A Note About the New Tax Law

To Our Valued Clients, 

The “Tax Cuts and Jobs Act” of 2017 became law just before Christmas, so there will be significant tax law changes beginning with 2018 income and deductions.  The law is complex and long, covers (as usual) many items not directly part of tax law (but incidental to federal gov’t income), impact both corporate and personal taxes, has several areas that will need explanation by IRS, and brings some new ideas to the tax rules.
Changes with biggest impacts are:
  • Shift of the personal tax rules toward the ‘Alternative Minimum Tax’ approach where tax rates are lower & fewer; each filer receives a much larger standard deduction; but no standard exemptions (partially offset by refundable tax credit for dependents); no alimony deduction (or tax to recipient) for divorce/separation agreements signed after 2018;  a limited amount of mortgage interest for mortgages signed after 2017, a limited amount of medical expenses, and up to $10,000 of income and property taxes.
     
  • Approximately 50% reduction in the corporate federal tax rates (to 9% on the first $75,000; 21% on income above that).
     
  • Mixture of business expense changes, including immediate deduction for up to $1 million of equipment costs; limits on deduction of interest expense and net loss carryovers; repeal of the Domestic Production tax break; and a new 20% income exclusion for business and rental profits taxed directly on individual income tax returns by pass through from sole proprietorships, partnerships, and S Corporations (some businesses may want to elect S corporation treatment).

There are also a wide range of smaller-impact proposals that will have substantial effect on some taxpayers: larger range for the special zero tax rate on capital gains and qualified dividends; no deduction for casualty and theft losses other than designated national disaster areas; no deduction for moving expenses other than active military; no deduction for “Miscellaneous” itemized deductions like home office expense, investment management fees, unreimbursed work expenses; special lower tax rate for ‘repatriated’ income from Foreign Sales Corporations (& their predecessor ‘DISCs’) which could free up funds for large dividend payouts from Apple, Oracle, GE, and other exporters; complicated rules governing tax rates of profits on items that cross U.S. borders.

As widely reported, the limit on itemized deduction for income, sales tax, and property taxes will disproportionately hit those in high-tax/mortgage urban areas of the West Coast, Minnesota, Illinois, Texas, and the Northeast.  For many, this means prepaying in 2017 property or income tax that would otherwise need to be paid in 2018, to the extent it would exceed $10,000 next year; or investment management expenses – but note this wouldn’t help those covered by Alternative Minimum Tax in 2017 (under which taxes and “Miscellaneous” amounts are not deductible).

Note that the states have not had time to consider and react to these changes.  Some states like Oregon directly use the federal definition of income and deductions to calculate taxable income; others like California select some, and reject other, federal definitions, and we'll need to wait for legislation and regulations before that tax planning can be done.

Actual effect of this law will vary depending on eventual Regulations, individual circumstances, and your ability to make changes to your income and spending plans.  We will also be watching those Regulations, and provide further information and we look forward to working with you in 2018.

BayCPA

 

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