The U.S. House of Representatives and Senate passed the “Tax Cuts and Jobs Act” on December 20, 2017, and President Trump signed the law before Christmas. This piece of legislation is the most comprehensive change to the tax code since the Tax Reform Act of 1986. Because most of changes took effect January 1, 2018, when you file your 2017 return, you’ll want to discuss with your tax professional the pros and cons of this tax legislation as it applies to your own unique situation.
Some of the biggest changes for individuals are changes to personal deductions. The standard deduction has doubled to $12,000 for single filers and $24,000 for married filers. A new $10,000 limit has been placed on combined state and local income taxes, property taxes and sales taxes. Home equity interest and miscellaneous deductions like tax preparation fees, investment expenses, union dues and unreimbursed employee expenses have been completely eliminated. Because of these changes fewer people will be itemizing their deductions in the future. However, here are a few tips to maximize or preserve some of the benefits from these lost deductions:
— If you have large unreimbursed employee business expenses, contact your employer about establishing an accountable reimbursement plan so these deductions can be removed from your taxable wages (also known as pre-tax deductions).
— Consider doubling your charitable deductions and making them every other year. Then time payments of large out-of-pocket medical expenses to coincide with the years you double your charitable donations.
— Now may be the time to sell your primary residence if you’re carrying a large amount of home equity indebtedness. Under the new law, up to $750,000 of debt incurred to purchase, build, or improve your new residence is considered acquisition indebtedness and interest paid on this debt is fully deductible.
— Consider purchasing an HSA qualified health insurance policy and contribute money to an HSA to preserve a benefit for out-of-pocket medical expenses, which is a higher tax benefit than the Schedule A deduction.
— The threshold for itemizing is lower for Oregon, so you may be able to itemize on your state return.
The lower taxable corporation tax rates, and the new 20 percent deduction on flow-through qualified business income present new opportunities for new and existing businesses, no matter their size:
— Since personal service corporations are now taxed at the same 21percent rate that applies to all taxable corporations, existing high net income service S corporations, and flow-through partnerships or LLCs might want to consider electing to be treated as a taxable subchapter C corporation.
— With the new 21percent flat corporate tax rate and expanded amounts of income eligible for the lower qualified dividend rates, owners of closely held flow-through entities might pay an overall lower rate of tax by electing or converting to a C corporation.
— Qualified business income eligible for the new 20 percent deduction includes sole proprietors, partnerships, LLCs, residential and commercial rental income that rises to the level of a business, and ordinary income from a Subchapter S corporation.
The 100 percent bonus depreciation and increased limits on the Code Section 179 deduction offer opportunities that require careful analysis. Here are important considerations to make when deciding which deduction to use:
— Both new and used equipment purchases qualify for the bonus depreciation deduction.
— Bonus depreciation can create a net operating loss, whereas Section 179 cannot.
— The Act now allows the Section 179 deduction for subsequent improvements to commercial real property for roofs, heating and A/C, fire protection, alarm systems, and security systems.
— If business use percentage on Section 179 assets drops below 50 percent in a subsequent year, the deduction must be recaptured as income.
— Section 179 has more flexibility than bonus depreciation regarding the dollar amount and number of items expensed. Bonus depreciation must be claimed on an entire class of assets, e.g. if bonus depreciation is claimed on one five-year asset, it must be claimed on all five-year assets.
— The annual limit on vehicle depreciation has been increased for all classes of vehicles.