“Trying to navigate the maze of tax reform can be frustrating and seem challenging and almost impossible at times. “ By Trenda Hackett, CPA
As I’m sure you are aware, the Tax Cuts and Jobs Act, also known as the TCJA, was signed into law on December 22, 2017. Most provisions of the Act are not effective until January 1, 2018 or later. However, some provisions are retroactively effective.
I’d like to take this opportunity to highlight some of those retroactive items that you should be aware of as you approach this tax season. While this is not intended to be a detailed explanation regarding these topics, I will suggest areas that may require additional research if you think they may impact you, or any of your clients.
Some Retroactive Items
Medical Expense Deduction: The AGI threshold on medical expense deductions is reduced to 7.5% for all taxpayers for tax years beginning after December 31, 2016 and ending before January 1, 2019.
State and Local Property Taxes: Because of the $10,000 limit starting in 2018 on the deduction for state and local property taxes, many taxpayers prepaid 2018 property taxes in 2017. However, the IRS has announced that 2018 property taxes are not deductible in 2017 unless they were assessed prior to 2018. In addition, prepayment in 2017 of 2018 state income tax did not create a 2017 deduction.
Mortgage Interest: A mortgage interest deduction for interest paid on the first $1 million of acquisition debt was previously allowed on Schedule A. Although the Act lowered to $750,000 the amount of acquisition debt for which interest may be deducted, the $1 million acquisition debt limit is grandfathered for loans taken out prior to December 15, 2017. This deduction is also available if an existing mortgage is refinanced or if a taxpayer had a binding written contract prior to December 15, 2017 for purchase of a principal residence, for which closing occurred prior to January 1, 2018.
Disaster Area Losses:
- As it relates to net disaster losses from 2016 disaster areas, the $100 casualty floor has been increased to $500 for 2016 and 2017, and the 10% of AGI deduction is no longer applicable.
- Taxpayers that do not itemize for 2016 or 2017 are retroactively allowed to deduct 2016 disaster area losses by adding the net disaster loss to the standard deduction.
- Favorable tax treatment is provided for qualified 2016 disaster area losses; and qualified 2016 disaster distributions can be included in gross income over a three-year period of time. 2016 disaster area victims may make penalty-free early retirement plan withdrawals.
Depreciation: Previously, bonus depreciation was established at 50% for 2017 and was scheduled to be phased out completely in subsequent years. However, under the Act, bonus depreciation is increased to 100% for property acquired and placed in service after September 27, 2017 and before January 1, 2023 (or 2024 for certain property with longer production periods). Bonus depreciation is also extended to used property and to acquisitions of real estate, but is once again scheduled to be phased out starting in 2023 and completely eliminated by 2027. Previously completed cost segregation studies may need to be revised to reflect the changes in bonus depreciation.
Update on Extenders
You or your clients may have been hoping for extension to 2017 of some items that had been set to expire as of December 31, 2016. Unfortunately, none of the following items were extended to 2017:
- Builders credit for energy-efficient homes
- Deduction for energy-efficient commercial buildings
- Mortgage insurance premium deduction
- Qualified tuition and fees deduction
2018 and forward
There are a few other notable items that you should be cognizant of during the 2018 filing season or in planning for 2018 going forward.
- Distributions up to $10,000 per student from Section 529 Plans can now be applied to public, private, or religious elementary and secondary schools rather than being strictly for higher education.
- A new Section 199A deduction equal to 20% of qualified business income may be available to trusts or individuals that own sole proprietorships, partnerships, or S corporations. The deduction may be limited based on taxable income, capital gains, or business income.
- The maximum corporate tax rate is 21%; and corporate alternative minimum tax has been eliminated.
- Like-Kind Exchanges are no longer allowed for personal property, with a transitional rule provided for 2017.
- No entertainment expense deduction is allowed for activities generally considered to be entertainment, amusement, or recreation. The 50% deduction limit for meals has been expanded to include meals that meet the employer convenience or de minimis rules.
- After 2017, the following itemized deductions have been eliminated: employee business expenses, tax preparation fees, investment interest expense, and personal casualty and theft losses (other than those related to federally declared disaster areas).
In addition to the retroactive elements of the Tax Cuts and Jobs Act mentioned above relative to 2017 returns and the few mentioned for 2018 and beyond, there are changes for individuals that include new tax brackets, an increased standard deduction, the elimination of personal exemptions for the taxpayer and dependents, and the repeal of the individual mandate under the Affordable Care Act and changes for businesses that include limits on the deduction for business interest and other items . There are significant changes to international tax and pass-through entities such as partnerships and S corporations as well as changes to estate and gift tax and pension and benefits.
Want to learn more about Tax Reform that impacts you or your clients? The Tax Alliance Conference planning committee will have speakers highlighting Tax Reform changes during our June 5–7, 2018 conference. They will be on hand to answer your questions and help you get through the maze of tax reform. Join us for the conference! We don’t believe you will find better CPE especially when you consider the cost! Check it out at www.taxalliance.org.