Well, we now have the answer to the question I raised in last month’s blog post – the reconciled tax bill that had been debated and tossed around for quite some time has been agreed to and passed by both houses of Congress and now sits on the President‘s desk for his signature which he has indicated he will do (with much fanfare, I am sure).
What does the new law contain and how will it affect you? This is a very valid question and the typical collegiate answer of “it depends” is an appropriate answer in this case. This is because this law giveth and it taketh away at the same time. Each taxpayer will be affected a bit differently than the next depending on the circumstances in each case.
The tenants of the new tax law generally take effect January 1, 2018 and stay in place for eight years until January 1, 2026. There are a few exceptions to this timeline and those include a provision which opens up 100% bonus depreciation of equipment for any asset purchased after September 27, 2017. This could be a substantial benefit for any business owner that has purchased or will purchase a vehicle that would not have otherwise been eligible (under the minimum 6,000 lb. gross vehicle weight) for the section 179 depreciation deduction in 2017. In short, any business use vehicle purchased after that date up until December 31, 2017, can be written off in full in 2017 by claiming the 100% bonus depreciation. Earlier this year and before this change, bonus depreciation was available up to 50% of the cost of the new equipment. I will also note that with the change, bonus depreciation is available for both used and new equipment whereas before it was only available for new assets that has never been used before.
Another change brought about by this new tax law that won’t take effect until January 1, 2019, is the repeal of the spousal support (alimony) tax deduction previously available to the payor of spousal support and the related repeal of the requirement to claim spousal support received as taxable income by the recipient. I surmise that this delayed effect was given to allow those who were already in the process of filing divorce to complete that process before this change takes effect. The prevailing commentary I have seen regarding this change is that it will likely reduce the amount of spousal support granted by divorce courts going forward when the tax burden for these payments is shifted back to the payor from the recipient. In other words, since the recipient will no longer be responsible to pay taxes on this income, less spousal support would be ordered pursuant to a divorce.
All other changes provided by this new law will take effect January 1, 2018. This will require a substantial adjustment to the current W-4 form that each employee fills out when beginning work for an employer. It will likely take the IRS several weeks to produce the new 2018 W-4 form and, therefore, wage withholding will need to continue on using the 2017 withholding structure until that is completed. I would guess that every employee will be required to complete a new W-4 at that time since the structure will be entirely different than it is now.
I have summarized below the major changes to tax law for individual and business brought about by the new tax law.
Personal
- retain 7 tax brackets but with lower rates for each and different income threshold transitions between tax brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%)
- top individual tax rate of 37% down from previous top rate of 39.6%
- 20% net income deduction for pass-through business entity owners creating a maximum effective tax rate on business income of 29.5%
- increased alternative minimum tax (AMT) phaseout threshold of $1M (married filing joint status) which means less taxpayers will be subject to AMT in the future
- spousal support deduction repealed effective January 1, 2019 along with repeal of requirement to claim spousal support as income by recipient (see commentary above)
- increased standard deduction (double) for each filing status – single ($12,000), head of household ($18,000) and married filing joint ($24,000) meaning less taxpayers will claim itemized deductions going forward (projected that 90% of taxpayers will claim the standard deduction up from the current 70%)
- medical expense itemized deduction retained with lower 7.5% of adjusted gross income (AGI) threshold down from the current 10% limit
- home mortgage interest deduction only allowed on up to $750,000 of debt with home equity line of credit (HELOC) interest no longer deductible
- charitable contribution deduction limit raised to 60% of adjusted gross income (AGI) from the current 50% of income limit
- miscellaneous itemized deduction repealed
- moving expense deduction repealed, except for military
- qualified education deduction and education credits retained in their current form
- student loan interest deduction of up to $2,500 retained
- home sale exclusion provision retained
- increase of estate tax exclusion per person to $11.2M
Business
- reduced corporate tax rate of 21% down from 35% (this may cause some flow-through entity owners to reconsider the merits of C-corporation status going forward)(the new law also simplifies the process of transition from S-corporation to C-corporation status)
- corporate alternative minimum tax (AMT) repealed
- bonus depreciation deduction increased to 100% from 50% through 2022 and both new and used assets are now eligible) (see commentary above)
- increased section 179 depreciation deduction of $1M with overall asset acquisition cap of $2.5M
- increased luxury auto deduction limits
- domestic manufacturing deduction repealed
Please contact us if you have any questions regarding the provisions of the new tax law. Happy holidays!