Individual and corporate tax returns will look significantly different come April of 2019. The Tax Cuts and Jobs Act passed in both the House and Senate last week and was officially signed into law on Friday by the President. Key changes to the tax code include a sharp reduction in the corporate tax rate, formation of new, lower tax brackets and elimination of certain deductions and credits, among other things. In light of this, tax planning strategies will also need to be reevaluated for the coming year. To help clients, prospects and others understand the final tax bill and how it will impact them, JLK Rosenberger has provided a summary of noteworthy changes below.
Business Tax Changes
- Corporate Tax Rate – The corporate tax rate has been reduced from 35% to 21%. While this is higher than the original bill passed by the House, it puts the U.S. in alignment with the average tax rate on businesses in the industrialized world. There is no phase-in time for this change, so companies will enjoy a lower tax rate immediately.
- Pass-Through Entity Taxation – Owners of pass-through entities, such as S-corporations and partnerships, currently pay tax on company earnings based on their personal tax rates. This means that the highest earners can pay a top rate of 39.6%. The bill creates a 20% deduction for pass-through income. It’s important to note that entities operating in health, law and financial services are exempt from this deduction unless taxable income is below $157,500 for single filers or $315,000 for those married, filing jointly. There is also a process in place designed to prevent high-income earners from changing wage income to pass-through income to obtain the lower tax rate. This provision is set to expire in 2025.
- Foreign Earnings – Foreign earnings repatriated to the U.S. will be taxed at a rate of 15.5% for cash or cash equivalents and 8% for reinvested earnings. This change will allow companies to repatriate profits domestically at a much lower rate than previously anticipated.
- Immediate Expensing – The bill permits the full expensing of capital investments for the next five years and then phases out the benefit 20% each year over the following five years. This will give companies the opportunity to immediately expense capital purchases that previously needed to be depreciated over a several year period (five years or longer). The result is an immediate tax benefit.
Individual Tax Changes
- New Tax Brackets – Despite efforts to reduce the number of individual tax brackets, the final bill will keep seven, but most taxpayers will experience a reduction in overall taxes. The new brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The last bracket, down from 39.6%, will be for single taxpayers with income above $500,000 and couples with income above $600,000. It’s important to note that the brackets will expire in 2025 when Congress will have to act to extend them.
- Standard Deduction – The standard deduction will nearly double from $6,350 to $12,000 for individuals and $12,700 to $24,000 for couples. This change is designed to encourage more taxpayers to take the standard deduction versus itemizing and is scheduled to expire in 2025.
- Expansion of Child Tax Credit – This credit will be increased from its current value of $1,000 to $2,000 per child with $1,400 of that amount being refundable. This was a late change that was added to win the support of Congressional holdouts.
- Mortgage Interest Deduction – Interest on mortgages up to $750,000 is still deductible in the new legislation, which is a reduction from the current $1M cap and a compromise between the Senate and House.
- Estate Tax Repeal – While there won’t be a repeal of the estate tax as originally proposed, there have been changes. Under the final bill, the estate tax of 40% will only impact the wealthiest taxpayers. The exemption will double, allowing $11.2M per individual – up from $5.5M – to be passed on without taxation.
- Education Incentives Remain – Despite efforts to eliminate the deduction on student loan interest and a waiver for graduate student tuition, it could not be done. There was too much concern from the academic community about the impact of the change and these incentives will remain untouched.
The new tax bill makes big strides in tax reform, especially with the shift to lower tax rates for individuals and businesses and for owners and partners of pass-through entities. If you would like to learn more about these changes or if you have questions about tax planning in light of the reform, JLK Rosenberger can help. For more information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.