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Initial Review The Tax Cuts and Jobs Act H.R. 1

Initial Review: The Tax Cuts and Jobs Act (H.R. 1) of 2017

December 26, 2017

The Tax Cuts and Jobs Act (H.R. 1) was passed by the House and Senate on December 19 and 20, 2017 respectively and signed into law by the President on December 22, 2017. The original iteration of the tax bill was passed by the House of Representatives on November 16, 2017. The Senate passed its own version of the bill on December 2, 2017. Subsequently, the House and Senate appointed a conference committee to reconcile both versions of the bill into one final revised bill. The revised version of the tax bill was re-voted upon and passed by the House and Senate and signed into law by the President. Because of the evolution of H.R. 1 and the scope of its changes, many taxpayers may be confused about the consequences of the tax bill. Accordingly, Cohick & Associates composed this article to provide clarification and information about the components of H.R. 1 we believe will have the greatest impact on the average taxpayer.
H.R. 1 generally impacts all individuals and businesses filing US tax returns. The tax bill decreases individual and corporate tax rates, substantially alters many tax credits and deductions, and eliminates the individual shared responsibility penalty associated with the Affordable Care Act. While the tax bill modifies many aspects of tax law, its most widespread alterations are aimed at simplifying the tax code and reducing tax rates for individuals and small businesses. Much of H.R. 1 is set to take effect on January 1, 2018, but the tax bill is merely a suspension of current tax law; most of the tax bill’s changes will expire on December 31, 2025 without future action.
H.R. 1 will create many new planning opportunities moving forward.  These opportunities will become increasingly important over the coming months as the Internal Revenue Service interprets and implements the tax law. Given the magnitude and scope of the changes, Cohick & Associates decided it was imperative to understand H.R. 1 and provide our clients with an overview aimed at providing some clarity and familiarity with an otherwise complex set of modifications.  The following article was compiled after our initial review of H.R. 1, and it examines the impact on individual taxpayers with regard to tax brackets, standard deductions, exemptions, credits, itemized deductions, adjustments to income, Alternative Minimum Tax, Section 529 Plans, the individual mandate, estate tax, and business deductions. The article also reviews the tax bill’s impact on pass-through entities and C-Corporations.
Please note that the following is for informational purposes only. Future guidance, interpretation, and implementation of the tax bill is the responsibility of the Internal Revenue Service.  As the tax bill is developed, we will be able to provide further clarity as it relates to the tax code and its impact on your personal tax return.  Please consult a tax professional when interpreting new or preexisting tax law.
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Individual Tax Rates
All individual tax rates were reduced as a result of H.R. 1. A comparison of current tax rates through December 31, 2017 and rates effective January 1, 2018 for both single taxpayers and married filing joint taxpayers is provided below:
Tax Rate Comparison 2017 Versus 2018
Old Single Bracket New Single Bracket
Through 12/31/2017 From 1/1/2018 Forward
Rate Taxable Income Range Rate Taxable Income Range
10% $0-9,325       10% $0-9,525
15% $9,326-37,950       12% $9,526-38,700
25% $37,951-91,900 22% $38,701-82,500
28% $91,901-191,650 24% $82,501-157,500
33% $191,651-416,700 32% $157,501-200,000
35% $416,701-418,400 35% $200,001-500,000
39.6% Over $418,400 37% Over $500,000

Old Married Filing Joint Bracket New Married Filing Joint Bracket
Through 12/31/2017 From 1/1/2018 Forward
Rate Taxable Income Range Rate Taxable Income Range
10% $0-18,650 10% $0-19,050
15% $18,651-75,900 12% $19,051-77,400
25% $75,901-153,100 22% $77,401-165,000
28% $153,101-233,350 24% $165,001-315,000
33% $233,351-416,700 32% $315,001-400,000
35% $416,701-470,700 35% $400,001-600,000
39.6% Over $470,700 37% Over $600,000

Standard Deduction
H.R. 1 dramatically increases the standard deduction for individuals. An additional standard deduction for the elderly and the blind is retained by the updated tax law.
Filing Status Standard Deduction   Filing Status Standard Deduction
Through 12/31/2017   From 1/1/2018 Forward
Single & MFS       $6,350               Single & MFS         $12,000
Married Filing Jnt $12,700         Married Filing Jnt   $24,000
Head of Household $9,350         Head of Household   $18,000

Personal Exemptions
Under H.R. 1, personal exemptions are suspended and no longer available. Through December 31, 2017, an exemption of $4,150 can be claimed for each individual claimed on the personal tax return. Exemptions for individual taxpayers, spouses, and dependents are eliminated by H.R. 1.

