The following summaries highlight major changes in tax law.
2. Tax Rates—Seven brackets with rates between 10 and 37 percent replace the current range of 10 to 39.6 percent. Favorable rates for capital gains and qualified dividends remain.
3. Child Tax Credits—Each child under the age of 17 gains the family a $2,000 tax credit (up to $1,400 can be refunded even if the family has no tax). For 2017, these amounts are $1,000 and $1,000, respectively.
4. Itemized Deductions—Changes are coming for most taxpayers related to state tax payments, interest deductions and unreimbursed employee business expenses.
· Write-offs for state income taxes and property taxes cannot exceed $10,00.
· Interest paid on a home equity loan is no longer deductible.
· Unreimbursed employee business expenses are no longer deductible.
5. Moving Expenses—Reimbursements by employers to employees who are re-locating to initiate employment are no longer tax-free. Further, moving expenses paid by employees for relocation are no longer deductible.
6. Shared Responsibility Payment (Obamacare penalties)—After 2018, the penalty for not having minimum essential coverage for health care is eliminated.
7. Section 529 Plans—Distributions may now be received without penalty in order to pay for elementary or secondary education. Previous law limited distributions to postsecondary schools only.
· Prepay charitable contributions that might otherwise be donated in 2018.
· Prepay fourth quarter 2017 state estimated tax payment (not due until January 15, 2018)\
· Prepay December 2017 real estate tax bills.
2. As soon as possible, payoff any home equity loan balance or refinance into your main mortgage. Interest paid on these loans, similar to car loans and credit cards, is no longer deductible.
2. Passthrough Entity Taxation—Certain partnerships, S corporations and sole proprietorships may exclude 20 percent of their income from income taxation. Significant exceptions and limitations apply. For example, the business must have employees who receive Form W-2 compensation, since the exclusion cannot exceed 50 percent of total wages. AND, businesses “where the principal asset of the business is the reputation or skill of one or more of its employees” phase out if taxpayer's taxable income exceeds $157,500, or $315,000 filed jointly. (e.g., accounting, health, law, financial or brokerages services).
3. Corporate Tax Rate—A flat 21 percent of net income is the new corporate tax rate. This replaces a tiered structure with rates from 15 to 35 percent.
4. Immediate Depreciation Expensing (Section 179)—Up to $1,000,000 of each year’s capital expenditures may be written off immediately. Further, Section 179 now also applies to nonresidential real property (e.g., office, commercial and manufacturing buildings) for which improvements are paid for roofs, HVAC, fire protection, and security systems.
5. Accounting Methods for Small Business—Business with less than $25 million of gross receipts may use simpler methods for reporting income, expenses and inventory, including elimination of requirements to apply onerous UNICAP rules.
6. Domestic Production Activities Deduction—The 9 percent “off the top” tax deduction for manufacturers in the U.S. is eliminated.
7. Entertainment Expenses—A business write-off for an entertainment activity or “membership dues for any club for organized business, pleasure, recreation, or other social purposes” is eliminated.
2. Seek tax advice as soon as possible. The tax laws applying to business are much more complicated and have “ripple effects” on other financial and tax decisions. Some of the areas we are currently considering for clients relate to the following decisions.
· Whether the 20 percent passthrough entity deduction applies to a particular business client.
· Whether to revoke as of January 1, 2018, S Corporation elections in favor of C Corporation status.
· Whether the cash basis of accounting can apply to a business and its ramifications on tax planning.
· Whether the new corporate tax rate schedule and the loss of the domestic production activities deduction will have a positive or negative effect on overall tax payments.
· Whether the state legislature in which a business is domiciled will follow the new federal rules.
For more details or advice as to specific responses that you might consider for your family or business, please contact us at MinistryCPA.org.
New Tax Law Topics for INDIVIDUALS
1. Standard Deduction and Personal Exemptions—The married filing joint standard deduction rises from $13,000 to $24,000, BUT the $4,050 personal exemption for each family member is gone.2. Tax Rates—Seven brackets with rates between 10 and 37 percent replace the current range of 10 to 39.6 percent. Favorable rates for capital gains and qualified dividends remain.
3. Child Tax Credits—Each child under the age of 17 gains the family a $2,000 tax credit (up to $1,400 can be refunded even if the family has no tax). For 2017, these amounts are $1,000 and $1,000, respectively.
