Founder/CEO CWSEAPA PLLC
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Just the Tip of the Iceberg: The New Tax Law

Dec 22nd 2017
Founder/CEO CWSEAPA PLLC
Columnist
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tax law
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I recently returned home after having my third back surgery. So, I was home recovering and catching some college basketball when news on the new tax law signed by President Trump hit my email this morning.

There is just so much to it. This will be one of the many articles that I will write regarding this law. I haven’t really gotten into all the details of it yet, or heard the talking heads respond to it. I literally downloaded the codified law and began reading.

I don’t know if you are anything like me, but when I read a tax law, I’m looking for holes — ways to follow the law, but also to take advantage of the law until they make another law, that I can then find another way around that. I’m not going to give my opinion of these changes now, but I will in subsequent articles after more research.

The first thing that you will notice is that the income tax brackets have been lowered.

5 (A) MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES—The following table shall be applied in lieu of the table contained in subsection (a):
If taxable income is: The tax is:
Not over $19,050 ...................................... 10% of taxable income.
Over $19,050 but not over $77,400 .......... $1,905, plus 12% of the excess over $19,050.
Over $77,400 but not over $165,000 ........ $8,907, plus 22% of the excess over $77,400.
Over $165,000 but not over $315,000 ...... $28,179, plus 24% of the excess over $165,000.
Over $315,000 but not over $400,000 ...... $64,179, plus 32% of the excess over $315,000.
Over $400,000 but not over $600,000 ...... $91,379, plus 35% of the excess over $400,000.
Over $600,000 .......................................... $161,379, plus 37% of the excess over $600,000.

9 (B) HEADS OF HOUSEHOLDS —The following table shall be applied in lieu of the table 11 contained in subsection (b):
If taxable income is: Not over $13,600 ......the tax is 10% of taxable income.
Over $13,600 but not over $51,800 .......... $1,360, plus 12% of the excess over $13,600.
Over $51,800 but not over $82,500 .......... $5,944, plus 22% of the excess over $51,800.
Over $82,500 but not over $157,500 ........ $12,698, plus 24% of the excess over $82,500.
Over $157,500 but not over $200,000 ...... $30,698, plus 32% of the excess over $157,500.
Over $200,000 but not over $500,000 ...... $44,298, plus 35% of the excess over $200,000.
Over $500,000 .......................................... $149,298, plus 37% of the excess over $500,000.

1 (C) UNMARRIED INDIVIDUALS OTHER THAN SURVIVING SPOUSES AND HEADS OF HOUSEHOLDS —The following table shall be applied in lieu of the table contained in subsection 5 (c):
If taxable income is:                                    The tax is:
Not over $9,525 ........................................ 10% of taxable income.
Over $9,525 but not over $38,700 ............ $952.50, plus 12% of the excess over $9,525.
Over $38,700 but not over $82,500 .......... $4,453.50, plus 22% of the excess over $38,700.
Over $82,500 but not over $157,500 ........ $14,089.50, plus 24% of the excess over $82,500.
Over $157,500 but not over $200,000 ...... $32,089.50, plus 32% of the excess over $157,500.
Over $200,000 but not over $500,000 ...... $45,689.50, plus 35% of the excess over $200,000.
Over $500,000 ........................................... $150,689.50, plus 37% of the excess over $500,000.

6. (D) MARRIED INDIVIDUALS FILING SEPARATE RETURNS —The following table shall be applied in lieu of the table contained in subsection (d):
If taxable income is:                                    The tax is:
Not over $9,525 ........................................ 10% of taxable income.
Over $9,525 but not over $38,700 ............ $952.50, plus 12% of the excess over $9,525.
Over $38,700 but not over $82,500 .......... $4,453.50, plus 22% of the excess over $38,700.
Over $82,500 but not over $157,500 ........ $14,089.50, plus 24% of the excess over $82,500.
Over $157,500 but not over $200,000 ...... $32,089.50, plus 32% of the excess over $157,500.
Over $200,000 but not over $300,000 ...... $45,689.50, plus 35% of the excess over $200,000.
Over $300,000 ........................................... $80,689.50, plus 37% of the excess over $300,000.

