2017 Tax Reform

The Tax Cuts and Jobs Act (H.R.1), Summary and Highlights

December 21, 2017

The House and Senate, through the Conference Committee, reconciled their respective tax bills and the bill, known as the Tax Cuts and Jobs Act (“Bill”) is anticipated to be sent to President Trump for signature prior to year-end. The Bill provides for a reduction in the corporate tax rate, reductions in individual income tax rates, an increase to the standard deduction, preservation (while limited for some) of the mortgage interest deduction and limitations on the deduction for state and local income tax, sales tax and property tax. Listed below is a summary of some of the changes for tax years beginning after December 31, 2017, unless indicated otherwise. Given the significance of some of the changes outlined in the Bill, contacting your tax advisor to discuss the potential tax implications of the Bill is advisable. Listed below are highlights from the Bill as of December 20, 2017: 

Individual Tax Rates and Brackets
Seven personal tax rate brackets, with a maximum rate of 37%; See details on our website located here

Standard Deduction
$24,000 (Married filing jointly, MFJ)
$18,000 (Unmarried w/ qualifying child)
$12,000 (All other)

Personal Exemptions
Suspend until 2026

Individual Alternative Minimum Tax (“AMT”)
Tax years 2018 through 2025:
Increased exemption of $109,400 for MFJ;  Phase-out of exemption increased to $1 million

Miscellaneous Itemized Deductions (2% Floor)
All miscellaneous deductions subject to the 2% floor suspended through 2025

Limitation on Itemized Deductions (Pease)
Overall limitation on itemized deductions permanently repealed

Mortgage Interest Deduction
Tax years 2018 through 2025: Interest deduction allowed on acquisition indebtedness (first and second homes) incurred before 12/15/17 up to $1,000,000 (MFJ); Interest deduction allowed on acquisition indebtedness incurred after 12/14/17 up to $750,000; Interest deduction on home equity indebtedness suspended until 2026
Tax years after 2025: Interest deduction allowed on acquisition indebtedness incurred up to $1,000,000 regardless of when incurred (First and second homes); Interest deduction allowed on home equity indebtedness up to $100,000

State and Local Tax Deduction
Tax years 2018 through 2025:
Deduction generally suspended for state and local taxes  not paid or accrued in a trade or business; Aggregate state and local tax deduction allowed up to $10,000; Foreign real property tax not eligible for $10,000 allowed deduction; 2018 State income tax prepaid in 2017 will not be deductible in 2017

Medical Expense Deduction
Tax years 2017 and 2018:
For regular tax and alternative minimum tax the deduction threshold is reduced from 10% of AGI to 7.5% of AGI

Charitable Contributions
Increased AGI limitation from 50% to 60%; Repealed 80% deduction for contributions made for university athletic event seating rights

Affordable Care Act Individual Mandate
Tax years after 2018:
Eliminated shared responsibility payment for individuals failing to maintain essential coverage

Moving Expenses
Deduction suspended until 2026, except for active duty members of the armed forces who move pursuant to military orders; Reimbursement for moving expenses will be considered taxable income for tax years 2018 through 2025

Child Tax Credit and New Family Tax Credit
Tax years 2018 through 2025:
Credit for qualifying children under the age of 17 increased to $2,000 (maximum of $1,400 refundable); A new $500 nonrefundable credit for each qualifying dependent (including taxpayer) who is not a qualifying child; Phase out for all credits at $400,000 AGI for joint filers and $200,000 AGI for single filers

Gain from Sale of a Principal Residence Exclusion
Not changed in Conference Agreement

Like-Kind Exchanges
Deferral limited to exchanges of real property

Estate and Gift Taxes
Exclusion amount increased to $10,000,000, indexed for inflation after 2011, for decedents dying and gifts made after 2017 and before 2026; No change to gift tax rate; No change to basis step-up for property transferred at death

Corporate Tax Rate, Corporate AMT, and Net Operating Losses (“NOLs”)
After 2017, 21% flat corporate tax rate; Repeal of Corporate AMT after 2017. Deduction for NOLs are limited to 80% of taxable income

Depreciation Deductions
100% bonus depreciation for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023; Phase-out of bonus depreciation %, 2023 through 2026; No bonus depreciation after 2026; Eligible property expanded to include used property; Eligible property expanded to include qualified film, television, and live theatrical productions placed in service after September 27, 2017 and before January 1, 2027; No change to real property recovery periods

Section 179
Business expensing limit increased to $1 million and phase out amount increased to $2.5 million; Eligible property expanded to include certain personal property used in connection with furnishing lodging and certain nonresidential  real property improvements

Domestic Production Activities Deduction (“DPAD”)
Deduction repealed after 2017

Entertainment, etc. Expenses
Disallowed deductions for entertainment, amusement, or recreation activities under all circumstances; Disallowed deductions for many employee fringe benefits unless treated as taxable compensation

Deduction for Qualified Business Income (Pass-Through and Sole Proprietor)
Tax years 2018 through 2025:
Deduction allowed for 20% of qualified business income; Phased in limitation of deduction to 50% of W-2 wages paid if taxable income exceeds $315,000 (MFJ); Phased out deduction for certain service businesses if taxable income exceeds $315,000 (MFJ)

Business Interest Expense
For taxpayers with average annual gross receipts in excess of $25 million, the deduction for business-related interest expense is generally limited to 30% of taxable income; Carryover provisions apply; Real estate businesses that use the Alternative Depreciation System (ADS) may elect not to be subject to the limitation

Carried Interest
After 2017, gain from partnership profits interests, granted or held in connection with the performance of investment services, will be treated as short-term capital gain if the partnership interest has not been held for more than three years

The Tax Cuts and Jobs Acts represent a significant change to the tax code and will likely have several technical corrections in the months to come. We will continue to provide updates and are here to address your questions. 

For Further Information
Jason Flashberg
T: 805.413.1724
F: 805.374.9777
Jason.Flashberg@hcvt.com
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