Selected tax law changes for 2018-2025

[cpa]

I scanned the new tax legislation that is currently awaiting signature from the President. I thought that I would share some of items that did not get a lot of publicity yet could affect some of you or your families. The usual caveats apply:

--Don't believe everything you read on the interwebs. I spent about an hour scrolling through the 400-some odd pages of the act and made some notes. I could have misread a few things, or I could have missed the exceptions to the exceptions to the exceptions.

--If some of these changes affect you, I urge you to consult a professional. (I am not soliciting here, merely pointing out that TurboTax is no substitute for a competent professional.) Some of these areas can be tricky. I am just trying to remind you to watch where you step.

--This is not meant to be political in nature.

Coming next in the first or second quarter will be the Joint Committee poring over the statutory language and comparing the language to Congress' intent. They will be looking for typos, bad references, and other technical errors. There will be one or more technical correction bills introduced, passed and signed into law to clarify or restate problems in the bill just passed.

Coincident to and beyond these technical corrections, Treasury will be drafting regulations to interpret Congress' intent. Some will be published quickly. Others will be temporary or proposed awaiting public comment. They have a lot of work cut out for them over the next several years.

Kiddie Tax: The calculation for the Kiddie Tax changes dramatically. Instead of using the parents' income tax rates, the Kiddie Tax will now use the fiduciary rates (estates and trusts.) So, for those who are interested, the 10% bracket for fiduciaries cuts off at $2,550. The maximum 37% bracket starts at $12,500.

Casualty Losses: This continues to be an itemized deduction, and it can be added to the standard deduction if the taxpayer otherwise would not itemize. However, this deduction only is available for casualties in presidentially-declared disaster areas. No longer would burglary, robbery, or other casualties be deductible. The above-the-line deduction for theft by deception (think Bernie Madoff) has not been repealed.

Personal Interest: The new cap on mortgages is now $750,000 for sales closing after December 15 (or 20th--not sure.) The home equity/refinance interest deduction for up to $100,000 of proceeds will no longer be deductible. We are all grandfathered in with these provisions, however. So, if you refinance to by a Model 3 next year, you will not be able to deduct that interest.

Other Itemized Deductions: The miscellaneous deductions subject to the 2% floor of AGI are eliminated. No more deductions for investment expenses, hobby expenses, legal advice, or unreimbursed employee business expenses. In addition the 3% haircut under Section 68 is suspended, so for those who do itemize who have sizable AGI, they will not lose out on any of their itemized deductions.

Moving Expense Deduction: Suspended

Alimony: For dissolutions occurring in 2018 and beyond the deduction for alimony paid and the inclusion of alimony received goes away. (Caution: this was difficult to parse in the text of the bill, so best consult an expert if you are in the process of winding up your marriage in 2018.)

AMT: The exemption amounts increase to $70,300 (single) and $109,400 (joint).

Like-kind Exchanges: Personal property will no longer be eligible for section 1031 tax deferral. Only real property qualifies.

Meals and Entertainment: The deduction for entertainment expenses is suspended. No more tax break for Super Bowl tickets. Business meals still are subject to the 50%/80% deduction amount. Certain employer-provided meals for employees are no longer deductible.

Pass-through Entity Deduction: Owners of pass-through entities are now entitled to a deduction of up to 20% of their profit from those entities. This new legislation is incredibly complex, and I anticipate a slew of regulations coming down the pike. Essentially, qualifying entities include partnerships, S Corporations, sole proprietorships on Schedules C or F, rental income on schedule E or form 4835, and non-qualified dividends from REIT. Service businesses (essentially any business that does not need a lot of capital investment) cannot take this deduction unless the profit is beneath $157,500 (single, HOH) or $315,000 (MFJ.) There is a phase-out rule for profits that exceed these limits. There are other requirements related to wages paid and investment in property that are beyond the scope of my information. Again, consult a professional if you have investments or own these sorts of businesses.

Child Credits: These credits of up to $2,000 per qualifying child ($500 for a non-child) phase out at $200,000/$400,000 of taxable income for single/MFJ.

This by no means is exhaustive. There are 494 pages, and about 2/3 of them are highly specialized (sorry, Audobon!) and have no real application to most individual taxpayers.

