Tax Legislation Update

This week that tax reform bill was signed into law. The legislation is extremely complex and will require careful consideration to each taxpayer’s unique tax situation.  For your convenience, a list of provisions the KatzAbosch Team is following is below. As mentioned before, this legislation is too complicated to provide general advice. Please consult your KatzAbosch tax advisor for more specific information as it relates to your current circumstances.

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Some key provisions for individuals and businesses that are part of the legislation include:

Individuals

  • Individual Rates: Broadly reduced. Top marginal rate of 37% for joint filers with income >$600,000.
  • Individual Alternative Minimum Tax (AMT): Retained. Exemption amount was increased, so AMT should affect fewer taxpayers.
  • Tax on Capital Gains, Dividends and Net Investment Income: No change in rates.
  • State and Local Income and Property Tax Deduction: Total allowable deduction capped at $10,000 across state and local income and property taxes.
  • Charitable Deduction: Retained. Limit on cash gifts to charity increased to 60% of adjusted gross income (AGI) from 50%.
  • Estate Tax, Generation-Skipping Transfer Tax Exemption: Doubled from current levels, from $5.6 million to $11.2 million per individual.
  • Medical Expense Deduction: Available for expenses in excess of 7.5% of AGI through 2019.
  • Mortgage Interest Deduction: Retained with new caps. For existing mortgages, interest on up to $1,000,000 of principal will be deductible; for new mortgages, the threshold will be $750,000 of principal.  The deduction for home equity interest is gone.
  • Standard Deduction: Nearly doubled to $24,000 for joint filers.
  • Carried Interest Tax: Taxation will be at ordinary income rates for assets held for less than three years.
  • “Kiddie Tax” (tax on child’s investment and other unearned income): Replaced with new system, under which individuals under the age of 24 will be taxed similarly to trusts. Payers in this system will reach the highest income bracket relatively quickly.
  • 529 Education Savings Plans: Broader usage of these funds now allowed for elementary and secondary education (in addition to college expenses, as in the past).
  • Roth IRA Recharacterization: Repealed, effective Jan. 1, 2018.

Corporations and Institutions

  • Corporate Tax Rate: Lowered from 35% to 21%.
  • Pass-Through Entity Taxation: Implements a 20% deduction of an individual’s domestic qualified business income from pass-through entities. A broad range of sole proprietorships, partnerships and corporations qualify for this deduction, but there are exceptions. For example, “specified service trades or businesses”—such as the private practice of a doctor or lawyer—cannot claim this deduction for income beyond a set threshold ($315,000 for joint filers or $157,500 for individual filers). This is one of the most complex provisions in the new tax package; we highly encourage clients to confer with their accountants about how it may affect them.
  • Corporate AMT: Repealed.
  • Deductions for New Equipment: Full expensing of such purchases allowed under new law. Provision will expire after five years.
  • Foreign Income Taxation: One-time repatriation of foreign capital is available at a 15.5% tax rate on cash and 8% on illiquid assets. The proposed bill implements a territorial tax system going forward.
  • Unrelated Business Income Tax for Nonprofit Entities: New requirements for tax-exempt organizations to separately calculate income from unrelated business activities. Prohibit offsetting income from one activity with losses from another.

For the most part, the new rules will not impact 2017 tax returns, and opportunities for beneficial actions before year’s end are limited. There are, however, a few year-end steps that may make sense given the removal of many deductions as of Jan. 1, 2018. Please consult with your KatzAbosch tax representative to understand the best course of action for your tax situation and planning needs.

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