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• Tax Cuts and Jobs Act Summary • Individuals • Estate and Gift • Business / International • Section 199A • Summary • Proposed Regulations • Entity Selection • Tax Reform 2.0 2
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2017: If Taxable 2017: The Tax Due Is: 2018: If Taxable 2018: The Tax Due Is: Income is Between: Income is Between: 0 - $9,325 10% of taxable income 0 - $9,525 10% of taxable income $9,326 - $37,950 $932.50 + 15% of the amount $9,526 - $38,700 $952.50 + 12% of the amount over $9,525 over $9,325 $38,701 - $82,500 $4,453.50 + 22% of the amount $37,951 - $91,900 $5,226.25 + 25% of the amount over $37,950 over $38,700 $91,901 - $191,900 $18,713.75 + 28% of the amount $82,501 - $157,500 $14,089.50 + 24% of the amount over $91,900 over $82,500 $191,651 - $416,700 $46,643.75 + 33% of the amount $157,501 - $200,000 $32,089.50 + 32% of the amount over $157,500 over $191,650 $200,001 - $500,000 $45,689.50 + 35% o the amount $416,701 - $418,400 $120,910.25 + 35% of the amount over $416,700 over $200,000 $418,401 + $121,505 + 39.6% of the amount $500,001 + $150,689.50 + 37% of the amount over $500,000 over $418,400 4
2018: If Taxable Income 2018: The Tax Due Is: 2017: If Taxable 2017: The Tax Due Is: is Between: Income is Between: 0 - $19,050 10% of taxable income 0 - $18,650 10% excess of taxable income $18,651 - $75,900 $1,865 + 15% of the amount over $19,051 - $77,400 $1,905 + 12% of the amount over $18,650 $19,050 $75,901 - $153,100 $10,452.50 + 25% of the amount $77,401 - $165,000 $8,907 + 22% of the amount over over $75,900 $77,400 $165,001 - $315,000 $28,179 + 24% of the amount over $153,101 - $233,350 $29,752.50 + 28% of the amount $165,000 over $153,100 $233,351 - $416,700 $52,222.50 + 33% of the amount $315,001 - $400,000 $64,179 + 32% of the amount over over $233,350 $315,000 $416,701 - $470,700 $112,728 + 35% of the amount $400,001 - $600,000 $91,379 + 35% of the amount over over $416,700 $400,000 $470,700 + $131,628 + 39.6% of the amount $600,001 + $161,379 + 37% of the amount over $600,000 over $470,701 5
2017: If Taxable 2017: The Tax Due Is: 2018: If Taxable 2018: The Tax Due Is: Income is Between: Income is Between: 0 - $18,650 10% of taxable income 0 - $9,525 10% of taxable income $18,651 - $75,900 $1,865 + 15% of the amount over $9,526 - $38,700 $952.50 + 12% of the amount $18,650 over $9,525 $75,901 - $153,100 $10,452.50 + 25% of the amount $38,701 - $82,500 $4,453.50 + 22% of the amount over $75,900 over $38,700 $153,101 - $233,350 $29,752.50 + 28% of the amount $82,501 - $157,500 $14,089.50 + 24% of the amount over $153,100 over $82,500 $233,351 - $416,700 $52,222.50 + 33% of the amount $157,501 - $200,000 $32,089.50 + 32% of the amount over $233,350 over $157,500 $416,701 - $470,700 $112,728 + 35% of the amount $200,001 - $300,000 $45,689.50 + 35% o the amount over $416,700 over $200,000 $470,701 + $131,628 + 39.6% of the amount $300,001 + $80,689.50 + 37% of the amount over $470,000 over $300,000 6
• Standard deduction increased to the following: • $12,000 – Single and married filing separate • $18,000 – Head of household • $24,000 – Married filing jointly and surviving spouse • Amounts are adjusted for inflation after 2018 • Personal exemptions suspended until 2026 7
The Good The Bad • Miscellaneous itemized deductions that are • Pease limitations of overall itemized deduction subject to the 2% floor are suspended suspended (3% of Adjusted Gross Income (AGI)) • State, local, and real estate tax deduction limited • AGI floor for deductible medical expenses to $10,000 decreased from 10% to 7.5% until 2019 • Increased limitations on deductible mortgage • Charitable contributions now deductible up to interest expense (750K) 60% of AGI rather than 50% • Home equity interest deduction disallowed unless used to buy, build, or substantially improve home securing loan 8
• Alimony paid under agreements executed after Dec. 31, 2018, is not deductible by payer spouse nor taxable to payee spouse • The Affordable Care Act (ACA) individual mandate is permanently repealed after Dec. 31, 2018 • AMT retained but at substantially higher exemption levels as follows: • $109,400 for joint • $70,300 for single • $54,700 for married filed separately • Kiddie tax “eliminated” - now uses trust/estate rates (a standard deduction still exists) 9
• 529 plan distributions can be used to pay up to $10,000 in expenses for public, private, or religious elementary or secondary school • Repealed provisions for IRA recharacterizations • The ability to change your mind after converting a traditional IRA to a Roth IRA is gone • Converting from a nondeductible IRA to a Roth IRA remains unchanged • Increased the child tax credit and increased limitation thresholds • Credit is worth up to $2,000 per qualifying child, of which $1,400 is refundable • AGI phase-out for the credit increased to $400,000 (joint filers) 10
