Updated December 22, 2017, at 1:45 PM.
You’ve probably heard the new tax reform act lowers the corporate tax rate, changes individual income tax brackets and more. President Trump signed the tax bill into law Friday, December 22, and as the largest tax overhaul in more than 30 years, this legislation affects millions of Americans and their finances.
What does this mean for you, your business, and your assets? We aggregated a few provisions you should be aware of as you engage in year-end tax planning.
The Tax Reform Act’s Impact on Businesses
The new tax law drops the 35% maximum corporate tax rate to 21% effective in 2018.
Companies should be prepared to defer income and/or accelerate deductions into 2017. If the corporate rate decreases to 21% in 2018, there will be an immediate benefit.
Bonus depreciation gives businesses the opportunity to take an immediate first-year deduction on the purchase of eligible business assets, such as machinery and equipment. The tax reform act raises bonus depreciation to 100%.
The new tax law calls for a 20% deduction for certain pass-through income limited to the greater of 50% of wage income or 25% of wage income plus 2.5 percent of the cost of tangible depreciable property for qualifying businesses effective 2018. Remaining net business income would be considered as compensation bound to individual income tax rates.
The Domestic Production Activities Deduction
Also known as the “manufacturer’s deduction,” this credit provides tax relief to small and large businesses who create products in the United States. The new 1tax law eliminates the domestic production activities deduction.
The Tax Reform Act’s Impact on Individuals
New Individual Income Tax Rates
The new tax law creates seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. See the charts below to learn which bracket you fall under based on your individual circumstances. Understanding your new potential bracket can help you plan ahead when evaluating your personal finances.
Please note that individuals cannot pay 2018 income taxes in 2017. Income taxes paid by December 31, 2017, can only be amounts levied for 2017.
The tax reform act increases the standard deduction to $12,000 from $6,500 for single filers, $18,000 from $9,550 for heads of household and $24,000 from $13,000 for joint filers.
What does this mean? Increasing standard deductions would alleviate the need for many taxpayers to itemize deductions. Unless your itemized deductions are greater than the new increased standard deductions, these deductions may be lost. It might make sense to accelerate those allowable taxes and deductions into the current year to obtain benefit. Review your property taxes, charitable deductions and more to see how these proposed standard deductions apply.
State Income, Sales and Property Tax Deductions
Currently, the State and Local Tax deduction (SALT) is unlimited. The tax reform act, however, limits taxpayers to deduct up to $10,000 in state income, sales or property taxes.
This impacts residents of states with high income taxes the hardest, such as California (13.3%), Oregon (9.9%) and Minnesota (9.85%), as well as those with high sales taxes, like Louisiana (9.98%), Tennessee (9.46%) and Arkansas (9.3%). As a reminder, Florida has a combined sales tax rate of 6.8%.
This also affects residents of states with high average property tax rates like New Jersey (2.35%), Illinois (2.3%) and New Hampshire (2.15%). Florida’s average property tax rate is 1.1%.
If you want to claim deductions for state income taxes, submit your estimates due in January before the end of 2017. If possible, prepay your property taxes before year-end.
The Estate and Gift Taxes
The tax reform act doubles the exemption for estate and gift taxes, effective in 2018, from approximately $5.5 million to approximately $11 million per individual ($22 million for married couples), subject to annual inflation adjustments. Thus, under this law, fewer people will be subject to the taxes imposed on the transfer of property to heirs at death or during life.
How does this affect wealthy Americans? Kaufman Rossin’s John Anzivino, estate and trust principal, notes that the need for charitable planning for large estates will likely weaken.
“Charitable lead trusts, which are effective in eliminating or reducing estate tax while providing funds to charity and family, would be much less attractive without the estate tax” in place, Anzivino said in an interview with Financial Advisor. “The estate, gift and generation-skipping transfer taxes are definitely a motivating factor in charitable giving. They make gifts less costly to the family.”
Miscellaneous Credits & Deductions
As mentioned above, the tax law increases standard deductions for taxpayers who don’t itemize, diminishing the incentive for some families to donate in future years. If you’re planning on making a charitable contribution, submit your donation before the end of 2017 to take advantage of this write-off.
Currently, you can deduct medical expenses over 10% of your adjusted gross income. The tax law would temporarily reduce the threshold to qualify for medical expense deductions to 7.5% of adjusted gross income for 2017 and 2018 tax years. Consider receiving medical procedures and paying for them before the end of 2017 if you anticipate these expenses to exceed 10% of your adjusted gross income.
The tax reform act kills the moving deduction. If you’re relocating for employment purposes in the near future, do so now to take advantage of this deduction.
Please reach out to me or another professional in Kaufman Rossin’s tax practice with questions on how the tax changes may affect you and your assets. You can also explore the 2017-2018 tax planning guide.
Louis Balbirer, CPA, is a tax principal in Kaufman Rossin’s Fort Lauderdale office. Kaufman Rossin, one of the top CPA firms in the U.S., offers state and local tax services for individuals and businesses. Louis can be reached at firstname.lastname@example.org.