ON DEC. 22, 2017, the tax world changed as the Tax Cuts and Jobs Act became law. It affects all of us, and below is a little insight into some of the changes that will have the most impact. These are not all of the changes, nor are they discussed in depth but merely highlighted so they are in your mind when tax planning. Next month, this column will touch on businesses, pass-through entities and some international tax changes.
From an individual tax perspective, the lowest tax rate remained at 10 percent while the highest tax rate was reduced from 39.6 percent to 37 percent. In between, the rates are lower in 2018 than 2017, and the income range in each bracket is larger, meaning you will not jump into higher brackets as quickly in 2018 as you did in 2017.
However, the government giveth and the government taketh away. The following items are no longer available: personal exemptions (standard deductions increased); state and local income and property tax deductions in excess of $10,000 annually; tax preparation fees; investment advisory fees; employee business expenses; personal casualty losses; and the large and commonly utilized entertainment expense (except meals, which are 50 percent deductible).
Deductibility of interest expense incurred for personal real estate mortgages has also changed. Interest expense incurred post-Dec. 15, 2017, is limited to a principal mortgage amount of $750,000. Refinances post-Dec. 15, 2017, are grandfathered at $1 million only up to the debt level at the date of refinance, which means you are not able to deduct interest expense if you are cashing out equity. Additionally, interest expense on a home equity line of credit is only going to be deductible to the extent proceeds were used to acquire, construct or substantially renovate property.
Deductibility of medical expenses also changed; moving forward, they are deductible to the extent they exceed 7.5 percent of adjusted gross income, down from 10 percent in 2017. The limit on contributions to qualified charitable organizations increased from 50 percent of AGI to 60 percent of AGI. The standard deduction for a married couple is now $24,000. Child credits also increased. Stock option income received from grants of privately held companies can now be deferred for five years.
A few other changes that may not impact the majority but will have a large impact on some: Business losses are now limited to $500,000 per year, and any excess will be carried forward as net operating losses. Net operating losses cannot be carried back any longer but can be carried forward indefinitely. The use of these losses is limited to 80 percent of taxable income for post-2017 losses.
Please keep in mind the above refers to federal taxes only. State and local taxes vary widely, and states are more aggressively clawing for tax dollars. As many of the readers of this publication are businesspeople who travel not only the country but the world, it is important to understand the nexus rules of the areas where you do business so you are compliant with your tax filings. Receiving a delinquent tax notice from a state where you did not even know you had to file a tax return will make your heart drop. Be proactive and speak to your tax professional — it will be one of the best investments you ever make.
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