Over the past few months, tax reform has been a hot topic on everyone’s minds. Now that the Tax Cuts and Jobs Act has been signed into law, we are writing to inform you of some of the significant changes that may affect our clients. At this point, we are unable to give an opinion on whether the tax reform will be beneficial for all taxpayers, but we will keep you updated as regulations and interpretations progress. Please keep in mind that there will be significant revisions and rulings in the coming months and years that may impact these laws.
The state of Iowa has not discussed their plans for tax reform yet. Governor Reynolds has proposed a multi-year effort to reform Iowa’s tax code, but we are unsure how they will respond to the federal tax reform.
Individual income tax changes beginning in 2018 unless noted otherwise:
- New individual income tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
- Standard deduction is increased: $24,000 for married filing joint, $18,000 for head-of-household, and $12,000 for all other taxpayers.
- Personal exemptions are suspended through December 31, 2025, for all taxpayers.
- Capital gains: 0%, 15%, and 20% rates stayed the same.
- AMT rates have been retained, but we now have higher exemption amounts.
- Obamacare individual mandate is repealed permanently starting after tax year 2018.
- Personal state and local tax deduction is limited to $10,000. This includes state income tax, personal property taxes, and personal state and local sales tax. Business/rental property tax is still deductible without limitation.
- Mortgage and home equity indebtedness interest deduction is limited. Personal interest is only deductible on loans up to $750,000, with exceptions. Interest on home equity loans is no longer deductible.
- The limit on medical expense deduction was reduced from 10% of AGI to 7.5% of AGI for tax years 2017 and 2018.
- Beginning with divorce decrees signed after December 31, 2018, alimony will no longer be included as a deduction on the payer’s return nor included as income on the recipient’s return.
- Miscellaneous itemized deductions are suspended.
- Overall limitation (Pease limitation) on itemized deductions are suspended for higher-income taxpayers.
- Repeal of the deduction for moving expenses, except for members of the Armed Forces on active duty.
- The child tax credit is increased to $2,000 per qualifying child under the age of 17. The income level phase-outs have increased to $400,000 for married filing joint and $200,000 for all other taxpayers. The credit is refundable up to $1,400 per child.
- There is a $500 nonrefundable credit for dependents who are not qualifying children.
- Expanded use of 529 account funds to include tuition at an elementary or secondary public, private, or religious school, up to $10,000 per tax year.
- The estate tax exemption was increased from $5 million to $10 million (indexed for inflation) per deceased. Portability rules still apply between spouses. For 2018, this is expected to be approximately $11.2 million, $22.4 million per married couple.
Corporate income tax changes beginning in 2018:
- Corporate tax rates changed from graduated tax rates of 15%, 25%, 34%, and 35% to a flat 21%.
- The dividends-received deduction percentages have been reduced from 80% (own at least 20% of another corporation) and 70% (all others) to 65% and 50%, respectively.
- AMT repealed at the corporate level.
Business income tax changes beginning in 2018 unless noted otherwise:
- Increased Section 179 expensing from $500,000 to $1 million and the phase-out threshold amount is increased from $2 million to $2.5 million. The expensing is also expanded to include the following improvements to nonresidential real property: roofs, HVAC, fire protection/alarm systems, and security systems.
- Bonus depreciation was increased from 50% of the cost of qualified property to 100% starting September 28, 2017-December 31, 2022 and now includes both new and used property. The percentage decreases to 80% for tax year 2023, 60% for 2024, 40% for 2025, 20% for 2026, and then eliminated in 2027.
- Luxury automobile depreciation limits increased to $10,000 for the first year, $16,000 for the second year, $9,600 for the third year, and $5,760 for each of the final years.
- New farming equipment and machinery is 5-year property, down from 7-year property, when the original use commences with the taxpayer.
- Business interest deduction may be limited if average annual gross receipts for the prior three-tax year period exceeds $25 million. Net interest expense is limited to 30% of the business’s adjusted taxable income.
- Net operating losses are no longer allowed to be carried back five years for farm businesses or two years for all other businesses. The carry forward is allowed indefinitely, exceptions apply, and a two-year carry back is allowed for farming businesses only. The NOL deduction will now be limited to 80% of taxable income.
- Domestic production activities deduction has been repealed.
- Like-kind exchange treatment is now limited to real property only. Trades on equipment and vehicles are now treated as a sale and subsequent purchase.
- Employer’s deduction for fringe benefit expenses has been limited. Starting in 2026, all meals will be disallowed as a deduction.
- A new credit for employer-paid family and medical leave is available.
- The cash method of accounting is now allowed for most taxpayers with annual average gross receipts that do not exceed $25 million for the prior three tax years.
- New 20% deduction for qualified business (pass-through) income:
- The deduction is 20% of your qualified business income (QBI) from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. This excludes any capital gains or losses, dividends, and interest income (unless allocable to the business). QBI does not include any income earned as an employee, including from your S corporation or a guaranteed payment from your partnership.
- The deduction is taken “below the line” so it reduces your taxable income but not your adjusted gross income. The deduction cannot reduce your taxable income below zero.
We hope this information helps you better understand these changes. Please give us a call if you wish to discuss the impact of these changes on your particular tax situation and the possible planning steps you might consider in response to them.