1. Tax cuts and jobs act 2018
Public Law No

2. One Year Later… When will this Reform take effect??
From the 2018 tax year
We file the tax returns in 2019 calendar year
Most Individual tax provisions are set to expire in January 2025
We expect that they will be extended (similar to Bush Tax Cuts)
Immediate Changes Noticed?
By end of February 2018, withholding on paychecks will change
Reflects New Tax Rate Schedule
General: Take-Home pay should be an increase for most

3. Major changes for individuals
Four Major Sections

4. Individual Provisions
Tax Rate Brackets
Itemized Deductions
Deductions & Credits
Affordable Care Act
Individual Provisions

5. Tax Rates for Individuals
Maximum Tax Rate:
Highest bracket decreased from 39.6% to 37%
7 bracket structure: 10%, 12%, 22%, 24%, 32%, 35%, 37%
Approximate 2-3% decrease in rates from old to new
General: Positive effects seen across the board (Decrease overall tax)
Single Filers [new]
Married Filing Jointly (MFJ) [new]
22%
$38,700– 82,500
$77,400 – 165,000
24%
$82,500 – 157,500
$165,000 – 315,000
32%
$157,500 – 200,000
$315,000 – 400,000
35%
$200, ,000
$400, ,000
37%
$500,000 +
$600,000 +
Table is highlighted to show the ranges versus the old law. The pink cells show that the range of values has “decreased” for that tax bracket. The green cells show that the range of upper/lower limits has decreased in terms of dollars for that bracket.
The bill is publicized as a “Middle class tax bill” however you can see the spread has actually decreased for the “middle class rates” and increased for the upper rates.
Another thing to notice is that in general, when a person moves from Single to MFJ their tax bracket doubles. As you can see towards the top (35% and 37%) there’s actually not a true Doubling of ranges.

6. Deductions & Tax Credits Changes
Standard Deduction:
Increased  Single: $12,000 MFJ: $24,000
Expecting more people to choose this over Itemized Deduction
Personal Exemption:
Suspended  Larger families affected
Child Tax Credit:
Increased  $2,000 per child, maximum $1,400 is refundable
”Refundable” – you can take the credit even if you don’t owe any tax ($0 liability)
AGI limitation “phase-out”: $200,000/$400,000
Moving Expenses & Alimony Payments:
Eliminated
Personal exemption was about $4,000 per person (Taxpayer, Spouse, 3 kids/dependents [parents] = $4,000 * 5 = $20,000)
Moving Expenses – Employment Related change - not deductible in 2018 tax year. Get your charm on and woo your employers to pay for your move!
Alimony Payments not deductible for agreements made AFTER Dec 31, Any agreements made before that date fall under the old rules “business as usual” = deductible
Person who paid = deduction; Person who received = paid taxes  this has fundamentally changed now
Child & Dependent Credit [elderly] and Adoption Credit PRESERVED

7. Itemized Deductions Charitable Contributions:
Increased  Now AGI limitation is 60%
General: Decrease tax savings for low-bracket individuals; Similar/Greater tax saving appeal for high-bracket individuals
Medical Deductions:
Temporary Increase  Allowed expenses in excess of 7.5% AGI
From 2019 Tax Year, back down to 10% AGI floor
Mortgage Interest:
Limited  Up to $750,000 of Home Acquisition Debt allowed
Allowed for New Primary or Secondary Homes
Home Equity Debt Eliminated unless used for Home Improvement
Charity: people don’t donate just for the tax savings but those are an added bonus. By increasing SD it’s now harder for “smaller” TPs to donate to various charities and surpass the limit to itemize.
Refer back to Property tax limitation of $10,000. Again makes it hard to have enough expenses to itemize, therefore can negatively impact a person’s reasoning to donate to charity. High bracket payers won’t see much of a difference in terms of their limitation.
Many tax payers are opting to “bunch” their donations into one year in order to surpass the SD.
Mortgage: reverts back to $1 M loan interest deductible on Home acquisition debt when the provisions run out (01/01/2026)
this may not affect that many TPs - Just those who live in areas that have Real Estate valued over $750,000
Home Equity used to be deductible up to $100,000 and now is NOT allowed

8. Itemized Deductions Miscellaneous 2% Deductions:
Eliminated  Tax Prep Fees, IRA Custodial Fees, Investment Advisory Fees, Home Office Deduction, Employee Business Expenses
Casualty & Theft Losses:
Eliminated
Exception: Federally Declared Disasters
State and Local Taxes:
Limited  $10,000 aggregate
State/Local Property Taxes + Income Tax (or Sales Tax)
General: Affects more expensive property, higher-income areas, individuals working/living in higher state tax rates
Misc 2% - Employee Business Expenses – union dues, uniforms, licensing fees, regulatory fees, unreimbursed employee expenses
Casualty – very small percentage of people take this. But now, any “Act of God” is not deductible as it was in the past. Hopefully no one has to experience this