Child Tax and Qualifying Dependents Credits
In light of the elimination of personal exemptions, the Child Tax Credit is expanded and increased for families with dependents.
Through December 31, 2017, the Child Tax Credit provided a tax credit of $1,000 per qualifying child. The credit was refundable up to the full $1,000 if the taxpayer had no taxable income. The income phase-out for the credit began at $110,000 for taxpayers filing as married filing joint, $75,000 for taxpayers filing as single and head of household, and $55,000 for taxpayers filing as married filing separate.
Beginning January 1, 2018, the Child Tax Credit under H.R. 1 is increased to $2,000 per qualifying child.  Moreover, the refundable portion of the credit is increased to $1,400 if the taxpayer has no taxable income. The income phase-out for the credit begins at $400,000 for taxpayers filing as married filing joint and $200,000 for taxpayers filing as single.

Itemized Deductions
As a result of overall tax simplification and larger standard deductions, certain taxpayers will no longer benefit from itemizing under H.R. 1. However, some taxpayers will continue to benefit from itemizing and should be attentive to certain changes on Schedule A.
One of the broader changes to itemized deductions relates to the state and local tax (SALT) deduction. Per H.R. 1, SALT is capped at $10,000 as opposed to being a previously unfettered deduction. The cap will directly affect more taxpayers than any other change to Schedule A and be most noticeable for taxpayers residing in areas with high state, local, and property taxes.
The second most comprehensive change is the elimination of all deductions previously subject to the 2% of adjusted gross income (AGI) floor. Notably, this change eliminates the deductibility of unreimbursed employee business expenses and investment expenses.  Pennsylvania and local tax authorities are expected to continue to allow a deduction for certain unreimbursed employee business expenses; investment expenses continue to be an excluded expense.
Interest expense resulting from home mortgage(s) (primary and secondary home) and home equity line(s) of credit (HELOCs) also underwent changes under H.R. 1. The deductibility of home mortgage interest is eliminated for primary home mortgages of $750,000 ($375,000 if married filing separately) or more (previously $1,000,000). HELOC and secondary home mortgage interest are no longer deductible on Schedule A under H.R. 1. Mortgage and HELOC interest, as they relate to income production, remain deductible as an expense on applicable schedules.
Lastly, certain taxpayers will benefit from the elimination of the overall limitation placed on itemized deductions. Previously, itemized deductions were limited when AGI exceeded certain thresholds. These thresholds and corresponding limitations are eliminated by H.R. 1.

Adjustments to Income
H.R. 1 alters certain above-the-line adjustments to AGI.  One of the more relevant changes involve court ordered alimony.  Under H.R. 1, alimony is no longer deductible as an adjustment or includable as income by the recipient.  Because of the change’s impact on separation agreements, this change will only apply to divorce and separation agreements executed after December 31, 2018.  Another modification to adjustments includes the elimination of the qualified moving expense adjustment.  As a result, the change means that any reimbursement of an employee’s moving expenses will now be included in the employee’s gross income (previously the amount was excludable).  The new tax law does not change the deductibility of excess expenses or exclusion of reimbursement from gross income for members of the U.S. Armed Forces and their family members.

Alternative Minimum Tax (AMT)
AMT underwent substantial review throughout the development of H.R. 1.  AMT is a recalculation of income which modifies certain adjustments, expenses and itemized deductions.  For married taxpayers, income exempt from AMT is increased from $86,200 to $109,400 and the phase-out threshold increased from $164,100 to $1,000,000.  For single taxpayers, income exempt from AMT is increased for 2018 from $55,400 to $70,300 and the phase-out threshold increased from $123,100 to $500,000.  AMT income exemptions and phase-outs will continue to be indexed for inflation.  While AMT remains, its impact on the average taxpayer is diminished as a result of H.R. 1’s SALT cap.

