The provisions of the new tax law, many of which went into effect as of January 1st, are broad and extensive. This being the case, both business and individual taxpayers would be well advised to understand the ramifications of these sweeping changes before making important tax planning decisions. Although most of the changes go into effect at the beginning of 2018, some have future initiation dates. In addition to starting at different times, some of the provisions also have phase out periods which adds another twist to the tax planning mix. The following list highlights some of major changes targeted by the new tax law organized according to activation date.
· Increase in Medical Expense Deduction
Retroactive to include the 2017 tax year, taxpayers can deduct out-of-pocket medical expenses that exceed 7.5 percent of adjusted gross income. This is down from 10 percent which was the threshold prior to the passage of this legislation.
· Expansion of Child Tax Credit
The new tax law provides for the expansion of the Child Tax Credit from $1000 to $2000 and increases the amount of the refundable portion to $1400.
· Doubling of Estate Tax Exemption
The Republican tax bill increases the annual estate tax exclusion from $5 million to $10 million ($20 for couples with appropriate tax planning strategies). These amounts are indexed to inflation and will remain in effect until 2025. At this time, in the absence of further legislation, the estate tax exclusion will revert back to the previous base, also indexed to inflation.
· Increase in Alternative Minimum Tax Exemption
The new tax law provides a break for high income earners who are affected by the Alternative minimum Tax. Under the provisions of the new legislation, the exemption amount is increased from $54,300 to $70,300 for single taxpayers and from $84,500 to $109,400 for married couples filing jointly. In addition, the income threshold at which the tax begins to pause out is increased dramatically – from $120,700 to $500,000 for single filers and from $160,900 to $1 million for married couples filing joint returns.
Future Start Dates
· Repeal of Individual Mandate
Although the Affordable Care Act will remain in effect, the provision that requires most Americans to be covered by a basic level health insurance will be repealed on January 1, 2019. As of that date, individuals will no longer be penalized for not carrying health insurance and business will not be required to provide health insurance for their employees.
· Cancelation of Alimony Deduction for New Divorces
As of January 1, 2019, alimony payments for new divorces will no longer be tax deductible for the person making the payments and the person receiving the payments will no longer have to count them as taxable income.
· Allowance for Immediate Capital Expensing
The new tax law allows for the deduction the full amount of any capital expenditure during the tax year that purchase is made. This provision is retroactive to January 27, 2017 and continues until the end of 2022, at which time it will be phased out at the rate of 20% per year.
· Limitation on Interest Deduction
Beginning this year, the interest deduction will be limited to 30% of earnings before interest, taxes, depreciation and amortization. On January 1, 2022, the reduction of income by depreciation and amortization will drop off and the interest deduction will increase to 30% of income, reduced only by interest and taxes.
· Allowance for Repatriation of Foreign Income
Under the provisions of the new tax law, foreign earnings that have accumulated overseas will be charged a repatriation tax of 15.5 % for cash assets and 8.0 % for illiquid assets. Although the onetime tax will be levied immediately, companies are given the option of paying the tax bill over a period of eight years.
Future Start Date
· Provision for Amortization of R&D Investment
As of January 1, 2022, companies will be required to amortize research and development expenditures over a period of five years rather than writing off the entire amount of the expense in the year it is made.
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