1. The Tax Cuts and Jobs Act Presented to Birmingham Association of Realtors
James W. Moody, CPA
April 8, 2019

2. The Goals Overview of the US tax system
What are the main areas of reform in 2018
What does tax reform mean for:
Individual and Business taxpayers
Real Estate Professionals
Homeowners (and renters)
Investors in real estate
Rental Real Estate

3. Overview of U.S. Tax System
Types of Taxpayers
Individuals
Pass Through Entities
S Corporation
Partnership (LLC, LLP, LP, etc.)
Corporations
Trusts and Estates

4. Overview of U.S. Tax System
Types of Taxes
Income tax
Payroll tax (SS, Medicare, Self Employment)
Property tax - ad valorem
Estate and gift
Excise tax
Sales and Use tax
Franchise Tax
Permits and licenses
But wait, there’s more…

5. Overview of U.S. Tax System
Rate Terminology
Marginal Rate
the rate your next dollar of income will be taxed at
Average Rate – Or Blended Rate
Total tax divided by total income
A Credit is Better than a Deduction!
A deduction reduces your taxable income. A $1,000 deduction reduces tax by $150 if the marginal tax rate is 15%
A credit reduces your tax. A $1,000 credit reduces your tax by $1,000.

6. 2018 Tax Reform Individual Income Tax Provisions
Adjusted Tax Rates and Brackets
Generally lower than 2017
7 Tax Brackets ranging from 10% to 37%
2017 – 10 – 15 – 25 – 28 – 33 – 35 – 39.6
2018 – 10 – 12 – 22 – 24 – 32 – 35 – 37
Top 37% bracket applies to taxable income over $600,000 (Married) and $500,000 (single)
Favorable tax rate for capital gains retained
0%, 15%, 20%

7. 2018 Tax Reform Individual Income Tax Provisions - Continued
Itemized Deductions
State and local income and property taxes limited to $10,000
Mortgage Interest limited to $750,000 principal – new loans
Home Equity loans may still be deductible (it depends)
Medical Expenses allowed limited to 7.5% of AGI
Charitable Donations allowed up to 60% of AGI
Employee unreimbursed job expenses eliminated
certain investment expenses eliminated
Phaseout of itemized deductions eliminated

8. 2018 Tax Reform Individual Income Tax Provisions - Continued
Standard Deduction Increased – essentially doubled
Single - $6,350 to $12,000
Married filing joint - $12,700 to $24,000
Personal Exemptions eliminated
Previously +/- $4,000 extra deduction per family member
Child Tax Credit doubled and expanded
Increases from $1,000 to $2,000 per child (under 16)
Income phaseout increased significantly so more taxpayers will benefit from the credit ($200,000/$400,000)
Up to $1,400 is refundable for some filers
A new $500 Credit for dependents over 16

9. 2018 Tax Reform Individual Income Tax Provisions - Continued
Other Retained Provisions:
Exclusion of Gain on Sale of Residence
Self Employment Tax
Alternative Minimum Tax, but fewer will pay
Student Loan Interest deduction
Other Repealed Provisions:
Individual health insurance mandate
Moving expense deduction
Casualty loss deduction (except federally declared disasters)
Alimony deduction (for divorces after 1/1/2019)

10. 2018 Tax Reform Individual Estate and Gift Provisions
Lifetime Exemption Amount Doubled
From $5.49 Million in 2017 to 11.2 Million in 2018
This is $22.4 Million per couple
Tax rate is 40% on gifts/estate transfers over limits
Limits apply to gift, estate, and GST.
These increased limits expire after 2025
This will significantly reduce the number of taxable estates for the next 7 years
The annual gift exclusion is $15,000 in 2018 and 2019
Gift and estate tax returns should still be filed if required

11. 2018 Tax Reform Business Tax Provisions – All Businesses
Accelerated Depreciation Expanded
100% Bonus Depreciation for eligible purchases
100% First Year Expensing under Section 179 also increased and expanded
Entertainment Expenses not deductible
Business Interest expense limited based on income
Net Operating Losses
Carry forward only, no expiration.
NOL deduction limited to 80% of taxable income.

12. 2018 Tax Reform Business Tax Provisions – All Businesses
Special Small Business Provisions
Businesses under $25 million benefit from a few special provisions
Interest expense not limited
Cash basis tax reporting
Uniform Capitalization Rules

13. 2018 Tax Reform Business Tax Provisions – C Corporations
C Corporation Tax Rates reduced to a flat 21%
Previous a graduated rate ranging from 15% to 39%
C Corporations are still subject to “double taxation”
Dividends are taxable to owner when received
Effective Tax Rate for C Corporations to earn a profit and distribute to the owners will still likely exceed 40% and in some cases, exceed 50%, depending on state tax rates.
Corporate AMT Repealed

14. 2018 Tax Reform Business Tax Provisions – Pass Through Entities
Proprietorships, Partnerships, and S Corporations
Income still “passes through” to their owners
New 20% deduction for “Qualified Business Income” or “QBI”
This is potentially the largest area of tax savings for many small business owners or self-employed individuals, but the most complicated to understand and apply.