9. Affordable Care Act Health Insurance:
Required Coverage in 2018 tax year
Suspended  as of 01/01/2019
They have NOT actually eliminated the requirement
They have reduced the Responsibility Payment to $0 in 2019
The Penalty:
The Greater of:
2.5% Household Income (Above Tax Filing $ Limit)
$695 per person. $ per child (Individuals Not Covered)
Please note: Amounts are 2017 figures and indexed for inflation
It’s interesting to note that the requirement for Health Insurance has NOT been repealed, strictly has been zeroed out temporarily.
As of 2017 amounts:
The penalties are limited – if using the 2.5% Household income, the max penalty is the “average total yearly premium for the Bronze Plan sold through marketplace:
If using the per person, the maximum penalty is $2,085

10. Additional changes for individuals
AMT
Estate Tax
Education

11. AMT and Estate Taxes Alternative Minimum Tax: What is it??
It’s an alternative tax assessed which disallows and/or limits certain deductions a taxpayer can take advantage of on their federal return
Taxpayers pay the higher of Regular Tax or AMT
Not Repealed (Darn it!!)
Increased  Exemption amount to $109,400 MFJ, Phase-Out Levels to $1 Million
Estate Taxes:
Increased  Personal Exemption essentially Doubled
$10 Million per person, subject to inflation
Annual Gift Exclusion: $15,000 (2018)
AMT Tax – Taxpayers need to pay the higher of their regular tax bill or their AMT tax bill
It’s a complex calculation but in a nutshell: Less people “should” be subject to AMT for a few reasons – there’s a larger exemption amount, there’s a larger phase out which allows people to actually take advantage of their exemption, even if they’re in a higher bracket. AND there are less itemized deductions and other exemptions that a taxpayer can now take, which will be less likely to trigger AMT.

12. Education Expenses Education Expenses:
529 Plan: Increased use  Now allowable for Private Schools, Elementary, Secondary, or Higher Education
Tax Free Earnings on 529 Plans
A max $10,000 withdrawal per pre-college beneficiary per year
No limits on withdrawals for college beneficiaries per year
Graduate Student Benefits:
Tax Free Graduate Funding: Education Grants received
Corporations can give Annual Benefit of ~$5,250 to Employees
Student Loan Interest:
Retained  $2,500 Interest paid is Deductible
529 Plan – allows taxpayers to slowly save for college – you can use it for tuition and books; generally managed by the state and money grows tax free from a federal perspective
In states with State Income Tax, a contribution to 529 is a tax-deduction on state income tax return – can lead to loss of revenue for the states.
The taxation laws are different for each state.
TX doesn’t have to worry – we have no state income tax!
No changes to American Opportunity Credit, or Lifetime Learning Credit. Works for 4 year college students AOC and any year college student Lifetime

13. Small businesses
Entity Choices & Structure
Pass-Through Entities

14. Entity Choices C – Corporation:
Pays Taxes at Entity Level – Double Taxation impact to Shareholders
Decreased  Now 21% Flat tax rate
S-Corporation, Partnership, Sole Proprietorship:
Pass-Through Entities
Profits and Losses flow through to Owners/Shareholders
New Tax Law Intent is to help Small Business Owners
Corporate Rate is Flat 21% as of 01/01/2018 – may be a time for S-corporations to consider revoking their election and being taxed as a C-corporation
Corporate AMT has been repealed entirely  tax practitioners are super happy about this!!!
S-Corps: avoid double taxation, requirements to be Scorp
Both: Meals & Entertainment – no Entertainment; Meals still allowed 50%  No more Season Tickets allowed!

15. Pass Through Entities & Schedule C (Sec 199A)
General: 20% deduction on Business Income for Pass-Through Entities
Limitations for certain “Personal Service Businesses”
Accountant, Attorney, “Provides Services” may not be eligible
Limitations on thresholds, phase-ins, phase-outs
“Qualified Business Income”:
Huge Calculation to figure this amount out
Takes into account W-2 wages and qualified property
Real Estate Professionals may be eligible for this deduction
Personal Service Income Exception
All these criteria are subject to Litigation – the law has been written. The IRS will provide Regulations which give CPAs more guidance. Then we see what happens in the courts and how these new laws hold up from a legal standpoint. THEN we understand more on how to apply them effectively.
RE Professional – Personal Service Income Exception: Threshold of Taxable income $157,500/$315,000 MFJ
If “Non-personal service income” may still be eligible to claim 20% deduction under same thresholds
If “Non-personal service income” ABOVE threshold amounts, may still claim 20% deduction but may be limited

16. Kershaw K. Khumbatta PLLC
Kershaw K. Khumbatta, CPA
Mitra K. Khumbatta, CPA, MSA
Phone:
The topics discussed in this presentation should not be used for anything other than informational purposes only. The items discussed do not constitute tax or legal advice. If there are items requiring additional clarification, please consult with your tax advisor.