Tax Reform: All Your Questions About the 2018 Tax Bill, Answered

Every year, the IRS makes changes to the tax code. Whether you’re a CPA, a tax attorney, an EA, or a tax preparer, you’re probably accustomed to updating yourself at the beginning of the new tax year. Maybe you take a year end tax update webinar, or simply review your favorite accounting blog for relevant updates and new information.

This year, though, things are different. In December of 2017, the United States Congress voted to pass a new tax reform bill that will result in dramatic, widespread changes to the U.S tax code. Regardless of what type of clients your working with–employees, business owners, corporate accounts, or any other type of client–the 2018 tax bill is going to change the way that you prepare their taxes.

We highly recommend that you take a tax reform webinar in order to properly familiarize yourself with all of the changes to the tax code included in the recent bill. Your clients are counting on you to be their go-to expert: you’re bound to get a lot of questions in 2018 as you’re preparing your clients’ taxes, and you’ll be expected to have the answers.

Our one-hour tax reform webinars will cover both the new legislation’s impact businesses as well as individual tax filers. We’ll talk about marginal tax rate changes; the estate tax and new rules pertaining to it; alterations to pass-through taxation for corporations, partnerships, and sole proprietors; deduction calculating with new allowances and restrictions; and more.

In this guide, though, we’ll aim to answer any questions you might have about how the Tax Cuts and Jobs Act will impact you, your accounting practice, and your clients. Read on to learn more.

What’s contained in the 2018 tax bill?

It’s hard to answer this question in a short and succinct way: the Tax Cuts and Jobs Act is over 1,100 pages long, and condensing all of that information is a challenge. However, we can provide an outline of the most important changes here, and then discuss some of them individually.

The 2018 tax reform legislation includes changes to the tax code that will impact both businesses and individuals.

Changes to the code that will impact businesses include:

Corporate tax rates
Cost recovery provisions
Small business tax reforms
Business deduction and exclusion reforms
Pass-through taxation and the Qualified Business Income (QBI) deduction
Foreign earnings

Additionally, changes to the following areas will have a direct effect on individual tax filers:

The Sunset provision
Tax brackets
Affordable Care Act
Withholding tables and Form W-4
Standard deduction
Personal exemption
Kiddie Tax
Maximum rates on capital gains and qualified dividends
Deduction for personal casualty and theft loss
Gambling losses
Child tax credit
State and local tax deductions
Exclusion of gain on sale of principal residence
Mortgage and home equity interest deduction
Mortgage Credit Certificates (MCCs)
Medical expense deduction
Charitable contribution deduction
College athletic seating rights
Alimony
Miscellaneous itemized deduction
“Pease” limitation on itemized deductions
Qualified bicycle commuting exclusion
Exclusion for moving expense reimbursements
Moving expenses deduction
Combat zone tax treatment
Alternative Minimum Tax (AMT) exemption and phaseout
ABLE account changes
Recharacterization of IRA contributions
Discharged student loan debt taxability
Head of household

How will the 2018 tax bill affect small businesses and corporations?

The new tax reform bill will have a significant effect on both large corporations and small businesses alike. If you prepare taxes for these kinds of clients, you’ll want to familiarize yourself with some of these important changes. Read on to learn more.

Has the corporate tax rate changed?

Following the new tax legislation, the corporate taxation rate has been altered significantly.

Prior to 2018, a corporate Alternative Minimum Tax was in effect. This AMT for corporations was set at 20%. The new legislation removes the corporate AMT. Additionally, the variable corporate taxation rates of 15% (for amounts up to $50,000), 20% (for amounts between $50,000 and $75,000), 34% (for amounts between $75,000 and $10,000,000) and 35% (for amounts over $10,000,000) have been replaced by a flat corporate tax rate of 21%. According to the Tax Foundation, the so-called “statutory rate”–the amount when local and state taxes are factored into the total paid by a corporation–is roughly 26.5%.

Are cost recovery provisions impacted?

Under the new legislation, cost recovery for businesses will change significantly. Depreciation rules are changing, and used property will now be available for 100% first year expensing. This area of the tax reform law is particularly complicated, and we highly recommend signing up for a tax reform webinar in order to familiarize yourself with these provisions.

What’s changing with regards to business deductions?

Small business owners are usually looking for every opportunity to rack up deductions on their annual return. Prior to the new law, interest paid or accrued on loans could be deducted from a business’s taxable income. Now, any net interest expense in excess of 30% of the business’s adjustable taxable income cannot be deducted. Additional rules apply for individual taxpayers, partnerships, and S-corporations. Additionally, net operating losses (NOLs) can no longer be carried back up to 2 years (unless you’re running a farm business).

What about passthrough income?

Up until 2018, an S-corporation, partnership, or sole proprietorship would pay tax on any pass-through income as determined by their personal income tax bracket. According to the tax reform law, all eligible businesses can now deduct up to 20% of Qualified Business Income, or QBI, with a limitation of 50% of total wage income. Some industries have been excluded from taking this deduction, including businesses in the legal and financial sectors.

Are changes to foreign earnings being implemented?

Most countries around the world utilize a so-called territorial tax system. However, the United States has historically never used such a system. Following the new legislation, a territorial tax system will be implemented in the U.S. As a result, foreign earnings will not be subject to taxation. However, any company with more than $500,000,000 in annual gross receipts will be subject to the Base Erosion Anti-Abuse Tax, or BEAT. This tax is calculated by calculating 10% of the business’s total taxable income and subtracting their total corporate tax from the former amount.

