This information is current as of December 27, 2017.
At the request of our clients, we have summarized some of the more important provisions of the sweeping new tax law (“TCJA”), which was signed into effect on December 22, 2017. Please note that all of these provisions are subject to interpretation by the Internal Revenue Service. We will not know the true effect of the law until the IRS publishes regulations in the coming years.
These changes do not affect the tax return that you will file next year for 2017. The changes will take effect with the tax return you file in 2019 for tax year 2018.
We cannot emphasize enough that this new tax law marks the biggest change to our tax system since the 1980s. Your individual tax situation and your company’s tax situation may have changed dramatically.
To understand fully how the new tax law will affect your particular circumstances, you should consult your tax professionals. In particular, everyone who owns or operates a business should make an appointment with the company’s tax professionals early in 2018 to consult on the effect of the new tax law. To the extent those recommendations affect the company’s structure, corporate legal advice should also be sought before any changes are made.
However, here is an executive summary of a few things that you should think about doing now, meaning before December 31, 2017; or that you should think about doing very early next year.
Income Tax For Individuals
The new law keeps a seven-bracket structure, but cuts tax rates in five of those brackets, and generally raises the threshold for each higher bracket. The top bracket — for individuals earning more than $500,000 per year, and married couples earning more than $600,000 per year – will be 37% in 2018, down from 39.6% in 2017.
Suggestion: To the extent possible, defer acceptance or recognition of income to 2018.
For single filers, the standard deduction has increased from $6,350 to $12,000. For married couples filing jointly, it’s increased from $12,700 to $24,000. The net effect of that change is that fewer taxpayers will itemize their deductions, because many more taxpayers will be better off taking the standard deduction instead.
Suggestion: If you think you may not itemize next year on your personal tax return, consider making this year’s and next year’s contributions to charity by December 31, 2017, to get the itemized deduction benefit now.
Suggestion: If you have been thinking about donating an old car or other property to charity, consider doing it by December 31, 2017 to get the itemized deduction benefit now.
Gone. Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. The new law eliminates the tax savings from those personal exemptions.
Property Tax and Sales Tax
Beginning in 2018, the deduction you can claim for property taxes and sales taxes will be limited to a total of $10,000.
Suggestion: Make sure you pay 2017 and prior property taxes by December 31, 2017. These are the property taxes for which you already have a bill from the county tax assessor-collector.
Suggestion: Consider prepaying your 2018 home property taxes by December 31, 2017, if your county allows you to do so. These are property taxes for which you do not yet have a bill, so you would have to estimate the correct amount. We have confirmed that Dallas County allows prepayment of an estimated amount. The county clerk requests that taxpayers clearly indicate 2018 prepayments on the check’s memo line, along with the property account number.
NOTE on Prepaying 2018 Property Taxes: The IRS has now come out saying it will disallow deductions for property tax 2018 pre-payments on the theory that the tax has not yet been levied. Many advisers are saying that the IRS’s position does not comply with the language of the new law. The TCJA expressly disallows prepaid income tax (which of course does not apply to Texas, because Texas does not have state income tax), but does not disallow prepaid property tax. The argument is that if Congress had intended to disallow prepaid property tax, it could have done so with the same few words it used to disallow prepaid state income tax — ergo, Congress did not intend to disallow prepaid property tax. The short answer is that nobody knows at this time whether prepaying your 2018 property tax will save you money, or will cause you more trouble than it’s worth.
Suggestion: If you are contemplating a large purchase that is subject to sales tax (such as a car, RV, boat, aircraft, etc.), consider making that purchase by December 31, 2017, to maximize the deductibility of the sales tax.
For those who itemize, the new law allows taxpayers to deduct contributions to public charities of up to 60% of their income, rather than limiting deductions to 50% of income.
Child Tax Credit
The new law doubles the child care credit to $2,000 per child under 17, and is available at higher income levels.
Mortgage Interest Deduction
Beginning in 2018, you may deduct the interest paid on new home mortgage loans of only $750,000 or less. If you bought your home before December 15, 2017, you will still be able to deduct the interest on up to $1M of mortgage loan. Experts are currently in disagreement whether a taxpayer may allocate some or all of the $750,000 to a vacation home, or whether vacation home mortgage interest is no longer deductible.
HELOC Interest Deduction
Gone. Interest paid on a home equity loan is no longer deductible.
Alternative Minimum Tax
The alternative minimum tax (AMT) remains in effect.
If you have student loans, you may continue to deduct up to $2,500 per year in interest.
For 2018, you may deduct medical expenses to the extent they exceed 7.5% of your income. For 2017, that threshold was 10% for most people. This tax break for medical expenses will expire in 2019, and the threshold will return to the current level.
Suggestion: If you are planning to have an expensive, uninsured medical procedure, 2018 is a good year financially to do so.
Health Insurance Mandate/Penalty
The tax bill repeals the “individual mandate” to purchase health insurance, effective for the 2019 tax year. The mandate remains for 2018, so the economic effect of the repeal will not be known for several years. However, the Congressional Budget Office estimates that, by 2027, 13 million fewer Americans will have health insurance, and that, because fewer healthy people will apply for insurance, health insurance premiums will increase as the pool of applicants consists of sicker people. The brunt of premium increases will be felt primarily by families of four who make more than $98,000 per year.
