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Tax Cuts and Jobs Act Unveiled

The “Tax Cuts and Jobs Act” was unveiled on Thursday, and includes many proposed changes to our current tax laws.  While these changes haven’t officially been enacted, we will be carefully monitoring the progress.  We chose to highlight a few of the proposed changes below. Unless otherwise noted, these changes would be effective for tax years beginning after 2017:

  • Seven tax brackets consolidated into four: 12%, 25%, 35% and 39.6%.
    • Highest bracket starts at $1 million for MFJ.
    • $500,000 for single, MFS and HOH.
  • Enhanced standard deduction – $24,000 joint, $12,000 for single($18,000 if at least one qualifying child).
    • No more personal exemptions.
  • Partners and S Corporation Shareholders would potentially benefit from a maximum 25% rate on “business income” derived from pass-through entities.  Various factors would be considered in determining the taxpayer’s portion of income taxed at the lower rate, including: active/passive status, type of business and percentage of capital ownership.
    • Certain investment income such as capital gains, dividends, etc. would retain their character and not be included in the “business income” calculation.
  • Enhanced Child tax credit and new family tax credit.
    • Increase from $1,000 to $1,600 per child.
    • $300 credit available for non-child dependents.
  • Adoption credit and credit for plug-in electric drive vehicles repealed.
  • Three existing higher education credits consolidated into an enhanced American Opportunity Tax Credit.
    • Similar to existing AOTC but is available for a fifth year of post-secondary education at half the rate of the credit for first four years.
    • Deduction for interest on education loans and deduction for qualified tuition and related expenses repealed.
  • Repeal of certain itemized deductions, including the overall limitation on itemized deductions.
    • Mortgage interest still deductible, but for debt incurred after 11/2/17 the interest deduction would only be allowed on debt up to $500,000 and only on taxpayer’s principal residence.
    • State and local income tax deduction would be limited to taxes paid in carrying on a trade or business.
    • Real estate tax deduction would be capped at $10,000.
    • Repeal of medical expense deduction.
  • Alimony no longer deductible by payer or included in income of payee.
  • Principal residence exclusion would require home to be used as taxpayer’s principal residence for five of previous eight years and only available once every five years. Also, the exclusion is phased out dollar for dollar when AGI exceeds $500,000 MFJ, $250,000 Single.
  • Beginning after 2017, the basic exclusion for estate, gift and generation-skipping tax would double from $5 million(as of 2011) to $10 million, indexed for inflation.  After 2023, estate and generation-skipping tax would be repealed and the gift tax rate would be lowered to a top rate of 35% while maintaining the $10 million lifetime exclusion and $14,000 annual exclusion.
  • Repeal of the Alternative Minimum Tax.
  • Corporate tax rate would be a flat 20% rate.  Personal services corporations would be subject to a flat 25% corporate tax rate. Currently, corporations are subject to a gradual rate structure with the top rate at 35%, and personal services corporations pay the top 35% rate on all taxable income.
  • Changes to “bonus” depreciation would allow immediate expensing of 100% of the cost of qualified property acquired and placed in service after 9/27/17 and before 1/1/2023.  The original use requirement would be repealed so that property would be eligible as long as it was the taxpayer’s first use. Qualified property would not include property used in a real property trade or business.
  • Section 179 expensing limitation would increase from $500,000 to $5 million.  The deduction is currently phased-out when the cost of 179 property placed in service exceeds $2 million. This threshold would increase to $20 million.
  • Repeal of the deduction for domestic production activities.
  • Deferral of gain on like-kind exchanges will continue to be allowed for real property only.

Please connect with your Edelstein advisor if you have any questions.