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The new tax reform law which was enacted on December 22, 2017, and commonly called the “Tax Cuts and Jobs Act” (TCJA), is the biggest federal tax law overhaul in 31 years.  Nearly everything in the TCJA went into effect on January 1, 2018.  It has both good and bad news for taxpayers.

Now, many months later, we are just beginning to get guidance from the IRS regarding various aspects of the new law.  Hopefully, this will continue. Some technical corrections from Congress are also needed.

Below are highlights of some of the most significant changes affecting individuals and businesses taxpayers.  Except where noted, these changes are effective for tax years beginning after December 31, 2017.

Remember that this is just a brief overview of some of the most significant provisions of the TCJA.  There are additional rules and limits that apply as well as additional provisions.

Highlights of the Tax Cuts and Jobs Act

Individuals | Businesses

If you have any questions regarding how this new tax law may affect you and/or your business, please do not hesitate to contact us.  Or, better yet, we could prepare a tax projection for you for 2018 using the tax law changes and new tax rates.  This would be an opportunity for you to do some tax planning for 2018 and future years.

It would also be a good time to look into whether federal tax withholdings should be adjusted on your paychecks. There is a Withholding Calculator on the IRS website that can be used to do a “paycheck checkup” to see if too little or too much tax is being withheld from your wages. We can also assist you with that computation. Any changes to be made would require submitting a new Form W-4 to your employer.

We can be reached at 812-663-7567 or 800-676-7567.  We look forward to hearing from you.

 

Individuals

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% - through 2025
  • Near doubling the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) – through 2025
  • Elimination of personal exemptions – through 2025
  • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit – through 2025
  • Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty – effective for months beginning after December 31, 2018
  • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes – for 2017 and 2018
  • New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers) – through 2025
  • Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions – through 2025
  • Elimination of the deduction for interest on home equity debt – through 2025
  • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters) – through 2025
  • Elimination of miscellaneous itemized deductions subject to the 2% floor ( such as certain investment expenses, professional fees and unreimbursed employee business expenses) – through 2025
  • Elimination of the AGI-based reduction of certain itemized deductions – through 2025
  • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) – through 2025
  • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year
  • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers – through 2025
  • Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) – through 2025
  • For children who have unearned income and are subject to the kiddie tax, they must file their own tax return and income will be taxed at trust rates.

Businesses

  • Replacement of graduated corporate tax rates ranging from15% to 35% with a flat corporate rate of 21%
  • Repeal of the 20% corporate AMT
  • New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships – through 2025
  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets – effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
  • Other enhancements to depreciation-related deductions
  • New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction – effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018 for C corporation taxpayers.
  • New rule limiting like-kind exchanges to real property that is not held primarily for sale
  • New tax credit for employer-paid family and medical leave – through 2019
  • New limitations on excessive employee compensation
  • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
  • Taxpayers whose average annual gross receipts for the three prior years are less than $25million may now use the cash method of accounting
  • The uniform capitalization rules of Section 263A for inventory are no longer required for businesses under the $25 million threshold referred to above.

 

When Congress was debating tax law reform last year, there was talk of repealing the federal estate and gift taxes. As it turned out, rumors of their demise were highly exaggerated. Both still exist and every taxpayer with a high degree of wealth shouldn’t let either take their heirs by surprise.

Exclusions and Exemptions

For 2018, the lifetime gift and estate tax exemption is $11.18 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, no federal estate tax will be due.

Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But not every gift you make will use up part of your lifetime exemption. For example:

  • Gifts to your U.S. citizen spouse are tax-free under the marital deduction, as are transfers at death (bequests).
  • Gifts and bequests to qualified charities aren’t subject to gift and estate taxes.
  • Payments of another person’s health care or tuition expenses aren’t subject to gift tax if paid directly to the provider.
  • Each year you can make gifts up to the annual exclusion amount ($15,000 per recipient for 2018) tax-free without using up any of your lifetime exemption.

It’s important to be aware of these exceptions as you pass along wealth to your loved ones.

A Simple Projection

Here’s a simplified way to help project your estate tax exposure. Take the value of your estate, net of any debts. Also, subtract any assets that will pass to charity on your death.

Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.

You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).

If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.

Be aware that many states impose estate tax at a lower threshold than the federal government does. So, you could have state estate tax exposure even if you don’t need to worry about federal estate tax.

Strategies to Consider

If you’re not sure whether you’re at risk for the estate tax, or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us.

For some people, Roth IRAs can offer income and estate tax benefits that are preferable to those offered by traditional IRAs. However, it’s important to take note of just what the distinctive features of a Roth IRA are before making the choice.

Traditional vs. Roth

The biggest difference between traditional and Roth IRAs is how taxes affect contributions and distributions. Contributions to traditional IRAs generally are made with pretax dollars, reducing your current taxable income and lowering your current tax bill. You pay taxes on the funds when you make withdrawals. As a result, if your current tax bracket is higher than what you expect it will be after you retire, a traditional IRA can be advantageous.

