Tax Cuts and Jobs Act: Overview of Impact on 2018 Individual Taxes

1. Tax Cuts and Jobs Act: Overview of Impact on 2018 Individual Taxes Russell Tietz, MBA, CPA Assistant Professor of Accounting University of Mount Union

2. TCJA approved December 2017 • Effective Jan. 1, 2018 • Last major tax legislation – Tax Reform Act of 1986 • Numerous smaller changes since • Revenue Sources – 2017 • Individual Income Taxes – 48% • Social Security Taxes – 35% • Corporate Income Taxes – 9% • Other – 8% Introduction

3. Significant Changes • Tax rates • Standard deduction • Itemized deductions • Moving expenses • Alimony • Dependents • Alternative minimum tax • Qualified business income • Meals & entertainment • Depreciation • ACA provisions • Other

4. Number of tax brackets remained the same Some marginal tax rates reduced Width of marginal tax brackets has changed Majority of taxpayers will pay less tax Tax Rates

5. Single Taxpayer – 2018 vs. 2017

6. Prior law – CG rates based on ordinary rates • Ord. rate = 15% or less; CG rate = 0 • Ord. rate = 39.6%; CG rate = 20% • All other ord. rates; CG rate =15% • TCJA bases CG rates based on filing status and taxable income • CG = 0%; Single – up to $38,600; MFJ – up to $77,200; HOH – up to $51,700 • CG = 20%; Single > $425,800; MFJ > $479,000; HOH > $452,400 • CG = 15%; All other taxable income amounts Capital Gains Rates

7. TCJA nearly doubles the standard deduction • Additional standard deduction for aged and blind • Married - $1,300 • Single - $1,600 • Many more taxpayers will be able to use standard deduction Standard Deduction

8. Changes to medical, state & local taxes, mortgage interest, charitable contributions, casualty & theft losses, miscellaneous itemized deductions • Some changes favorable; others not • Overall limit on itemized deductions suspended • Prior years – lost 3% of certain deductions to extent AGI exceeded thresholds (e.g. $313,800 for MFJ) up to maximum of 80% Itemized Deductions

9. Medical and Dental Expenses • AGI floor changed from 10% to 7.5% • Can deduct eligible expenses exceeding floor • Floor increases to 10% in 2019 Itemized Deductions (cont.)

10. State and Local Taxes • Deduction limited to $10,000 ($5,000 – MFS) • Applies to income taxes and real estate taxes • No deduction for foreign real estate taxes • Real estate taxes associated with a trade or business are fully deductible • Recharacterization to charitable contributions not permitted under federal law • Suggested by certain states • See IRS Notice 2018-54 Itemized Deductions (cont.)

11. Home Mortgage and Home Equity Interest • Deduction limited to interest secured by main or second home • Buy, build or substantially improve • Interest on home equity loans used for other purposes not deductible • Loans originating after Dec. 15, 2017 • Interest deductible on up to $750,000 ($375,000 MFS) of debt. Itemized Deductions (cont.)

12. Charitable Contributions • Limit increased from 50% of AGI to 60% • No charitable contribution for amounts paid to higher education institutions for rights to purchase seating • Prior law allowed 80% deduction Casualty and Theft Losses • Deductible only if attributable to federally declared disaster area (FEMA code required) • Loss still must exceed $100 and total losses must exceed 10% of AGI Itemized Deductions (cont.)

13. Miscellaneous Itemized Deductions • Suspended until 2026 • Includes following: • Unreimbursed employee business expenses • Tax preparation fees • Investment expenses Itemized Deductions (cont.)

14. Deduction suspended until 2026 • Does not apply to active duty military personnel • Reimbursements for moving expenses are taxable income Moving Expenses

15. Payments for divorce agreements executed or modified after December 31, 2018: • Not deductible by payer • Not income to recipient • Tax treatment for pre-December 31, 2018 agreements is unchanged Alimony

16. Deduction for personal exemptions suspended Cannot claim yourself, spouse, dependents 2017 exemption amount was $4,050 Impacts may be offset by increased Standard Deduction and Child Tax Credit Child Tax Credit Credit increased to $2,000 per qualifying child (under age 17) Up to $1,400 is refundable Income level for phaseout ($50 per $1,000 of excess AGI) begins at $200,000 ($400,000 MFJ) of AGI Dependents

17. Credit for Other Dependents • New credit of up to $500 for qualifying dependents • Applies to older children and other relatives • Dependency rules for qualifying relatives Dependents (cont.)

18. Generally, business meals (50%) are deductible • On premises, convenience of employer • Employee meals while traveling on business • Meals with clients, customers, prospects with substantial business discussions • Meals provided during meetings between employees (business purpose) including board meetings – 100% Meals & Entertainment

19. Entertainment expenses not deductible • Tickets for sporting, entertainment and amusement events – for client • Charity golf outing – cost of golf and meals nondeductible; excess is charitable contribution • Country club and membership dues • Meals billed separately from entertainment – 50% deduction Meals & Entertainment (cont.)

20. Deduction is 20% of QBI from partnership, S Corp, sole proprietorship • Deduction is “from AGI” and reduces taxable income • QBI is net amount of income, gain, loss and deductions from trade or business • Excluded: investment income, employee compensation or guaranteed payments from entity • Taxpayers in service-related businesses (e.g. law, accounting, healthcare, consulting) only eligible if taxable income < threshold amount ($157,500 – single; $315,000 – MFJ) Qualified Business Income

21. Rental property qualifies if trade or business vs. investment • Burden of proof on taxpayer – time involved is substantial factor • W-2 wage limit applies in some circumstances • Does not apply to businesses meeting same thresholds as service businesses Qualified Business Income (cont.)

22. AMT exemption amount increased as follows: • MFJ - $109,400 from $84,500 • MFS - $54,700 from $42,250 • Single, HOH - $70,300 from $54,300 • Exemption phaseout (25% of excess AMTI less) threshold) starting point increases as follows: • MFJ - $1,000,000 from $160,900 of AMTI • MFS - $500,000 from $80,450 • Single, HOH - $500,000 from $120,700 • Far fewer taxpayers expected to pay AMT; currently represents 2% of income tax collected. Alternative Minimum Tax

23. TCJA doubled exclusion amount $5.6 million to $11.2 million Scheduled to return to original amount in 2026 Estate Tax Exclusion

24. After 2017, NOL deduction limited to 80% of current year taxable income • No more carrybacks(except 2 years for farmers); carryforward indefinitely • Prior – carry back 2 years and forward 20 years Net Operating Losses

25. Yearly depreciation limits on passenger automobiles increased Computers no longer considered to be “listed property” Section 179 expensing increased from $510,000 to $1 million Expansion of qualifying property for Section 179 Bonus depreciation increased to 100%; used property now qualifies Depreciation Provisions

26. 2018 – must report coverage, qualify for exemption, or report shared responsibility payment 2019 and beyond – shared responsibility payment is eliminated ACA Provisions

27. Tax simplification • Tax forms • Lower Taxes • Tax Policy Center estimate • Professional observation • Economic impacts • Short-term • Long-term Observations

28. Questions?