Tax reform is now law.
A few weeks ago, Congress passed H.R.1, a tax reform bill known as the Tax Cuts and Jobs Act. Its full title is “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” On Dec. 22, President Trump signed the bill into law.
As busy season approaches, it’s important that CPAs are aware of how this bill affects their clients. Some provisions apply retroactively, including reducing the threshold for deduction of medical expenses from 10% to 7.5% of adjusted gross income (AGI) for a two-year period beginning in 2017. This means some clients may be able to deduct more from their 2017 taxes or qualify for the deduction for the first time.
Individual tax rates changed, effective 2018-2025 tax years. These are now set at 10%, 12%, 22%, 24%, 32%, 35% and 37%. The IRS will issue guidance soon, meaning we could see changes to paychecks as early as next month. Business clients could also see their tax rate lower with the new flat 21% corporate tax rate. Previously the corporate rates ranged from 15% to 38% and were graduated based on taxable income.
CPAs will need to prepare their clients for next year’s filing season. These provisions go into effect this year and should be considered when evaluating a client’s tax liability:
- An increase in the standard deduction to $12,000 for singles and marrieds filing separately; $18,000 for heads of households; and $24,000 for marrieds filing jointly and surviving spouses
- Up to $10,000 in deductible state and local taxes for individual taxpayers
- An increase in the child tax credit to $2,000 (refundable up to $1,400), beginning to phase out after income levels of $400,000 for marrieds filing joint and $200,000 for all other taxpayers
- Home mortgage interest to acquire a home will now be limited to $750,000 in debt rather than the previous $1 million; interest on home equity mortgages and lines of credit are no longer deductible.
- Increased exemption amounts and phase-out thresholds for the individual alternative minimum tax (AMT), and a repeal of the corporate AMT
- Roughly doubles the estate tax exemption to $11.2 million for individuals and $22.4 million for married couples
- A maximum 20% deduction for “qualified business income” of pass-through entities (subject to various limitations), which begins to phase out at $157,500 for most service providers ($315,000 phase-out for married taxpayers)
- An increase in the section 179 expensing to $1 million with a phase-out beginning at $2.5 million
Many of the legislation’s tax cuts for individuals will expire in 2025 to comply with Senate budget rules. However, the reduction in the corporate rate is permanent.
It’s important to remember that some deductions are disappearing. These include deductions for moving expenses, unreimbursed employee expenses and certain casualty and theft losses.
Some provisions are delayed until the start of 2019. Those who do not have qualifying health insurance before December 31, 2018, will pay a tax penalty. Also, alimony payments will not be deductible for divorced couples who enter into a divorce agreement after December 31, 2018.
CPAs must understand how these legislative changes affect their clients and their businesses. From new tax rates to changes in deductions and credits, the Act has wide-ranging and immediate effects on almost everyone.
Visit the AICPA’s Tax Reform Resource Center to help stay on top of how tax reform impacts not only this year’s filing season but next year’s filing season and beyond.
This blog post was written for the AICPA’s Insights blog and can be found here.