I hope that this information puts forth a few things that might affect your personal situations into the light so that you can pursue just how your own tax bill will be affected in the next eight years.

This is really the Accountants' Income Security Act of 2017.

 

[hacer]

...

Personal Interest: The new cap on mortgages is now $750,000 for sales closing after December 15 (or 20th--not sure.) The home equity/refinance interest deduction for up to $100,000 of proceeds will no longer be deductible. We are all grandfathered in with these provisions, however. So, if you refinance to by a Model 3 next year, you will not be able to deduct that interest.

...

When you say "we are grandfathered", it would imply that you WILL be able to deduct [home equity/refinance interest] but then you say you will NOT be able to. Which is it? Or maybe you are saying you will if you already re-financed this year in order to pay next year, but won't if you do the refinance next year.

 

[brucet999]

When you say "we are grandfathered", it would imply that you WILL be able to deduct [home equity/refinance interest] but then you say you will NOT be able to. Which is it? Or maybe you are saying you will if you already re-financed this year in order to pay next year, but won't if you do the refinance next year.

"Grandfathered" would apply to loans funded before the effective date of the new law. Loans funded after that would not be deductible.

 

[hacer]

"Grandfathered" would apply to loans funded before the effective date of the new law. Loans funded after that would not be deductible.

Yes, I know what grandfathered means. CPA's post says " We are all grandfathered in with these provisions, however. So, if you refinance to by a Model 3 next year, you will not be able to deduct that interest."

Which is confusing. On my first reading I read "refinance" as "refinanced" because the sentence beginning with "So" seems to be predicated on the one before where "we are all grandfathered" and it seemed contradictory. Given the incorrect word "by" instead of "buy", it could be that the "d" was mistakenly left off of refinance (typo). I haven't read much of the legislation so I really don't know (it actually won't affect me either way), but I'd like to have it straight. It might be that home equity loans used to improve a property are "grandfathered" but home equity loans used to buy cars are not "grandfathered". The OP has left me wondering, so I ask for clarification about what he thinks the law says. I still don't know.

 

[cpa]

I mistyped. Sorry. The $1,000,000 mortgage limitation is grandfathered in.

The deduction for home equity loans or refinanced acquisition debt that increased the amount of the mortgage is not.

For example, X buys a home for $1.2 million, and borrows $1,000,000 as acquisition debt. At December 31, 2017, his remaining balance on his note is $895,000. X can continue to deduct the entire amount of mortgage interest.

Z has original acquisition debt on his home of $675,000 in 2010. In 2017, he refinances when the mortgage balance is $640,000 and pulls out $60,000 for any purpose. Z will be able to deduct 64/70 of his mortgage interest in 2018 and beyond until these provisions expire or are made permanent. Similarly, if the $60,000 additional debt were a home equity line of credit, Z would still deduct 100% of his acquisition debt interest, but none of the home equity debt.

I would hope that the IRS will redesign the 1098 form to show total interest paid, and total interest deductible on Schedule A. That would be nice!

Again, I apologize for my misstatement earlier. Trying to read the blasted bill and committee reports with their substitutions, restatements, additions, deletions, kinda got the neural pathways between my brain and my fingers bollixed up.

 

[GOPJEW]

I scanned the new tax legislation that is currently awaiting signature from the President. I thought that I would share some of items that did not get a lot of publicity yet could affect some of you or your families. The usual caveats apply:

--Don't believe everything you read on the interwebs. I spent about an hour scrolling through the 400-some odd pages of the act and made some notes. I could have misread a few things, or I could have missed the exceptions to the exceptions to the exceptions.

--If some of these changes affect you, I urge you to consult a professional. (I am not soliciting here, merely pointing out that TurboTax is no substitute for a competent professional.) Some of these areas can be tricky. I am just trying to remind you to watch where you step.

--This is not meant to be political in nature.

Coming next in the first or second quarter will be the Joint Committee poring over the statutory language and comparing the language to Congress' intent. They will be looking for typos, bad references, and other technical errors. There will be one or more technical correction bills introduced, passed and signed into law to clarify or restate problems in the bill just passed.

Coincident to and beyond these technical corrections, Treasury will be drafting regulations to interpret Congress' intent. Some will be published quickly. Others will be temporary or proposed awaiting public comment. They have a lot of work cut out for them over the next several years.

