PROMLAP & ASSOCIATES

tax reform changes affecting Individuals

Tax rates

For 2018, most rates have been reduced. The new income tax brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
View the new tax rate tables here.

Deductions & exemptions

Standard Deduction Increase - starting for the 2018 tax year, the standard deduction available to individuals has now increased from $12,700 to $24,000 (Married Filing Jointly), $6,350 to $12,000 (Single) and $9,350 to $18,000 (Head of Household). This is an increased benefit for those previously relying on the standard deduction and may help provide some relief for certain individuals that were previously relying on the state and real estate tax deduction.

Deduction for Personal Exemptions Suspended - starting in 2018, you can no longer claim an exemption for yourself, your spouse or your dependents. This means you will no longer be able to reduce your taxable income by the exemption amount for each person claimed on your tax return which you were previously able to in prior years.

State and Local Tax & Real Estate Deductions - for tax years 2018 to 2025, an individual may not deduct more than $10,000 of state and local taxes and real estate taxes (combined). This same limit applies to both single and married filing jointly filers. The limit for a person filing married filing separately is $5,000. Previously, this deduction was not limited and provided some relief for taxpayers in certain states with high income and property taxes.

Miscellaneous Itemized Deductions Suspended - starting in 2018, all 2% miscellaneous deductions are suspended until 2025. This deduction previously included reimbursed employee expenses, tax preparation fees, investment expenses.

Charitable Contributions - the Adjusted Gross Income (AGI) limitation on charitable contributions has increased from 50% to 60%. This means individuals can now claim a charitable contribution deduction of up to 60% of their AGI.

Deduction for Casualty and Theft Losses Modified - individuals can now only deduct personal casualty and theft losses attributable to a federal declared disaster.

Excess Business Losses - non-corporate taxpayers are now subject to the new excess business loss rules in which limit the deductibility of business losses. Losses from a trade or business are now limited to $250,000 for single taxpayers and $500,000 for a joint return. Excess business losses that are disallowed are treated as a non-operating loss carryover to the next taxable year.

New Dollar Limit on Qualified Residence Loan Balance - the dollar limit for qualified residence interest was reduced for loans originating after December 15, 2017. For loans originating after December 15, 2017 you may deduct interest on up to $750,000 of qualifying debt. For loans originating before December 15, 2017, the old rules apply and you may deduct interest on up to $1,000,000 of qualifying debt.

Deduction for home equity interest limited - interest paid on home equity loans can now only be deducted if the proceeds on the loan were used to buy, build or substantially improve a main or second home.

Limit on overall itemized deductions suspended - previously taxpayers with high AGI had their itemized deductions phased out. This limit no longer applies starting in 2018.

Alternative Minimum Tax (AMT) Exemption Increased - the AMT exemption amount is increased to $70,300. ($109,400 if married filing jointly, $54,700 if married filing separately. Additionally, the income threshold for the phaseout of the AMT exemption has been increased to $500,000 for single taxpayers, or $1,000,000 for married filing jointly.

Repeal of Deduction for Alimony Payments - Alimony and separate maintenance payments are no longer deductible for any divorce or separation agreement executed after December 31, 2018 or any divorce or separation agreement executed on or before December 31, 2018 but modified after that date. Additionally, alimony and separate maintenance payments received are no longer included in income.

Net Operating Loss (NOL) Rules - most taxpayers can no longer carry-back a NOL. NOLs generated after tax years ending December 31, 2017 can only be carried forward. Additionally, for losses incurred in taxable years beginning after December 31, 2017, the NOL deduction is limited to 80% of taxable income (without regard to the NOL deduction). NOLs incurred prior to this date are not affected by this limitation.

credits

Child Tax Credit - for 2018, the maximum credit increased to $2,000 per qualifying child. Up to $1,400 is can be refundable. Additionally, the income threshold in which the child tax credit begins to phase out begins at $200,000 if single, or $400,000 if married filing jointly. Note that a Social Security Number is now required in order to claim the child tax credit. Children with an ITIN can’t be claimed for the credit.

Please contact us to learn how these changes affect you and your tax filings in 2018.

tax reform changes affecting businesses 

Corporate Tax Rates Reduced - the maximum tax rates on c-corporations (including personal service corporations) have been reduced from 35% to 21%.

New 20% Deduction for Qualified Business Income - also known as Section 199A, this new rule allows an individual, trust or estate a deduction of up to 20% of qualified business income. There are however limitations based on income and certain types of service businesses are specifically excluded.

Limitations on Carried Interest - new law extends the holding period requirement for certain carried interest to three years. Carried Interest are ownership interests in a partnership that are usually issued to investment managers. Upon meeting certain thresholds these investment managers receive an allocation of the underlying income, which is usually capital gain income subject to lower tax rates.

Like-Kind Exchanges (Section 1031) - like-kind exchanges now only apply to exchanges of real property and not to exchanges of personal or intangible property. Real property held primarily for sale still does not qualify for 1031 exchanges.

Net Operating Loss (NOL) Rules - most taxpayers can no longer carry-back a NOL. NOLs generated after tax years ending December 31, 2017 can only be carried forward. Additionally, for losses incurred in taxable years beginning after December 31, 2017, the NOL deduction is limited to 80% of taxable income (without regard to the NOL deduction). NOLs incurred prior to this date are not affected by this limitation.

Business Interest Expense - Section 163(j) was amended and the limitation is now only imposed on large businesses (taxpayers with average annual receipts in excess of $25 million. For large businesses, business interest expense is limited to business interest income plus 30% of the businesses’ adjusted taxable income. Prior to TCJA, IRC Section 163(j) provided limitations on interest paid to foreign persons, these have since been removed and may provide additional benefit to foreign companies that leverage their investment into the US with debt.

Entertainment Expenses Eliminated - new law now disallows deductions by employers related to (1) entertainment, amusement or recreation; (2) membership dues for clubs organized for business, pleasure or other social purposes; or (3) a facility used in connection with the above.

Recovery Period for Residential Rental Property (ADS) - the recovery period for residential rental property under the alternative depreciation system was changed from 40 to 30 years. This may provide an additional benefit to those that have rental properties outside of the US since these can only be depreciated under ADS.

100% Bonus Depreciation - new tax reform temporarily allows a 100% deduction for business property acquired and placed in service after September 27, 2017 and before January 1, 2023.

Changes to Section 179 Depreciation - the maximum deduction was increased to $1,000,000 and increased the phase-out threshold to $2,500,000. The definition of Section 179 property was also modified to allow a taxpayer to elect to include certain improvements made to nonresidential real property.

Changes to Listed Property - computer and peripheral equipment were previously categorized as listed property. TCJA removes these from the definition of listed property.

Opportunity Zones - newly introduced with the TCJA, investors can elect to temporarily defer tax on capital gains that are reinvested in a Qualified Opportunity Fund (QOF). The tax on the gain can be deferred until the earlier of the date on which the QOF investment is sold or exchanged, or December 31, 2026. If the QOF investmnet is held for at least 10 years, the investor may be eligible for a permanent exclusion on the capital gain on the sale or exchange of the QOF. More information related to Opportuny Zone locations can be found here.

Please contact us to learn how these changes affect your business and your 2018 tax filings.

 2018 Individual Tax Brackets