In contrast, contributions to Roth IRAs are made with after-tax funds. You pay taxes on the funds now, and your withdrawals won’t be taxed (provided you meet certain requirements). This can be advantageous if you expect to be in a higher tax bracket in retirement or if tax rates increase.

Roth distributions differ from traditional IRA distributions in yet another way. Withdrawals aren’t counted when calculating the taxable portion of your Social Security benefits.


TCJA eliminated option to recharacterize Roth IRAs.

The passage of the Tax Cuts and Jobs Act late last year had a marked impact on Roth IRAs: to wit, taxpayers who wish to convert a pretax traditional IRA into a post-tax Roth IRA can no longer “recharacterize” (that is, reverse) the conversion for 2018 and later years.

The IRS recently clarified in FAQs on its website that, if you converted a traditional IRA into a Roth account in 2017, you can still reverse the conversion as long as it’s done by October 15, 2018. (This deadline applies regardless of whether you extend the deadline for filing your 2017 federal income tax return to October 15.)


Also, recharacterization is still an option for other types of contributions. For example, you can still make a contribution to a Roth IRA and subsequently recharacterize it as a contribution to a traditional IRA (before the applicable deadline).

Additional Advantages

A Roth IRA may offer a greater opportunity to build up tax-advantaged funds. Your contributions can continue after you reach age 70½ as long as you’re earning income, and the entire balance can remain in the account until your death. In contrast, beginning with the year you reach age 70½, you can’t contribute to a traditional IRA — even if you do have earned income. Further, you must start taking required minimum distributions (RMDs) from a traditional IRA no later than April 1 of the year following the year you reach age 70½.

Avoiding RMDs can be a valuable benefit if you don’t need your IRA funds to live on during retirement. Your Roth IRA can continue to grow tax-free over your lifetime. When your heirs inherit the account, they’ll be required to take distributions — but spread out over their own lifetimes, allowing a continued opportunity for tax-free growth on assets remaining in the account. Further, the distributions they receive from the Roth IRA won’t be subject to income tax.

Many Vehicles

As you begin planning for retirement (or reviewing your current plans), it’s important to consider all retirement planning vehicles. A Roth IRA may or may not be one of them.

Please contact our firm for individualized help in determining whether it’s a beneficial choice.

Here's a look at some of the more important elements of the new tax law that have an impact on foreign taxation. In general, they are effective starting in 2018.

Deduction for foreign-source portion of dividends. The new law provides a 100% deduction for the foreign source portion of dividends received from specified 10%-owned foreign corporations by domestic corporations that are 10% shareholders of those foreign corporations. No foreign tax credit is allowed for any taxes paid and accrued as to any dividend for which the deduction is allowed, and those amounts are not treated as foreign source income for purposes of the foreign tax limitation. In addition, if there is a loss on any disposition of stock of the specified 10%-owned foreign corporation, the basis of the domestic corporation in that stock is reduced (but not below zero) by the amount of the allowable deduction.

Sales or exchanges of stock in foreign corporations. Under this new law provision, if a domestic corporation sells or exchanges stock in a foreign corporation held for over a year, any amount it receives which is treated as a dividend for Code Sec. 1248 purposes, will be treated as a dividend for purposes of the deduction for dividends received discussed above. Similarly, any gain recognized by a CFC from the sale or exchange of stock in a foreign corporation that is treated as a dividend under Code Sec. 964 to the same extent that it would have been so treated had the CFC been a U.S. person is also treated as a dividend for purposes of the deduction for dividends received.

Incorporation of foreign branches. Under the new law, if a U.S. corporation transfers substantially all of the assets of a foreign branch to a foreign sub, the transferred loss amount must generally be included in the U.S. corporation's gross income.

Deemed repatriation. Under the new law, U.S. shareholders owning at least 10% of a foreign sub must include in income for the sub's last tax year beginning before 2018, the shareholder's pro-rata share of the undistributed, non-previously-taxed post-1986 foreign earnings of the corporation. The inclusion amount is reduced by any aggregate foreign earnings and profits deficits, and a partial deduction is allowed such that a shareholder's effective tax rate is 15.5% on his aggregate foreign cash position and 8% otherwise. The net tax liability can be spread over a period of up to 8 years. Special rules apply for S corporation shareholders and for RICs and REITs.

Global intangible low-taxed income (GILTI). Under the new law, a U.S. shareholder of any CFC has to include in gross income its global intangible low-taxed income (GILTI), i.e., the excess of the shareholder's net CFC tested income over the shareholder's net deemed tangible income return (10% of the aggregate of the shareholder's pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder). The GILTI is treated as an inclusion of Subpart F income for the shareholder. Only an 80% foreign tax credit is available for amounts included in income as GILTI.

