We are presenting this paper in order to state some of the most obvious new provisions under the “Tax Cuts and Jobs Act “of 2018. As you can imagine, many of the provisions of this new Tax Law are still being written as of today and will leave room for interpretation and discussion for months to come and possibly years.
Many important terms such as “Qualified Business Income “as enacted under the “Pass-Through Deduction” provisions are still unclear and leave room for much desired clarification by Congress.
Therefore, our newsletter shall be updated periodically to bring you up to date as new definitions and Questions and Answers are brought into the light of day.
For now, some of the concepts mentioned below is what we know, so far from our leaders in Washington DC………
Individual Tax Rates
Seven Individual Income Tax Brackets: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. Previously our highest Individual Income Tax Rate went as high as 39.6 percent, our highest rate has only received a 2.6 percent reduction.
Capital Gains and Qualified Dividends
Net capital gains and qualified dividends will continue to be taxed at 15 percent and 20 percent depending on your investment income and will continue to be subject to the 3.8 percent net investment income tax.
So, nothing has changed in this area, those with large investment income portfolios will remain the same as in prior years…..i.e. 23.8 percent.
For married taxpayers filing joint tax returns, the deduction is $ 24,000. For single taxpayers, $ 12,000.
Suspended, no more exemption for yourself, spouse, kids or other dependents.
Deduction for State and Local Taxes
Limited to $10,000 for the sum of all your home property taxes plus any state or local income taxes that you pay.
However, the limitation on deduction of property taxes does not apply to real property held for rental, or for sales taxes paid on income from a business.
Limited to 60 percent of the taxpayer’s adjusted gross income. Congress increased this percentage by 10 percent.
Home Mortgage Interest Deduction Limitation
The home mortgage interest deduction will be limited to the interest paid on $ 750,000 of debt, down from the $1 million under prior law.
The $750K debt limitation will be effective for homes purchased under a contract that is dated after December 14, 2017, therefore this limitation WILL NOT apply to an existing mortgage. Furthermore, should the homeowner refinance an existing mortgage, the debt limitation will only apply to the existing balance as of the day of Refinancing.
Home Equity Line of Credit
Suspended, remember the $100,000 home equity relief, it’s gone now, and by the way, it is NOT grandfathered, so it’s totally gone, old and new Home Equity Line of Credit.
All Miscellaneous Itemized Deductions subject to the 2 percent floor are suspended, HOWEVER, the overall limitation on itemized deductions is gone.
Pass-Through Deduction for S Corporation, LLC’s, LP’s, LLP’s, LLP and Sole Proprietorships
Individuals, estates, and trusts generally will be permitted to deduct up to 20 percent of “qualified business income” received from a sole proprietorship, partnership, or S corporation. Qualified business income generally includes net income from domestic sources, but generally excludes (1) investment-related income (e.g., capital gains, dividends, interest), (2) any amounts treated as reasonable compensation to the taxpayer (e.g., actual or deemed salary), and (3) income from any trade or business (A) in health, law, consulting, financial services, brokerage services, or (B) where the principal asset is the reputation or skill of one or more of its employees or owners.
As a rule of thumb, if the success of your business depends on you and not on something that you sell, you’re pretty much included (except for engineering and architectural services, which are specifically excluded. The definition also includes a business where the performance of services consists of investing and investment management trading, or dealing in securities, partnership interests, or commodities.
However, the owner of a professional service business would be eligible for the 20 percent deduction if total taxable income, including income from such business, is less than $157,500 for a single filer, or $315,000 in the case of a joint return, which is phased out once taxable income reaches $207,500 (for a single filer) or $415,000 (in the case of a joint return). The deductible amount is limited, for each underlying trade or business, to the greater of (1) 50 percent of W-2 wages paid by the business and (2) 25 percent of W-2 wages paid by the business plus 2.5 percent of the business tangible capital assets, though this limitation is phased-in for income exceeding $157,500 ($315,000 in the case of a joint return), with phase-out over the next $50,000 of taxable income ($100,000 in the case of a joint return)
This area of “the Act “shall be further revisited since it will generate many questions and debate.
A new 100 percent deduction on the acquisition of first year accelerated depreciation for investment in qualified tangible property, including many categories of equipment and non-real estate capital assets. This will apply for, all new investments in assets acquired and placed in service after Sept. 27, 2017, subject to a phase-down schedule following Dec. 31, 2022. Similarly, the legislation increases the amount a taxpayer may immediately expense under Section 179 of the Code from $500,000 to $1,000,000 in the year such property is placed in service with a phase-out provision increasing from $2,000,000 to $2,500,000. The expensing provision applies to qualified tangible property and is elected by the taxpayer.