15. 2018 Tax Reform 20% QBI Deduction
Applies to Proprietors, Partnership, and S Corp owners
What is QBI?
taxable income of the partnership, S corp, or proprietorship.
Wages or guaranteed payments are not eligible for deduction
If taxable income is less than $315,000 (MFJ) or $157,500 (single), eligible for 20% deduction.
If taxable income exceeds $315,000 (MFJ) or $157,500 (single) the 20% deduction may be limited or eliminated based on:
The nature of the business (professional service)
The amount of W2 wages
The amount of fixed assets
The amount of taxable income

16. 2018 Tax Reform 20% QBI Deduction - Continued
Certain professionals are completely excluded from this deduction, unless taxable income is below thresholds
Accountants, attorneys, doctors, consultants, financial services, and others where the main asset of the business is the skill or reputation of one or more of its employees or owners
Maximum deduction is 20% of QBI.
The deduction may be phased out if AGI is between $315,000 and $415,000 (MFJ) or $157,500 and $207,500 (single). See factors on previous slide.

17. 2018 Tax Reform 20% QBI Deduction - Continued
A 20% deduction for business income is like reducing the tax rate on that income by 20% (or more)
The 37% tax rate would be reduced to 29.6%.
Compare to the 39.6% highest bracket in 2017
If QBI is $100,000, the QBI deduction would be $20,000, making only $80,000 subject to tax.
QBI deduction could be reduced if taxable income is smaller than the QBI amount of $100,000

18. 2018 Tax Reform Real Estate Professionals
Are Realtors considered “personal service businesses”? Like lawyers,doctors and stock brokers?
Recently finalized Regulations clarify “No”
This is a huge win for Realtors
Self-Employed Realtors filing Schedule C (proprietor)
If taxable income below thresholds ($315,000/$157,500), Schedule C income eligible for 20% deduction
If taxable income exceeds thresholds ($315,000/$157,500), may still be eligible for the 20% deduction, but other factors apply
Deduction applies to income tax only (not SE Tax)

19. 2018 Tax Reform Real Estate Professionals W-2 Employees
Partners or S Corp Shareholders also eligible for QBI deduction – same as proprietors
Salaries not eligible for 20% deduction
W-2 Employees
No special QBI deduction or special provisions
Unreimbursed expenses or mileage are no longer deductible as an itemized deduction
See Examples 1 to 5 on pages of NAR Publication

20. 2018 Tax Reform
Homeowners
The standard deduction was increased significantly, so many taxpayers will no longer itemize (Federal).
Property taxes and interest are still itemized deductions, but those deductions provide no tax savings for taxpayers claiming a standard deduction.
There is no tax savings between renting and buying if the taxpayer claims a standard deduction.
Reminder: Reform is for Federal Tax only. Alabama standard deduction is still very low, so there may still be tax savings in Alabama.

21. 2018 Tax Reform
Homeowners
If state income taxes exceed $10,000, the property taxes will not be counted toward itemized deductions due to the $10,000 limitation.
Taxpayers with AL taxable income over $200,000
If itemized deductions exceed $24,000 (MFJ) or $12,000 single, the benefits of home ownership and mortgages will still exist.
State income and property taxes (no more than $10,000)
Mortgage interest ($750,000 principal)
Charitable Donations

22. 2018 Tax Reform
Homeowners
While there may be less tax incentives to purchase a home, especially for lower or median-income taxpayers, reduced tax rates and increased child tax credits may put more money in the pockets of taxpayers.
Exclusion of gain on sale of residence still applies
See Appendix 2 of NAR Publication

23. 2018 Tax Reform Investors 1031 Like-Kind Exchanges
Still allowed, but for real property only
Not allowed for personal property, such as equipment, automobiles, etc.

24. 2018 Tax Reform Rental Real Estate
Income from owning and renting real estate to others may (or may not) be eligible for the 20% QBI deduction
The facts and circumstances will determine whether the activity is considered trade or business income
A triple net lease, for example, may be considered an investment, rather than a trade or business
The time commitment of the owner, or their employees or agents, is another factor

25. James W. Moody, CPA jmoody@dentmoses
James W. Moody, CPA (205) Lakeshore Drive, Suite 300 Birmingham, Alabama 35209