Kiddie Tax: The calculation for the Kiddie Tax changes dramatically. Instead of using the parents' income tax rates, the Kiddie Tax will now use the fiduciary rates (estates and trusts.) So, for those who are interested, the 10% bracket for fiduciaries cuts off at $2,550. The maximum 37% bracket starts at $12,500.

Casualty Losses: This continues to be an itemized deduction, and it can be added to the standard deduction if the taxpayer otherwise would not itemize. However, this deduction only is available for casualties in presidentially-declared disaster areas. No longer would burglary, robbery, or other casualties be deductible. The above-the-line deduction for theft by deception (think Bernie Madoff) has not been repealed.

Personal Interest: The new cap on mortgages is now $750,000 for sales closing after December 15 (or 20th--not sure.) The home equity/refinance interest deduction for up to $100,000 of proceeds will no longer be deductible. We are all grandfathered in with these provisions, however. So, if you refinance to by a Model 3 next year, you will not be able to deduct that interest.

Other Itemized Deductions: The miscellaneous deductions subject to the 2% floor of AGI are eliminated. No more deductions for investment expenses, hobby expenses, legal advice, or unreimbursed employee business expenses. In addition the 3% haircut under Section 68 is suspended, so for those who do itemize who have sizable AGI, they will not lose out on any of their itemized deductions.

Moving Expense Deduction: Suspended

Alimony: For dissolutions occurring in 2018 and beyond the deduction for alimony paid and the inclusion of alimony received goes away. (Caution: this was difficult to parse in the text of the bill, so best consult an expert if you are in the process of winding up your marriage in 2018.)

AMT: The exemption amounts increase to $70,300 (single) and $109,400 (joint).

Like-kind Exchanges: Personal property will no longer be eligible for section 1031 tax deferral. Only real property qualifies.

Meals and Entertainment: The deduction for entertainment expenses is suspended. No more tax break for Super Bowl tickets. Business meals still are subject to the 50%/80% deduction amount. Certain employer-provided meals for employees are no longer deductible.

Pass-through Entity Deduction: Owners of pass-through entities are now entitled to a deduction of up to 20% of their profit from those entities. This new legislation is incredibly complex, and I anticipate a slew of regulations coming down the pike. Essentially, qualifying entities include partnerships, S Corporations, sole proprietorships on Schedules C or F, rental income on schedule E or form 4835, and non-qualified dividends from REIT. Service businesses (essentially any business that does not need a lot of capital investment) cannot take this deduction unless the profit is beneath $157,500 (single, HOH) or $315,000 (MFJ.) There is a phase-out rule for profits that exceed these limits. There are other requirements related to wages paid and investment in property that are beyond the scope of my information. Again, consult a professional if you have investments or own these sorts of businesses.

Child Credits: These credits of up to $2,000 per qualifying child ($500 for a non-child) phase out at $200,000/$400,000 of taxable income for single/MFJ.

This by no means is exhaustive. There are 494 pages, and about 2/3 of them are highly specialized (sorry, Audobon!) and have no real application to most individual taxpayers.

I hope that this information puts forth a few things that might affect your personal situations into the light so that you can pursue just how your own tax bill will be affected in the next eight years.

This is really the Accountants' Income Security Act of 2017.

Thanks for this. The law was already signed by POTUS - just before Xmas.

You should mention the 179 Deduction that is now 100% in first year for qualifying purchases - like an X but NOT an S.

 

[cpa]

Thanks for this. The law was already signed by POTUS - just before Xmas.

You should mention the 179 Deduction that is now 100% in first year for qualifying purchases - like an X but NOT an S.

I did not want to open that can of worms. First, for individuals who do not own a business the miscellaneous deduction (2%) vaporizes in 2018, so the discussion is moot. Second, the rules, restrictions, and eligibility will vary from taxpayer to taxpayer depending on too many factors, and I thought that if people are using their vehicles in their business, their tax professional knows their situation intimately and can explain the new rules as they would apply to those individuals in their particular cases.