Electric Car Credit
Drivers of plug-in electric vehicles can still claim a credit of up to $7,500. Just as before, the full amount is good only on the first 200,000 electric cars sold by each automaker. GM, Nissan and Tesla are expected to reach that number some time next year.
529 Savings Accounts
If you have been making contributions to a tax-free 529 savings account for the next generations, you may use that money, beginning in 2018, for elementary and secondary school costs, as well as for higher education costs.
If you pay alimony pursuant to a divorce that is final after December 31, 2018, the amount will no longer be deductible.
Moving expenses for job relocation will no longer be deductible.
Estate Tax for Individuals
The new tax law doubles the amount of money exempt from the gift and estate tax, which in 2017 was $5.49M per person. Each individual can now give away, during lifetime and/or at death, $11.2M without incurring the estate tax. Amounts in excess of $11.2M that an individual gives away during lifetime or at death will be taxed at the current rate of 40%. This increase in the exemption will expire in 8 years, at which time the exemption amounts will return to $5.6M per person.
Income Tax for Businesses
Corporate Tax Reduction
The new law cuts the tax rate for C-Corporations from 25% to 21%, starting in 2018, and eliminates the Alternative Minimum Tax for corporations.
Suggestion: To the extent possible, defer recognition of income to 2018.
Suggestion: If you are currently an S-Corp or LLC with relatively high revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect C-Corp taxation status.
Suggestion: Look to see where you can save money on tax, as it is important your business is making the highest profit possible. Click here for advice on where you can save tax within your business, ensuring your business is meeting the relevant tax charges and codes.
Pass-Through Entity Tax Reduction
The new law provides a 20% deduction to owners of certain S-Corporations, LLCs, partnerships, and sole proprietorships.
Suggestion: To the extent possible, defer recognition of income to 2018.
Suggestion: If you are currently a C-Corp with relatively low revenue, you should seek legal and tax advice very early in 2018 to determine whether it would be more advantageous to you to elect S-Corp taxation status or to convert to an LLC.
Multi-National Company Tax Breaks
The U.S. is switching to a territorial system of taxation, which means companies will not owe federal taxes on income they make offshore. To take advantage of this long-term benefit, companies will be required to pay a one-time tax on their existing overseas profits — 15.5% on cash assets and 8% on non-cash assets.
Sexual Harassment Payments
Beginning in 2018, companies can no longer deduct any settlements, payouts, or attorney’s fees related to sexual harassment claims if the payments are subject to non-disclosure agreements.
Suggestion: If you are contemplating settlement of such a claim, consider closing the deal by December 31, 2017.
1031 “Like Kind” Exchanges
Nontaxable exchanges of appreciated property for similar property will now be limited to real estate only. Trades of other types of property will be treated as sales and will trigger capital gains tax.
Suggestion: If you are contemplating a 1031 exchange of art or other personal or business property that has appreciated in value, consider completing that exchange by December 31, 2017 to avoid a capital gains tax in 2018.
Income Tax for Nonprofit Organizations
Standard Deduction Effect on Charitable Donations
For single filers, the standard deduction has increased from $6,350 to $12,000. For married couples filing jointly, the standard deduction has increased from $12,700 to $24,000. The net effect of that change is that more taxpayers will take the standard deduction rather than itemize their deductions. Because a taxpayer must itemize deductions to be able to deduct charitable contributions, fewer taxpayers will be able to deduct charitable contributions from their taxes. To the extent that a donor is motivated in whole or in part by the deductibility of his or her contribution, the donor is arguably less likely to give to nonprofit organizations. Generally speaking, 501(c)(3) organizations may see a decrease in donations by middle-income individuals.
501(c)(3) Deduction AGI Limit Increase
For those donors who do itemize, the new law allows taxpayers to deduct contributions to public charities totaling up to 60% of their income, rather than limiting those deductions to 50% of income.
Highly Paid Executives
The new law imposes a 21% tax on certain nonprofits that pay a salary above $1M to an executive.
Unrelated Business Income (UBI)
Unrelated Business Income, or UBI, refers to certain types of income for which a nonprofit must pay taxes, even though the organization is tax-exempt. The new law prevents nonprofits from setting off losses in one stream of UBI against gains from another stream of UBI. To know how the various “streams” of UBI will be defined, nonprofits must wait for the IRS to issue its regulations. Suffice to say, though, that the IRS will be looking closely at UBI in the coming years.
Suggestion: Nonprofits should consider an organizational audit in 2018 to ensure that they are accounting for UBI correctly.
The value of certain previously nontaxable employee benefits, including parking, transportation, and on-site athletic facilities, will be subject to Unrelated Business Income Tax beginning with the first pay period of 2018.
Donations Tied to Collegiate Season Tickets
Donations to a college or university to obtain the right to buy season tickets to sporting events are no longer deductible.
The new law does not significantly affect taxation of private foundations.
Liza Farrow-Gillespie serves as legal counsel to nonprofit organizations throughout North Texas. Ms. Farrow-Gillespie has been named to the list of Texas Super Lawyers (a Thomson Reuters service) and to the list of Best Lawyers in Dallas by D Magazine in every year since 2013.