Deduction for foreign-derived intangible income and GILTI. Under the new law, in the case of a domestic corporation, a deduction is allowed equal to the sum of (i) 37.5% of its foreign-derived intangible income (FDII) for the year, plus (ii) 50% of the GILTI amount included in gross income, see above. Generally, FDII is the amount of a corporation's deemed intangible income that is attributable to sales of property to foreign persons for use outside the U.S. or the performance of services for foreign persons or with respect to property outside the U.S. Coupled with the 21% tax rate for domestic corporations, these deductions result in effective tax rates of 13.125% on FDII and of 10.5% on GILTI. The deduction rates are reduced for tax years after 2025.

Subpart F changes. The new law made several changes to the taxation of subpart F income of U.S. shareholders of CFCs. Among other things, the new law expands the definition of U.S. shareholder to include U.S. persons who own 10% or more of the total value (not just vote) of shares of all classes of stock of the foreign corporation. In addition, the requirement that a corporation must be controlled for 30 days before Subpart F inclusions apply has been eliminated.

Base erosion prevention. To prevent companies from stripping earnings out of the U.S. through payments to foreign affiliates that are deductible for U.S. tax purposes, a base erosion minimum tax applies to corporations, other than RICs, REITs, and S corporations, with average annual gross receipts of $500 million or more that made deductible payments to foreign affiliates that are at least 3% (2% in the case of banks and certain security dealers) of the corporation's total deductions for the year. The tax is structured as an alternative minimum tax and applies to domestic corporations, as well as on foreign corporations engaged in a U.S. trade or business in computing the tax on their effectively connected income.

Other new law provisions limit income shifting via intangible property transfers, deny deductions for related party payments in hybrid transactions or with hybrid entities, and deny qualified dividend status to dividends received by individuals from surrogate foreign corporations. Finally, the new law introduces a series of modifications to the foreign tax credit system, as well as a number of other international reforms.

If you would like to discuss how these changes may affect your particular tax situation, please give us a call or complete the following form.

Here's a look at some of the more important elements of the new tax law that have an impact on tax-exempt organizations. In general, the provisions involved are effective starting in 2018.

Excise tax on exempt organization's excessive compensation. Before the new law, executive compensation paid by tax-exempt entities was subject to reasonableness requirements and a prohibition against private inurement. The new law adds an excise tax that is imposed on compensation in excess of $1 million paid by an exempt organization to a "covered" employee. The tax rate is set at 21%, which is the new corporate tax rate. Compensation for these purposes is the sum of (1) remuneration (other than an excess parachute payment) over $1 million paid to a covered employee by a tax-exempt organization for a tax year; plus (2) any excess parachute payment paid by the organization to a covered employee. A covered employee is an employee or former employee of the organization who is one of its five highest compensated employees for the tax year, or was a covered employee of the organization or its predecessor for any preceding tax year beginning after 2016. Remuneration is treated as paid when there is no substantial risk of forfeiture of the rights to the remuneration.

Excise tax on private college's investment income. Before the new law, private colleges and universities were generally treated as public charities, as opposed to private foundations, and were therefore not subject to the private foundation excise tax on their net investment income. The new law imposes an excise tax on the net investment income of colleges and universities meeting specified size and asset requirements. The excise tax rate is 1.4% of the institution's net investment income, and applies only to private colleges and universities with at least 500 students, more than half of whom are in the U.S., and with assets of at least $500,000 per student. For this purpose, assets used directly in carrying out the institution's exempt purpose are not counted. The number of students is based on a daily average of "full-time equivalent" students, i.e., two students carrying half loads would count as a single full-time equivalent student. For purposes of the excise tax, net investment income is the institution's gross investment income minus expenses incurred to produce it, but without the use of accelerated depreciation or percentage depletion.

Exempt organization's UBTI computed separately for separate businesses. Before the new law, a tax-exempt organization computed its unrelated business taxable income (UBTI) by subtracting deductions directly connected with the unrelated trade or business from its gross income from the unrelated trade or business. If the organization had more than one unrelated trade or business, the organization combined its income and deductions from all of the trades or businesses. Under that approach, a loss from one trade or business could offset income from another unrelated trade or business, thus reducing overall UBTI. Under the new law, an exempt organization cannot use losses from one unrelated trade or business to offset income from another one. Gains and losses are calculated and applied to each unrelated trade or business separately. There is an exception for net operating losses from pre-2018 tax years that are carried forward.

Exempt organization's UBTI to include disallowed fringe benefit costs. Under the new law, an exempt organization's unrelated business taxable income (UBTI) is to include any nondeductible entertainment expenses, and costs incurred for any qualified transportation fringe, parking facility used in connection with qualified parking, or any on-premises athletic facility. However, UBTI is not to include any such amount to the extent it is directly connected with an unrelated trade or business regularly carried on by the organization.

If you wish to discuss any of these provisions, please don't hesitate to contact us, or complete the following form.

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