 

[swaltner]

Regarding the SALT (State and Local Tax) deduction and the new cap on that, which line is getting capped at $10,000 in the 2018 tax year and beyond? Is it Line 9 on Schedule A that is getting capped? If so, I’m thinking of paying some property tax from next year right now to be able to fully use this deduction (at least for this year and next year).

 

[ohmman]

My understanding is that the estate tax exemption has doubled to $11MM single/$22MM married, and is slated to phase out in 2024, though my guess is that it's very unlikely that'll be permitted to happen in the long term. Please correct me if I'm wrong.

 

[cpa]

My understanding is that the estate tax exemption has doubled to $11MM single/$22MM married, and is slated to phase out in 2024, though my guess is that it's very unlikely that'll be permitted to happen in the long term. Please correct me if I'm wrong.

Yes, Ohmman, the estate and gift tax exclusion has been effectively doubled to 11MM per person. Section 11061 of the conference agreement says, ". . .INCREASE IN BASIC EXCLUSION AMOUNT--In the case of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, Subparagraph (A) [IRC section 2010(c)(3)] shall be applied by substituting $10,000,000 for $5,000,000."

The DSUE rules and traps are unchanged.

In 2026 we revert to the old law unless extended or repealed. My gut feeling is that this provision will be allowed to expire or extended with a lower exclusion. I recall that for the most recent year with statistics (2015) that there were only 30,000 or so estate returns filed. There are predictions that the number of 706 filings will drop to <7,000 per year.

By 2026 the inflation-adjusted exemption under the $5,000,000 amount should be close to $6.5MM. Congress may well decide then that this figure is high enough.

Treasury is directed to issue regs to deal with the different exemption amounts under the old law, this transitory law, and whatever will become of the law in 2026.

One of life's lessons about all forms of taxation: Congress giveth, and Congress taketh away.

 

[cpa]

Regarding the SALT (State and Local Tax) deduction and the new cap on that, which line is getting capped at $10,000 in the 2018 tax year and beyond? Is it Line 9 on Schedule A that is getting capped? If so, I’m thinking of paying some property tax from next year right now to be able to fully use this deduction (at least for this year and next year).

All forms of personal taxation: State income tax, local income tax, personal property tax, and real property tax will be limited to $10,000 in 2018. Not sure the line on Schedule A--but it is the total amount for taxes that is in the right-hand column to be footed with all other itemized deductions. (I have not looked at the 2017 forms yet.)

 

[RichardL]

A little light reading for anybody interested in the Passthrough business changes:

Tax Geek Tuesday: Making Sense Of The New '20% Qualified Business Income Deduction'

Enjoy!

 

[cpa]

A little light reading for anybody interested in the Passthrough business changes:

Tax Geek Tuesday: Making Sense Of The New '20% Qualified Business Income Deduction'

Enjoy!

Thank you for that. I said above that this area was incredibly complex. Glad to see that this article validated my statement.

To distill this analysis down to the more common situations:

If taxable income is beneath the 157.5/315K thresholds, then the 20% deduction can be taken regardless of type of business.

If taxable income exceeds those limits, then there is a phase-out of 50/100K for service businesses and for any business that pays no wages or has substantial investments in property.

If taxable income is over the phase-out amounts, service businesses receive zero deduction, and other businesses have to go through the limitations on wages and property.

Don't forget that the net capital gains play a role in limiting the deduction.

Finally, for those who might be inclined to cut a deal with your employer to become an independent contractor, pay close attention to the caveats in this article. You can call yourself what you want, but the IRS and your state may disagree. That could get expensive for both your employer and yourself.

 

[SMAlset]

All forms of personal taxation: State income tax, local income tax, personal property tax, and real property tax will be limited to $10,000 in 2018. Not sure the line on Schedule A--but it is the total amount for taxes that is in the right-hand column to be footed with all other itemized deductions. (I have not looked at the 2017 forms yet.)

If only we had to pay a total of $10,000 of tax period.

 

[cpa]

If only we had to pay a total of $10,000 of tax period.

Therein lay the rift in Congress. From east of the coastal ranges to west of the Hudson River, most taxpayers don't have that amount in total personal taxes to deduct from their return. I would submit that only about 2-3% of the population would exceed $10,000. With the increased standard deduction, even though a taxpayer would have 15-20K in taxes to deduct, they might not have any mortgage debt and do not donate heavily to charity.