I thought you would find this summary of the new tax bill interesting and challenging. It will give us a new set of forms and regulations to deal with.
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The Tax Cuts and Jobs Act (TCJA) became effective in December 2017. This is a summary of that bill from the 2018 U.S. Master Tax Guide.
The Republicans passed this bill without a single Democrat vote with an objective of not exceeding $1.5 Trillion in revenue reduction over the next 10 years. To meet that goal, most of the provisions were temporary and will expire on December 31, 2025 at which time most of the amendments will revert to the law as it existed prior to the enactment if the TCJA.
Business Tax Changes
The big change is that the top corporate tax rate went from 35% to 21%. The corporate tax rate changes are permanent. This change should cause a big increase in domestic stock values. Stocks are valued by multiples of earnings. The tax savings go straight to the bottom line to increase earnings and stock values.
Prior law required most businesses to use accrual accounting; the TCJA greatly expands the ability of businesses to use cash basis accounting. Rules for expensing assets and writing them off fully under Sect. 179 have been expanded. In the past net operating losses could be carried back two years generating refunds and then carried forward; the carry back provision has been eliminated and carry forwards can only offset 80% of taxable income. The deduction of business interest expense is now limited to 80% of adjusted taxable income.
Individual Tax Changes
We still have 7 tax brackets, but the income breaks for each bracket have increased while the rate on each level has decreased.
The standard deduction has been doubled to $12,000 for individuals and $24,000 for married filing joint taxpayers. This move, in conjunction with changes that either limit or repeal many itemized deductions, means that in 2018 90% of taxpayers will claim the standard deduction. Personal exemptions are eliminated and the child tax credit has doubled in size from $1,000 to $2,000.
Sole proprietors and small businesses can now claim a 20% deduction against qualified business income. The purpose of this is to give proprietors and partners approximately the same rate on business income that would be paid by corporate taxpayers.
Paybacks by individual taxpayers include the following. Taxpayers will be permitted to deduct only $10,000 in combined state and local income and real property taxes. Interest expense on new home mortgages will be deductible only up to $750,000 of acquisition debt. Interest on home equity loans will no longer be deductible. Charitable contributions can still be deducted. All other miscellaneous itemized deductions are eliminated including unreimbursed employee business expenses. Commentators say that this will incentivize employees with business expenses that are not reimbursed to become independent contractors. This is a factually complicated area. Advanced planning can reduce risk.
The estate tax exemption has doubled to $11.2 Million.
International Tax Changes
To encourage U.S. businesses to invest abroad previous tax law allowed exclusion of income earned abroad until the earnings were repatriated in the form of a dividend. This deferral was repealed by the TCJA. U.S. corporations will be deemed to have repatriated deferred earnings in 2018 and will be required to pay tax on previously earned foreign income. The tax rate is 15.5% for items that are cash equivalent and 8% for others. It will be interesting to see what kind of revenues this generates.
Another issue not covered by the TCJA is the closing of the Offshore Voluntary Disclosure Program (OVDP) on 09/28/2018. This program allowed taxpayers with tax evasion problems from undisclosed foreign assets to make full disclosure and avoid the risks of prosecution. That window is closing.