1 (E) ESTATES AND TRUSTS —The following table shall be applied in lieu of the table 3 contained in subsection (e):
If taxable income is:                                     The tax is:
Not over $2,550 ........................................ 10% of taxable income.
Over $2,550 but not over $9,150 .............. $255, plus 24% of the excess over $2,550.
Over $9,150 but not over $12,500 ............ $1,839, plus 35% of the excess over $9,150.
Over $12,500 ............................................. $3,011.50, plus 37% of the excess over $12,500.​

As you can see, the highest rate of 39.6 percent is gone, giving way to a maximum rate of 37 percent. Some new things:

  • Exemptions have been suspended until 2026 (the law says suspended, not that they’re going away).
  • Then there are new due diligence tests we have to give for Head of Household (HOH).

NET OPERATING LOSSES

Remember the days when you had a client that paid $50,000 in taxes two years back and in the tax year that you are working on, you could do a 1045, carrying back that loss up to two years? Any remainder loss was carried forward to the next proceeding year with anything additional being carried forward. There is no carryback period now, you can only carryforward the loss, and only deduct 80 percent of the loss on the next tax return.

CHANGES TO S-CORPORATIONS, PARTNERSHIPS, AND SOLE PROPRIETORSHIPS

The law says this:

(f) SPECIAL RULES — 10 (1) APPLICATION TO PARTNERSHIPS AND S-CORPORATIONS — 12 (A) IN GENERAL — In the case of a partnership or S-Corporation (i) this section shall be applied at the partner or shareholder level, (ii) each partner or shareholder shall take into account such person’s allocable share of each qualified item of income, gain, deduction, and loss, and (iii) each partner or shareholder shall be treated for purposes of subsection (b) as having W–2 wages and unadjusted basis immediately after acquisition of qualified property for the taxable year in an amount equal to such person’s allocable share of the W–2 wages and the unadjusted basis immediately after acquisition of qualified property of the partnership or S-Corporation for the taxable year (as determined under regulations prescribed by the Secretary. For purposes of clause (iii), a partner’s or shareholder’s allocable share of W–2 wages shall be determined in the same manner as the partner’s or shareholder’s allocable share of wage expenses.

The last time that I checked, the only time a partner in a partnership could take a W-2 would be as a guaranteed payment, subject to self-employment tax. It’s unknown what that amount is when they talk salaries and partnerships, but for S-Corporations.

OTHER NUANCES

Probably one of my favorite changes has to do with those ABLE Accounts that are barely used. If you have a special needs child, you can simply make arrangements for when you are not around, or you can do things like start an ABLE Account.

The ABLE Account was enabled a few years ago, and it mimics a special needs trust. However, if you have a Special Needs Trust and apply for disability, they use the trust against you. Not with an ABLE Account. You can put up to the gift tax limits into an ABLE, or pay your child a salary to get the money in there.

The ABLE Account has changed so it is now allowed to be rolled over to a Section 529 Plan. Further, Section 529 Plans can now be used for K-12 plus college, and vice versa. If one of your other kids doesn’t go on to higher education, the money can be transferred to an ABLE Account.

For corporations, the tax has been reduced to 21 percent from 35 percent. Don’t overlook that. The rub against C-Corporations has always been double taxation. However, if you codify the C-Corporation election with non-taxable fringes like health insurance, a health reimbursement account, a company car, gym memberships, etc., then you have a situation where double taxation doesn’t exist.

Alternative Minimum Tax (AMT) can be explained by saying that it isn’t alternative and is not minimum. It is an alternate calculation of your taxes due to tax preferential items. C-Corporations eliminate AMT.

COST RECOVERY

Section 179 has been around for as long as I’ve been practicing. To review the new rules, you can Section 179 up to $1 million, and it phases out at $2 million. With a 179, you can reduce income to zero, but not below.

They have taken the 50 percent bonus depreciation away and replaced it with 100 percent expensing. This is effective September 27, 2017. Another new thing is that the equipment use doesn’t have to commence with the taxpayer.

Just like anything good, the 100 percent expensing sunsets, and these are the new limitations:

  • 80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.
  • 60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025.
  • 40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.
  • 20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.

And it sunsets in 2027.

For passenger automobiles placed in service after Dec. 31, 2017, in tax years ending after that date for which the additional first-year depreciation deduction under Code Sec. 168(k) is not claimed, the maximum amount of allowable depreciation is increased to: $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period.

For passenger automobiles placed in service after 2018, these dollar limits are indexed for inflation. For passenger autos eligible for bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000.

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