Tax Reform Current Tax Law vs. New Changes
Recently President Trump signed the tax reform bill into law. Today we will be looking at the new changes and compare it with current tax law. As mentioned in the disclaimer, I will not be providing legal or tax advice in this video. It is for informational purpose only. If you have a general question, please feel free to comment under the video, if you have a specific tax question, please contact your CPA or Tax Adviser. So Here is a summary of the key provisions in the new law, and let’s take a look at the changes one by one.
1. Personal tax rates: For 2017, there are seven different tax brackets with tax rates of 10, 15, 25, 28, 33, 35, and 39.6 percent. How much you will actually owe depends on both your income and your filing status. The new tax law lowers the rates and the new tax rates are 10%, 12%, 22%, 24%, 32%, 35%, 37%
2. The Personal long-term capital gains and qualified dividend tax rates are taxed at maximum rate of 23.8 % and it will remain the same- with rates tied to existing taxable income thresholds
3. Maximum pass-through tax rate currently is 39.6% and the new tax law states that Business income that passes through to an individual from a pass-through entity and income attributable to a sole proprietorship will be taxed at individual tax rates less a deduction of up to 20%; limited deduction for income from lower-income service businesses. Service businesses excludes engineers and architects
4. The Maximum corporate tax rate has been lowered from 35 to 21 %
5. Personal standard deduction increased substantially, which is a good thing for some taxpayers…this means that the new tax law allows taxpayers to subtract more from their taxable income, which reduces their overall tax bill; but obviously they can’t itemize deductions in this case.
6. Child tax credit- doubled; again this is good news for families with children and the new law allows parents to receive a credit of $2,000 per child (refundable to $1,400 per child); $500 for non-child dependents
7. On the other hand, Personal exemption has been repealed by the new law. This was a way to reduce the income tax
8. There has been a lot of misinformation recently about the Personal state income, sales tax, and property tax and many rushed to pay their property taxes before year end- The new bill clarifies that a payment made in 2017 for 2018 state or local income tax will be deemed paid on December 31, 2018 (and therefore not deductible in 2017). A reasonable estimate of a 2017 tax liability, however, may have been paid before December 31, 2017. Any overpayment credited to 2018 from the 2017 tax year is taxable in 2018 to the extent the overpayment provided a tax benefit. Furthermore, a 2017 overpayment credited to a 2018 state and local income tax liability will be subject to the $10,000 limit for the combined state and local income tax (or sales tax, in lieu of income tax) plus real property taxes.
9. Mortgage interest deduction, which is A common itemized deduction that allows homeowners to deduct the interest they pay on any loan used to build, purchase or make improvements of their residence was reduced from 1.1 mln to $750,000 of debt (including second home); and no home equity interest deduction is allowed by the new tax law
10. The Individual Alternative Minimum Tax (or AMT) is currently imposed when minimum tax exceeds regular income tax, was originally designed to prevent wealthy taxpayers from using loopholes to avoid paying taxes has been modified. The new law Increases AMT exemption amounts and phase-outs
11. There are no changes made to the Medical expenses deduction, Those remain Deductible to the extent they exceed 10% of adjusted gross income (AGI) (but keep in mind that it is 7.5% of AGI for years 2017 and 2018)
12. Alimony or spousal support after a divorce were Deductible to payor and taxable to recipient in the past. The new tax law provisions state that the payor can not deduct it and the recipient does not pay taxes on this amount for decrees executed or modified after year 2018
13. The Individual health insurance mandate has been repealed. If you like this one, please feel free to like this video! I am curious to find out how many people are happy about this specific change! If you have a comment on this topic, I really want to hear it so please feel free to comment under the video!
14. Let’s also take a look at a few more business related changes: Depreciation under current law allows long term assets to be capitalized and depreciated; in some cases, Section 179 allows immediate expensing of up to $500,000. The new tax law allows Immediate expensing of most new and used property (excluding structures) through year 2022; and the section 179 limit increased to $1 million
15. The Depreciable life of rental buildings remains the same - 39 years for most non-residential buildings; 27.5 years for residential rentals
16. The Net Operating Loss currently is carried back 2 years and forward 20 years. The new tax law repeals Carryback Net Operating loss except farms (two years); and allows indefinite carryover deduction limited to 80% of pre-NOL income for losses generated after 2017
17. On the other hand, there was no provision regarding the excess business losses in the past. The new law states that the Net businesses losses in excess of $500,000 ($250,000 single) are not deductible; they become a NOL carried over to the next year
18. The business interest has been generally deductible in the past. The new tax law states that business interest is Generally limited to the extent that interest exceeds 30% of income; and allows unlimited carryover of excess. Is Determined at entity level, but spillover effects to owner. Limitation is not applicable if average annual gross receipts do not exceed $25 million
19. O.k. moving on to the cash method of accounting. Currently, this method is Generally limited to business with less than $1 million, $5 million, or $10 million in receipts, depending on facts. The new provision Expanded to include businesses with less than $25 million in receipts with special rules for tracking inventory costs
20. Domestic production activities deduction. Currently the law allows Domestic producers to get a deduction equal to 9% of their qualifying income. This provision has been repealed after year 2017
21. And the last one for today is gift and estate taxes. Currently there is a Tax of up to 40% imposed on gifts and estates, subject to a $5.49 million lifetime exemption per spouse. The new tax law doubles the Lifetime exemption; estate tax remains in effect. Step-up in basis retained.
Obviously, this is not a complete list of all the changes. I’ve outlined the ones that stand out the most. We always welcome comments, likes and shares! In fact we love it! So, feel free to like, share, comment and subscribe to our channel Let’s Talk Money if you haven’t done so yet!
Tax and Legal Advice Disclaimer
We do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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