• Increased the estate, gift, and Generation Skipping Tax (GST) exemptions to approximately $11,200,000 per person • Applies to estates and gifts after Dec. 31, 2017 and before Jan. 1, 2026 • Husband and wife have $22,400,000 combined exemption • Gift tax exemption amount for 2018 increased to $15,000 • Exemptions are indexed for inflation 11
• Entertainment, amusement, or recreation expenses are no longer deductible unless for the benefit of employees • 100% bonus depreciation for eligible property for property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023 • Section 179 expensing increased to $1 million (phase-out begins at $2.5 million) • Expanded definition of Section 179 eligible property to include HVAC • Limitation on deduction of business interest when average receipts over the last 3 years exceeds $25 million • Expenses in excess of 30% of the business’ adjusted taxable income (add back interest, depreciation, amortization, and depletion) • Depreciation not added back after 2021 • Domestic production activities deduction (DPAD) repealed 12
• Any producer or reseller that meets the $25 million gross receipts test (average of preceding three years) is exempt from the application of Code Sec. 263A UNICAP rules • Taxpayers meeting the $25 million gross receipts test may also use completed contract method for contracts to be completed within 2-years instead of percentage of completion method for contracts entered into after 2017 • Taxpayers meeting the $25 million gross receipts test may also use cash basis method of accounting • An accounting method change under this rule is a change in the taxpayer’s accounting method for purposes of Code Sec. 481 • Like-kind exchanges are no longer permitted except for real estate 13
• Created flat tax rate of 21% (including capital gain income) • Corporate AMT repealed • Prior year AMT credits are refundable in an amount equal to 50% of the excess credit for the tax year over the amount of credit allowable for the year against regular tax liability • Net operating losses no longer have 2-year carryback option except for certain farming and insurance businesses • Net operating losses arising in tax years beginning after Dec. 31, 2017 are limited to 80% of taxable income 14
• Dividend received deduction reduced to 50%, from 70%, for less than 20% owned domestic corporations • Dividend received deduction reduced to 65%, from 80%, for 20% or more owned of domestic corporations 15
• Technical termination rule repealed (Partnership Only) • Under old tax law, a 50% or more transfer of ownership within a 12-month period would trigger a technical termination • Section 199A: Qualified Business Income Deduction – discussed later • Business losses limited to threshold amounts • $250,000 for single filers & $500,000 for joint filers • Excess loss “rolls” into NOL carryforward, which is subject to an 80% annual limit • Losses and income from all businesses are first netted against each other • Sunsets in 2026 16
• Introduction of a one-time repatriation tax (Section 965) • Calculate a 15.5% tax on accumulated post-1986 earnings in foreign entities • Tax can be paid over 8 years • Can be deferred until a triggering event on the shareholder level (Pass-throughs only) • Should already be accounted for by most businesses on their Dec. 31, 2017 tax returns • Dividends received from foreign corporations owned 10% or more are eligible for a 100% dividend received deduction to due the switch to a territorial system • Various topics that are outside the scope of this webinar 17
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• New “below the line” deduction for “qualified business income”(QBI) from pass-through entities (S-corporations and partnerships) and sole proprietorships • Maximum deduction is 20% of QBI • Non-corporate taxpayers (including estates and trusts) are eligible to claim the deduction • Effectively reduces the rate on pass-through income to eligible taxpayers to 29.6% • Sunsets in 2026 • One of the most complicated, least understood aspects of the new tax law will have the greatest effect on pass-through businesses 19
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• Generally, the QBI is ordinary income, gain, deduction, and loss of qualified trade or business • Excluded items – the taxpayer’s wages (or reasonable compensation), guaranteed payments, and investment-type income (capital gains, interest, dividends) 21
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