A Look at the Highlights of the Tax Cuts and Jobs Act of 2017
By: Richard Weisinger
The Tax Cuts and Jobs Act of 2017 represents the most sweeping tax legislation since 1986.
Included among the many provisions of this new law is the abolition of the Affordable Care Act (Obamacare) penalty, an across-the-board reduction in the corporate tax rate from 35 percent to 21 percent, a doubling of the estate tax exemption to $11.2 million per decedent ($22.4 million per married couple), an elimination of the deduction for meals and entertainment, and a substantial curtailment of the applicability of the Alternative Minimum Tax.
First, let’s review some of the changes that will affect individual taxpayers:
- All personal exemptions have been eliminated.
- The standard deduction has been substantially increased – to $12,000 for singles, $18,000 for heads of household, and $24,000 for those married filing jointly.
- Tax brackets have been changed to 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent – from 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent.
- Alimony will no longer be deductible for divorce or separation agreements executed after December 31, 2018. There is no change in deductibility for those that are in effect prior to then.
- Moving expenses are no longer deductible.
- Deductions for state income taxes and real property taxes are limited to $10,000 in total per taxpayer (a married couple is considered one taxpayer).
- All miscellaneous deductions have been eliminated, including tax prep fees, safe deposit boxes, investment fees, and unreimbursed employee business expenses.
- Interest deduction on home mortgages is limited to $750,000 of principal. This is down from $1.1 million of home mortgage principal. However, loans existing on or before December 15, 2017 are grandfathered in. So, the interest on those loans will continue to be deductible, even if they exceed the new threshold.
- The medical expense deduction threshold has been reduced to 7.5 percent of adjusted gross income from 10 percent. This will benefit those taxpayers who have heavy medical expenses.
- Deductions for personal casualty losses have been eliminated, except in a federally declared disaster area.
- Alternative Minimum Tax exemption amounts have been substantially increased to $70,300 for single taxpayers and $109,400 for married filing joint taxpayers. With severely curtailed itemized deductions under the new law, it is unlikely that many taxpayers will find themselves in AMT.
- The child tax credit for those qualifying children under the age of 17 has been doubled from $1,000 per credit to $2,000.
- 529 educational savings plans have been expanded to allow funds in the plan to be used for tuition at elementary and secondary schools.
- A sizeable increase in the “kiddie tax.” Unearned income (interest, rents, dividends, capital gains) of a child will now be taxed at estate and trust tax rates. The highest tax rate kicks in at a very low income level of $12,500.
- Net operating loss deductions have been modified. For losses in tax years beginning after December 31, 2017, the two-year carryback has been repealed. Future net operating losses will be only 80 percent deductible and usable only going forward, not backward.
Now, let’s take a look at the changes that will impact businesses. In general, the law is favorable to business. Some key provisions include:
- 15-year depreciation for qualified improvement property (think of this as either leasehold improvements or building improvements).
- Increase to $1 million in the ceiling of allowable Section 179 expensing.
- An increase to 100 percent for first-year depreciation (“bonus depreciation”) for qualified property.
- For passenger automobiles, the maximum amount of allowable depreciation has been substantially increased to: $10,000 for Year 1, $16,000 for Year 2, $9,600 for Year 3 and $5,760 for all years thereafter. This is up from $3,160, $5,100, $3,050 and $1,875, respectively, under the old law.
- Entertainment is no longer deductible at all. Under the old law, it was 50 percent deductible. This does not affect business meals.
- Business interest expense has been limited to 30 percent of a complex formula. Simplistically, it is 30 percent of the business’ adjusted taxable income. The excess interest that is not deducted is not lost and gets carried forward to future years. Those businesses where the average of the prior three years gross receipts is less than $25 million are exempt.
- Alternative Minimum Tax has been eliminated for corporations.
- Corporations with overseas, unrepatriated cash from prior earnings will be deemed to have repatriated those earnings and be immediately subjected to a 15.5 percent tax thereon.
- And, lastly, the most ballyhooed and misunderstood part of the new law – a deduction for pass-through income that is applicable to sole proprietorships, LLCs, partnerships and S corporations. It is essentially a deduction of up to 20 percent of the business’ net income, limited to the greater of (1) 50 percent of W-2 wages or (2) 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of depreciable property used in the business. This deduction does not apply to, among others, the professions of medicine, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services. However, ownership of rental real estate does qualify. For those landlords who have little or no W-2 wages, 2.5 percent of the original depreciable cost (thus land is excluded) of their property may provide a sizeable deduction. For most laundromat owners, W-2 wages are small, but investment in equipment and improvements are large. So, as with rental real estate owners, a deduction based on 2.5 percent of depreciable property is a nice benefit.
The law giveth, as well as taketh away. There are clearly winners and losers. Those with estates below $22.4 million are obvious winners; with proper planning, they will not have any estate tax to pay.
While the tax rates have seemingly decreased, the elimination of personal exemptions and many itemized deductions (state income taxes and real estate taxes being the single biggest deduction that was eliminated) and the increase in the kiddie tax may cause an overall increase in tax. Those taxpayers who previously did not itemize will do substantially better under the new law. That is also true of low- to moderate-income taxpayers who have minor children.
Those business owners whose primary source of income is a qualifying business will also make out better. If they can deduct 20 percent of the business’ income, which would otherwise be subject to 37 percent tax, their effective tax rate becomes 29.6 percent {37 percent – 7.4 percent (20 percent x 37 percent)}.
Not eliminated in the new law is the 3.8 percent Obama investment tax, levied on interest, dividends, capital gains, and rents. Thus, the marginal tax rate on this income for a high income taxpayer is 40.8 percent.
Yes, there is definitely much still to digest here. And, no, it’s not too soon to consult your tax professional and start your 2018 tax planning!
Richard Weisinger has been a licensed CPA for more than 40 years. He operated his own CPA practice for 20 years and, for the last nine years, has headed the tax department for Gerber & Co., a CPA firm in Los Angeles. Mr. Weisinger has had more than 130 of his articles published, and he has spoken on tax issues to laundry owners across the country for more than 25 years.
(Note: This item originally appeared in the February 2018 issue of Planet Laundry,the magazine of the Coin Laundry Association. It is reprinted here with kind permission from CLA.)