In addition to this, so-called deemed repatriation changes for overseas profits will go into effect. Under previous law, any foreign earning brought back into U.S. accounts were taxed at the standard corporate rates, which could go as high as 35%. Under the new bill, a flat 15.5% tax will be assessed on repatriated foreign earnings.

How will the tax reform legislation affect individual tax filers?

Perhaps even more so than with respect to small businesses and corporations, the new changes to the tax code may have a dramatic impact on individual filers. While we won’t go into every detail here, we’ll cover some of the major highlights. Consider signing up for our Income Tax Reform Webinar for Individuals to familiarize yourself with all the details.

Will personal income tax rates change as a result of the new tax bill?

Prior to the new tax bill, personal income tax brackets were divided as follows:

$0 – $9,525: 10%
$9,526 – $38,700: 15%
$38,701 – $93,700: 25%
$93,701 – $195,450: 28%
$195,451 – $424,950: 33%
$424,951 – $426,700: 35%
$426,701 and up: 39.6%

Under the new legislation, these brackets are changing significantly:

$0 – $9,525: 10%
$9,526 – $38,700: 12%
$38,701 – $82,500: 22%
$82,501 – $157,500: 24%
$157,501 – $200,000: 32%
$200,001 – $500,000: 35%
$500,001 and up: 37%

However, these changes will only be in effect until 2025. After that time, Congress must approve them again in order for them to remain in effect.

Will the new legislation change anything about the Affordable Care Act?

Up until now, individuals have been required to purchase health insurance coverage through a mandate as part of the Affordable Care Act. Any individuals who fail to purchase coverage must pay a tax called the individual shared responsibility payment. The new legislation will remove this mandate as of 2019, meaning that individual taxpayers will not incur a penalty for failing to purchase health insurance coverage.

Does the 2018 tax bill change the standard deduction?

Prior to 2018, the standard deduction was as follows:

$6,500 for single individuals
$9,550 for heads of household
$13,000 for married couples

As a result of the reform legislation, the standard deduction is being increased significantly. The new deduction amounts will be:

$12,000 for single individuals
$18,000 for heads of household
$24,000 for married couples

What about personal exemptions?

While the standard deduction has been increased for single taxpayers, heads of household, and married couples, the personal exemption has been completed eliminated. While taxpayers were previously able to deduct $4,150 from their income using the personal exemption, they will no longer be able to do so after 2018. Like the changes to the personal tax income brackets, this change will be in effect until 2025. At that time, Congress will need to review and renew the legislation in order for it to continue to remain in effect.

What provisions in the new reform legislation will affect families? Will the Child Tax Credit remain in effect?

Under previous tax code, the Child Tax Credit allowed families to claim up to $1,000 per child. The new law increases this amount to $2,000 per child, with a maximum amount of $1,400 being refundable. Additionally, a $500 non-refundable credit is available for non-child dependents. While the previous law included a phaseout of this credit for incomes above $110,000, the new legislation raises the bar for phaseout to $400,000 in annual income.

What about the “Kiddie Tax?”

The Kiddie Tax applies to a taxpayer’s child’s unearned income. Under the new law, taxable earned income for children will be taxed under the new bracket rates for single individuals. All taxable net unearned income for a child will be taxed based on the bracket that applies to any trusts or estates. A “child” is defined in the same way: no changes have been made to this definition.

Are there any changes to charitable contribution deductions?

Under the new provisions, the 50% deduction limit for cash contributions to charities has been increased to 60%. Any contribution above 60% can be carried forward for up to 5 years.

How does the new bill affect retirement plans? Will it change anything about my IRA?

Per the new legislation, no changes have been made to the annual contribution limits for retirement-focused investment accounts, includes IRAs and 401(k)s. However, it will no longer be possible to change an individual contribution’s type after the fact.

Are there any changes to the Alternative Minimum Tax?

The new reform legislation includes changes to the AMT. Previously, the AMT exemption amount for individual taxpayers was $54,300 and began to phase out at $120,700. For joint taxpayers, the amount was $84,500, with phaseout beginning at $160,900.

Following the 2018 bill, these exemption amounts increase. For individual filers, the minimum will be $70,300, with phaseout beginning at $109,400. For those filing jointly, these amounts will be $500,000 and $1,000,000. As with several other changes, these new rules will come to an end after 2025, and will need to be renewed.

What about the Estate Tax?

Exemptions for the estate tax will increase as well under the new law, with the amount rising from $5,600,000 to $11,200,000 for individual taxpayers.

Will I still be able to itemize deductions under the new tax reform law?

Many itemized deductions are affected by the new changes to the tax code. Amongst these, perhaps the biggest changes will be to deductions for taxes paid to local and state governments. Per the new legislation, deductions for state and local taxes are now capped at $10,000 annually.

Further, the allowed mortgage interest deduction has been reduced from $1,000,000 annually to $750,000 for married couples. This applies to all mortgages taken out after December 15, 2017.

In addition, medical expenses can be deducted up to a maximum of 7.5% of annual adjusted gross income. Following 2018, this number will rise to 10%.

On top of these changes, a number of itemized deductions will no longer be permitted for taxpayers. These include: regulatory fees; home office expenses; moving costs; payments to unions; bad debts from business; and others.

Tax Reform Webinar

As extensive as we’ve made this guide, we’ve only scratched the surface of the 1,100 page tax reform bill. In addition to the information you’ve gleaned here, it’s important to bring yourself up to date on all of the changes included in the new legislation.

Basics & Beyond™ offers top notch tax webinars, including a new series of tax reform webinars centered around the recent legislation.

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Tax Reform: The 2018 Tax Bill