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 $11.4 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 impact 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 resulted in decreased withholding for most employees. The IRS updated several tax provisions for inflation for 2019, including the tax brackets and the standard deduction, which increased to $12,200 for single filers and $24,400 for individuals filing under married filing jointly status. The IRS issued a new Form W-4 for tax years 2020 and beyond. The IRS released a FAQs about the new design of Form W-4. 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 may 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 exchanges Limited to Real Estate
The 2017 Tax Act changed the rules for 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 for tax years 2018 through 2025. 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 number of individuals who itemized in 2018 was 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 and 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.
Individuals that receive state tax credits for charitable contributions must reduce their itemized deduction for charitable contributions by the amount of the state tax credits received, but these individuals get to deduct the amount of the state tax credits used in a particular year as an itemized deduction for SALT. For individuals that are under the $10,000 SALT limitation before using the state tax credits, they are not affected by reducing their charitable contributions by the amount of state tax credits received. Essentially, this rule converts what would be a deduction for charitable contributions to a deduction for SALT, which is capped at $10,000.
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. Because of these changes, taxpayers should proceed carefully before creating an NOL.
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. WK recommends businesses maintain separate general ledger accounts for business meals and entertainment expenses. For more information on these changes, please click here.
3) 179 limit increases/Bonus
Section 179 Depreciation: The 2017 Tax Act increased the maximum amount of Section 179 depreciation expense from $500,000 to $1,000,000, adjusted for inflation. The 2017 Tax Act also expanded Section 179 to include qualified improvement property, roofs, HVAC, and alarm/security systems. The maximum amount of Section 179 expense for 2019 is $1,020,000. This dollar limitation is reduced (but not below zero) by the amount by which the cost of the Section 179 property placed in service during the tax year exceeds $2,550,000 in 2019.
Bonus Depreciation: Bonus depreciation changed significantly starting in 2018 compared to 2017. The bonus depreciation percentage increased to 100% for 2018 through 2022 for qualified assets. Bonus depreciation was also expanded to include used assets. Meaning, a taxpayer may 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 a 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” (SSTB), 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
Individual: The 2017 Tax Act drastically changed the tax rates and the brackets for figuring tax for tax years 2018 and beyond. 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.
Corporate: The corporate tax rate for 2018 and beyond 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%.
For more details or for questions on tax planning please contact a WK advisor at (573) 442–6171 in Columbia or (573) 635-6196 in Jefferson City.