4. Itemized Deductions—Changes are coming for most taxpayers related to state tax payments, interest deductions and unreimbursed employee business expenses.
· Write-offs for state income taxes and property taxes cannot exceed $10,00.
· Interest paid on a home equity loan is no longer deductible.
· Unreimbursed employee business expenses are no longer deductible.
5. Moving Expenses—Reimbursements by employers to employees who are re-locating to initiate employment are no longer tax-free. Further, moving expenses paid by employees for relocation are no longer deductible.
6. Shared Responsibility Payment (Obamacare penalties)—After 2018, the penalty for not having minimum essential coverage for health care is eliminated.
7. Section 529 Plans—Distributions may now be received without penalty in order to pay for elementary or secondary education. Previous law limited distributions to postsecondary schools only.
IMMEDIATE IMPLICATIONS for INDIVIDUALS
1. BEFORE December 31, 2017, prepay the following expenses, to the extent you are able. For their 2017 tax returns, many citizens will be itemizing deductions for the last time. Why? Itemizing won’t help them in 2018 unless they have more than $24,000 in write-offs. The 2017 threshold is $13,000.· Prepay charitable contributions that might otherwise be donated in 2018.
· Prepay fourth quarter 2017 state estimated tax payment (not due until January 15, 2018)\
· Prepay December 2017 real estate tax bills.
2. As soon as possible, payoff any home equity loan balance or refinance into your main mortgage. Interest paid on these loans, similar to car loans and credit cards, is no longer deductible.
New Tax Law Topics for BUSINESSES
1. Employee Compensation—Reimbursements for employees’ moving expenses are no longer tax-free. Unreimbursed employee business expenses are no longer deductible by your employees on their individual returns. Employer reimbursements for these expenses remain fully tax-free to employees.2. Passthrough Entity Taxation—Certain partnerships, S corporations and sole proprietorships may exclude 20 percent of their income from income taxation. Significant exceptions and limitations apply. For example, the business must have employees who receive Form W-2 compensation, since the exclusion cannot exceed 50 percent of total wages. AND, businesses “where the principal asset of the business is the reputation or skill of one or more of its employees” phase out if taxpayer's taxable income exceeds $157,500, or $315,000 filed jointly. (e.g., accounting, health, law, financial or brokerages services).
3. Corporate Tax Rate—A flat 21 percent of net income is the new corporate tax rate. This replaces a tiered structure with rates from 15 to 35 percent.
4. Immediate Depreciation Expensing (Section 179)—Up to $1,000,000 of each year’s capital expenditures may be written off immediately. Further, Section 179 now also applies to nonresidential real property (e.g., office, commercial and manufacturing buildings) for which improvements are paid for roofs, HVAC, fire protection, and security systems.
5. Accounting Methods for Small Business—Business with less than $25 million of gross receipts may use simpler methods for reporting income, expenses and inventory, including elimination of requirements to apply onerous UNICAP rules.
6. Domestic Production Activities Deduction—The 9 percent “off the top” tax deduction for manufacturers in the U.S. is eliminated.
7. Entertainment Expenses—A business write-off for an entertainment activity or “membership dues for any club for organized business, pleasure, recreation, or other social purposes” is eliminated.
IMMEDIATE IMPLICATIONS for BUSINESSES
1. As soon as possible, consider fully reimbursing employees for employee business expenses, since they can no longer save taxes if incurring these costs on their own. Also, understand that moving expense reimbursement taxation means that some of the money paid to cover these one-time costs incurred by employees will be lost to taxes.2. Seek tax advice as soon as possible. The tax laws applying to business are much more complicated and have “ripple effects” on other financial and tax decisions. Some of the areas we are currently considering for clients relate to the following decisions.
· Whether the 20 percent passthrough entity deduction applies to a particular business client.
· Whether to revoke as of January 1, 2018, S Corporation elections in favor of C Corporation status.
· Whether the cash basis of accounting can apply to a business and its ramifications on tax planning.
· Whether the new corporate tax rate schedule and the loss of the domestic production activities deduction will have a positive or negative effect on overall tax payments.
· Whether the state legislature in which a business is domiciled will follow the new federal rules.
For more details or advice as to specific responses that you might consider for your family or business, please contact us at MinistryCPA.org.
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