10) Double estate and gift exclusion
An individual who makes gifts or passes away after December 31, 2017 and before January 1, 2026, may have combined taxable gifts and estate assets of $10 million, indexed for inflation (currently $11.18 million), and not have to pay any estate or gift tax. This exclusion is double when compared to the 2017 amount ($5 million, indexed for inflation, or $5.49 million). This expanded exclusion is currently set to expire on December 31, 2025. However, the IRS recently released guidance stating there would be no adverse impacts for individuals who utilize the increased amounts between 2018 and 2025. For more details on the new guidance, please click here.
9) Withholding changes
The new tax law imposed changes to tax rates, itemized deductions, and personal exemptions, which in turn changed withholding tables in 2018. Generally, this will result in decreased withholding for most employees. Taxpayers are encouraged to do a paycheck checkup and submit a new Form W-4 to their employer to ensure a more accurate tax withholding, if necessary. Taxpayers can also make an estimated payment to the IRS and state revenue office if it is too late to update their paycheck withholding with their employer.
8) Like-kind exchange changes
Both individuals and businesses will see changes to like-kind exchanges effective January 1, 2018. Previously, exchanges of tangible personal property, such as vehicles and equipment, and real property could be qualified exchanges under Section 1031 (meaning no tax would be due on the exchange). Under the new law, only exchanges of real property (real estate) used in a business or for investment purposes will qualify for gain deferral under the like-kind exchange rules. This does not include real property held primarily for sale. Thus, if you trade a vehicle or equipment, it is treated as a sale and separate purchase, and any gain from the sale will be taxable income.
7) Increase standard deduction/child tax credit, no exemptions
The standard deduction for all filing statuses has nearly doubled when compared to 2017 amounts. However, personal and dependency exemptions have been removed in 2018. The amount for each exemption in 2017 was $4,050 per individual before phase-outs. For a complete list of the standard deduction amounts and exemption changes, click here.
There is good news, however, the child tax credit doubled from $1,000 to $2,000 for each qualifying child under the age of 17. Phase-out of the credit begins for taxpayers who earn $400,000 married filing jointly, and $200,000 for all others. This phase-out is over 3x greater when compared to 2017. For more details about the child tax credit, please click here.
6) Limitations on itemized deductions
The numbers of individuals who will itemize deductions in 2018 will be greatly reduced compared to 2017. One of the main reasons is the amount of state and local taxes (SALT) that can be deducted is capped at $10,000. This includes all state local sales, income, personal property, and personal real estate taxes. Additionally, miscellaneous itemized deductions subject to the 2% floor were removed. Items such as investment expenses, safe deposit box fees, professional fees, and unreimbursed employee business expenses may no longer be deducted. For a more detailed list, please click here.
5) NOL changes (carried forward, 80%)
Former tax law allowed for a net-operating loss from business activities (NOL) to be carried back 2 years, with any unused portion being carried forward 20 years (with an election to forgo to carryback). This allowed the taxpayer to first offset taxable income from the most recent two prior tax periods and claim an immediate refund of previously-paid tax. The TCJA no longer allows a carryback (thus, there is no immediate tax recovery available), but the NOL can be carried forward indefinitely to offset future taxable income. In addition, the amount of income in any given year that can be offset by the prior losses is limited to 80% of taxable income.
4) Separate meals and entertainment expense accounts
Under the former tax rules, business meals and entertainment were generally 50% deductible for tax purposes. With the new tax law, entertainment expenses are no longer deductible, but meals remain at 50%. For meals purchased during entertainment events, such as a baseball game, they will only remain partially deductible if purchased or stated separately. For more information on these changes, please click here.
3) Bonus/179 limit increases
Section 179 depreciation
The maximum amount of Section 179 depreciation expense increased from $500,000 in 2017, to $1,000,000 in 2018 and beyond. The phase-out limit of capital property increased to $2.5 million from $2 million. Furthermore, Section 179 was expanded to include qualified improvement property, roofs, HVAC, and alarm/security systems.
Bonus depreciation has changed significantly compared to 2017. The bonus depreciation percentage increased to 100% for 2018 through 2022 for qualified assets. Bonus depreciation was also expanded to included used assets. Meaning, a taxpayer can accelerate depreciation on most equipment-type assets, and take the full cost as a deduction in the year placed into service.
2) 199A deduction
Since the corporate income tax rate decreased, Congress had to think of way to incentivize pass-through entities. What they came up with is the “Qualified Business Income,” or QBI, deduction. Generally, this deduction equals 20% of income from qualified passthrough trades or businesses. The calculation of the deduction is complicated, as there are various limitations and phase outs based upon a taxpayer’s total taxable income, whether or not a business is a “Specified Service Trade or Business” (SSB), the amount of capital assets the business has, and the amount of wages paid by the business. With such complexity, it is vital that you contact your WK adviser to see how this deduction will affect you. To see a flow-through diagram relating to this deduction, please click here.
1) Tax rate decrease
The tax rates and the brackets for figuring tax in 2018 will be vastly different than those used in 2017. Although the number of tax brackets remained the same at seven, the tax rate for each bracket decreased and the income thresholds increased. Meaning the tax rate for each tax bracket decreased and you won’t jump to a higher tax bracket as quickly as in the past due to the increased income thresholds. For more information on the individual tax rates, please read more here.
The corporate tax rate for 2018 is a flat 21% for all income levels. The old tax law consisted of multiple tax brackets with the tax rates ranging from 15% to 35%, but now all corporate income is subject to the same tax rate– a flat 21%. To see a comparison of 2017 tax rates to the 2018 rate, please click here.