offset $250,000 ($500,000 for individuals filing jointly) of non-business income. Any excess loss can be carried forward as part of the taxpayer’s net operating loss deduction.
INDIVIDUAL INCOME TAX CHANGES:
Individual Income Tax Rate – Maximum rate reduced to 37%.
State and Local Tax Deduction – Limited to $10,000. This limitation applies to both income and real estate taxes.
Mortgage Interest – Only deductible to extent of first $750,000 of indebtedness secured by a mortgage on debt incurred after the effective date of the change. Mortgage interest on debt of up to $1,000,000 secured by mortgage prior to the effective date of change can continue to be deducted.
Standard Deduction – Increased to $12,000 ($24,000 for those who file jointly).
529 Savings Accounts – can now be used to cover the costs of sending a child/dependent to elementary or secondary school in addition to the costs of attending college. This is a permanent change.
Increase in Available Credits –
- Child care credit increased to $2,000 for children under age 17 – still subject to phase-out based upon income.
- Non-child dependent credit - $500 for children over 16 or an elderly parent supported by the taxpayer.
Expenses No Longer Deductible –
- Moving expenses
- Personal casualty losses – except if incurred in a federal disaster area declared to be such by the President
- Entertainment expenses
- Un-reimbursed business expenses of employees
- Tax preparation fees
- Investment advisory fees
- Safe deposit box rental