The Tax Cuts and Jobs Act of 2017 is the most significant tax reform legislation since 1986. It hits many aspects of personal and business income taxes, some of which changes very long standing traditions. Some of the changes are straight forward, but others are unclear as to how they will be implemented. Most provisions are effective starting in 2018 and some are scheduled to end if not extended. This newsletter will briefly hit some of the changes for both individuals and businesses.
Individual Income Taxes:
Not only have the individual rates gone down but the brackets have expanded. In 2017 taxpayers filing as married on a joint return had a 28% rate bracket that ended at $233,350, in 2018 the rate will be 24% up to $315,000 of taxable income. The joint and single brackets have changed so the "marriage penalty" won't kick in until after $400,000 of income.
The standard deduction on a single return increases from $6,350 to $12,000 and for joint returns it goes from $12,700 to $24,000.
Personal exemptions for taxpayers and dependents are eliminated entirely.
The tax credit for a Qualifying Child increases from $1,000 to $2,000.
There is a new Family Tax Credit of $500 for each dependent other than a Qualifying Child.
Distributions of up to $10,000 from a Section 529 qualified tuition plan may now be used to pay for tuition at a public, private, or religious elementary or secondary school.
Unused amounts in a 529 plan can be transferred to an ABLE account to benefit qualified beneficiaries who are disabled or blind.
Miscellaneous itemized deductions that were subject to the 2% threshold will no longer be deductible. This includes all un-reimbursed employee business expenses, investment fees and expenses, tax preparation fees, hobby loss expenses, and excess deductions on the termination of an estate or trust. Employees who pay their own expenses should take note of this and make arrangements with their employer to start an accountable reimbursement plan.
There are new restrictions on mortgage interest deductions. Only interest on Home Acquisition Indebtedness is deductible. This is defined as debt incurred to purchase, construct, or substantially improve your principal or second residence and secured by that residence. The deduction is limited to the indebtedness up to $750,000, however debt prior to December 15, 2017 is grandfathered at a $1,000,000 limit. Interest on home equity loans that do not meet the definition of home acquisition indebtedness is no longer deductible. It is generally allowable to refinance a preexisting debt, however the interest is only deductible for the term of the original debt.
Itemized deductions for property taxes and state and local income or sales taxes are limited to $10,000 per year. Foreign real property taxes are no longer deductible on Schedule A.
There will no longer be a deduction for personal casualty and theft losses except for Federally declared disaster losses.
Alimony and separate maintenance payments will no longer be deductible and the recipient will no longer be required to report the payments as income. This provision is effective for any divorce or separation instrument executed after 2018.
The tax-free qualifying transfer from IRAs to charities remains unchanged. This allows taxpayers who have reached age 70 1/2 to make tax-free transfers of up to $100,000 from their IRAs directly to a qualified charity and have it count toward their required minimum distribution. With the elimination of miscellaneous itemized deductions, limits on state and local tax deductions, and the increased standard deduction, this provision is of particular importance to seniors. This has the additional benefit of reducing Connecticut income taxes.
Business Income Taxes:
"C" Corporations will have a flat 21% tax rate for years beginning after 2017. Apparently corporations with a fiscal year will be able to pro-rate the new rate in the year that includes January 1, 2018. Previously, the corporate tax rates were graduated with the first $50,000 of income being taxed at 15%, the next $25,000 at 25%, and the next $25,000 at 34%. Therefore, with the new flat tax corporations with taxable income under $100,000 will experience a tax increase.
A new 20% deduction is provided to non-corporate taxpayers receiving "Qualified Business Income" (QBI) from pass-through entities. This new deduction comes with a variety of limitations. Generally, QBI is income from any trade or business other than income from a "Specified Service Trade or Business" (SSTB), which is any activity involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services. Owners of a SSTB may still qualify for the 20% deduction if their taxable income is below $315,000, at this level the deduction begins to phase out. Other businesses may be impacted by a W-2 wage and capital limitation. QBI does not include the reasonable compensation of owners of S-Corporations and partnerships, but this apparently does not apply to sole proprietorships. Therefore, S-Corporation owners should limit their wages to what is reasonable compensation. The Act specifically identifies a partner's guaranteed payments as not qualifying for the 20% deduction, but the IRS will need to issue regulations on how to determine any additional amounts to be excluded.
New depreciation rules apply to property placed in service after September 27, 2017. These rules have raised the limits for deducting capital items and expanded the types of allowable property. "Qualified Improvement Property", which generally is an improvement to the interior of a commercial building, now has a 15 year recovery period and may be eligible for an immediate write-off. The Act also increases the allowable depreciation deduction for passenger vehicles.
Entertainment, amusement or recreational activities and club membership dues will no longer be deductible. Apparently 50% of the cost of meals while traveling for business will still be deductible, but meals related to client entertainment may not be.
Net operating losses in general can no longer be carried back, but will have an unlimited carryforward subject to an 80% of taxable income limitation.
We expect to have more information as the IRS issues guidance.
A word of caution: this is a very briefsummary and does not include all of the details that may impact your individual situation. Please contact us if you would like more information.
Connecticut Fresh Start
Connecticut has a new program to allow delinquent taxpayers to pay past taxes and incur no penalties and have interest reduced by 50%. This covers all taxes administered by the Department of Revenue Services, such as income tax, sales and use, business entity, and gift taxes. It is limited to tax returns that were due on or before December 31, 2016.
To participate in the program you should not submit the actual tax return to DRS. Instead, you need to complete an online application and payments must be made through electronic payment or by credit card.
The program ends on November 30, 2018. For more information visit the DRS website by clicking here.
About Lewitz, Balosie, Wollack,
Rayner & Giroux, LLC
We provide accounting, tax, and financial services to individuals, businesses, nonprofit organizations, estates, and trusts. Our services include tax return preparation, software consulting, and compilations, reviews, and audits of financial statements. We have been located in the shoreline community of Old Saybrook, Connecticut for over 50 years. Feel free to contact us if we can be of service. We can be reached at 860-388-4451.