Section 529 Accounts
H.R. 1 modifies tuition savings program accounts, commonly known as Section 529 Plans, to include contributions towards tuition for enrollment or attendance at an elementary or secondary public, private, or religious school. The qualified distributions are capped at $10,000 per beneficiary per taxable year.  Traditional Section 529 Plans for post-secondary college tuition savings accounts are unchanged.

Repeal of the Individual Mandate
The individual mandate and penalty imposed on individuals without minimum essential health insurance coverage is repealed by H.R. 1. Individuals must maintain health insurance coverage through December 31, 2018 or be subject to the penalty. Repeal is effective for tax years beginning after December 31, 2018.

Estate Tax
H.R. 1 doubles the estate tax exclusion from approximately $5.5 million to $11 million per individual.  Married couples can exclude approximately $22 million of their estate from federal taxation.  The estate tax exclusion will continue to be indexed for inflation after passage of H.R. 1.  Moreover, portability of unused estate exclusion will remain in place for married couples who make the proper election upon the death of a spouse.

Business Deductions
Section 179 expensing election is increased to $1 million for qualifying assets (up from $500,000). The dollar limit is reduced dollar-for-dollar if the total cost of section 179 property placed in service during the tax year exceeds $2.5 million (up from $2 million). These changes are effective for property placed in service after December 31, 2017.
Bonus Depreciation is modified to increase the deduction immediately available for qualifying assets from 50% to 100% for property acquired and placed in service after September 27, 2017 and before 2023. Moreover, in certain circumstances the definition of “qualified property” is modified to include used property (previously, only new property could be utilized for bonus depreciation).
H.R. 1 modifies the deductibility of meals and entertainment expenses.  Under previous tax law, 50% of meals and entertainment expenses were deductible for most businesses.  Businesses subject to the Department of Transportation (DOT) hours of service limits were generally permitted a deduction of 80% of meals and entertainment expenses.  As a result of H.R. 1, entertainment expenses for all businesses are no longer deductible.  The deductibility of meals expenses is unchanged by the new tax law.

Pass-through Entity Structures and Sole Proprietors
Under H.R. 1, owners of certain pass-through entities and sole proprietorships, including S-Corporations, Partnerships and LLCs, are given a 20% deduction on their pass-through income.  Pass-through income is based upon the owners’ allocable share of domestic qualified income. The deduction will be reflected on the owners’ individual tax return after calculation of AGI but before taxable income is calculated.
A pass-through entity’s 20% deduction is calculated on domestic qualified income to the extent individual taxable income does not exceed $315,000 ($157,500 for single filers). The 20% deduction is fully phased out at $415,000 for joint filers ($207,500 for single filers) owning entities classified as personal service providers. Personal service providers are described as any trade or business activity involved in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trading, but excluding specifically engineering and architecture. Furthermore, personal service providers are any business where the principal asset is the reputation or skill of one or more of its owners or employees or any businesses that include investment services involving managing, trading, or dealing in securities.
For qualified pass-through entities which are not described as personal service providers, a deduction is available even when taxable income of the individual crosses the $315,000 threshold.  However, the deduction is limited to the greater of 50% of shareholder W-2 wages (or guaranteed payments) paid with respect to the qualified trade or business; or the sum of 25% of the shareholder W-2 wages (or guaranteed payments) with respect to the qualified trade or business plus 2.5% of the unadjusted basis (determined immediately after acquisition) of all qualified property.

Corporate Tax Rate
The corporate tax rate is reduced and simplified similar to the individual tax rates and calculations.  Under current law, corporations are subject to a graduated tax structure with a top corporate tax rate of 35%.  H.R. 1 assigns a flat tax of 21% and repeals corporate AMT. From a planning perspective, domestic pass-throughs benefit from a 20% deduction of domestic business income. However, all pass-through income remains subject to a graduated individual tax structure and a maximum individual tax rate of 37%.  In certain circumstances, an election to be taxed as a C-Corporation could be beneficial on a case by case basis. It is important, however, to remember that all corporate dividends are taxed a second time at the individual level. While a flat tax of 21% is enticing, the effect of double taxation on dividend distributions renders the corporate tax cut break unsuitable for most taxpayers currently operating as a pass-through entity.










Additional Resources:
United States.House of Representatives.(2017).Tax Cuts and Jobs Act: Conference report to accompany H.R.1.Retrieved from URL