Understanding the Tax Cut & Jobs Act of 2017 - O'Malley & O'Malley

Understanding the
Tax Cut & Jobs Act of 2017

                   Presented by: Mariette T. O’Malley, CPA, J.D. (Tax), CFP®

                                O’Malley & O’Malley, LLP
                                    Certified Public Accountants
                                    Certified Financial Planners™
                                  3112 Woodhaven Drive
                              Cinnaminson, New Jersey 08077
                            856-829-9100 · www.omalleycpa.com
                               omalleycpa@omalleycpa.com

What you want to know!
➢ Will the new tax law affect me?
   • Probably, Yes! The new tax law will affect anyone required to file a tax return – some in a
       good way and some not – the end result is very individualized.
➢ What are the core changes?
   • We will look at several of these items in some detail, but the most generic changes are the
     elimination of the personal and dependent exemptions, the increase to the standard
     deduction and the changes to the itemized deductions.
➢ So will I owe more money?
    • That is difficult to say without evaluating your individual situation. The tax rates have
      dropped, but many deductions have been suspended too, so the overall impact depends
      more on your overall situation, not just your income. Being proactive in your planning can
      really make a difference for 2018!

The Biggest Change!
• The biggest change is the shift in tax rates, per the Tax Tables.

• The new rates span from 10-37%

• There has also been an expansion of the income taxed at some of the
  lower rates.

Addressing the Basics on the New Tax Law

        1) Elimination of the Exemption

        2) Standard vs. Itemized Deductions

        3) The Pass-Thru Credit Benefit

        4) Some “Not So Entertaining” Business Deduction Changes

Elimination of the Exemption
Old Law:
 • An exemption (deduction) was allowed for every Taxpayer, spouse and dependent in the amount of $4,050.
   If your AGI exceeded $313,800 MFJ or $261,500 Single, this deduction was subject to a reduction and
   possible elimination.

New Law
 • No Exemptions!
 • Taxpayers with “qualified dependents” will be eligible for a tax credit, a dollar for dollar reduction of their
   tax. The amount depends on the dependent. Qualifying children under age 17 will result in a credit of
   $2,000 each, with up to $1,400 each eligible for refund. Other qualifying dependents will provide a
   nonrefundable $500 credit against taxes. Additional Regulations are expected to clarify these rules.

This is a major change! While the credit “softens the blow,” those with no dependent or numerous
dependents over 17 may see an increase in their taxes, despite lower rates. Families with young children
(under 17), especially in the higher tax brackets, will benefit from this change.

Standard vs. Itemized Deductions
OLD Standard Deductions                                 NEW Standard Deductions

• Single          $ 6,350                               • Single           $12,000
• MFJ             $12,700                               • MFJ              $24,000
• HOH             $ 9,350                               • HOH              $18,000

At first glance the increased standard deduction looks great BUT the increase in the standard deduction
needs to make up for the loss of the exemptions. Due to the new itemized deduction limitations, it is likely
more people will use the standard deduction but plan to put your itemized deduction information together
for 2018 until you know for sure.

Standard vs. Itemized Deductions
OLD Itemized Deductions                                          NEW Itemized Deductions
• Medical with 10% AGI floor                                     • Medical with 7.5% AGI floor, including nursing home and
• Foreign, state and local income taxes or sales tax, ALL real     similar care continues
  property taxes including foreign real estate                   • ONLY US state and local income taxes or sales tax and US real
• Mortgage interest up to $1.1 million of indebtedness –           property taxes BUT not to exceed $10,000 total.
  special rules for calculating the home equity portion          • Mortgage interest up to $1 million of indebtedness if debt
• Charities – 50% AGI limit                                        existed prior to 12/15/17. For new debt, after 12/15/17,
                                                                   then indebtedness is capped at $750,000. NO deduction for
• Casualty Losses – subject to 10% AGI floor                       home equity interest, even if re-fied into the mortgage! See
                                                                   comments on the next slide.
• Miscl deductions ie. tax prep fees, investment expenses,
  unreimbursed employee expenses and similar items subject       • Charities – 60% AGI limit on cash gifts
  to a 2% AGI floor                                              • Casualty Losses – NO deduction unless the loss occurred in a
• Other miscellaneous deductions, ie. gambling losses or           federally declared disaster area.
  repayment of Social Security, IRD deduction                    • Miscl deductions subject to a 2% AGI floor – ELIMINATED!
                                                                 • Other miscellaneous deductions, ie. gambling losses or
                                                                   repayment of Social Security, IRD deduction. These remain
                                                                   unchanged.

Standard vs. Itemized Deductions
❖ Thankfully, the medical expense deduction avoided elimination, it was on the chopping block for a while!

❖ The SALT deduction has been all over the news, especially since NJ, NY and CA have joined together to fight the constitutionality of the
  new law. Bottom line, most of us in NJ, especially those who work in Phila or NYC, are going to be capped by the $10,000 combined limit
  and this will impact our taxes, but it is not a major issue across the country.

❖ Mortgage Interest is going to be a major issue in 2018 and something many professionals have overlooked. With the loss of deductible
  home equity interest, the calculation of “acquisition indebtedness” becomes very important. Basically, “acquisition indebtedness” is
  your original debt balance plus any mortgage indebtedness incurred for home improvements. Taxpayers who have refinanced may need
  to re-visit this calculation to ensure all of their mortgage interest is deductible.

❖ The increased charity limit will assist only major donors.

❖ The elimination of the casualty loss will hurt middle to lower income individuals who are uninsured or underinsured in the event of a
  major loss, like fire or storms.

❖ The loss of unreimbursed business expenses to employees will likely be a major hit for many in the sales industry; losing the deduction
  for union dues, uniforms, tools will also impact many union employees; and the loss of the deduction for investment advisory expenses
  is an issue for those in managed accounts.

Consider a discussion with your tax advisor. They may provide ideas and solutions for some of these issues
but it is likely many of us are going to see a reduction in our itemized deductions and end up using the
standard deduction!

The Pass-Thru Credit Benefit
A NEW deduction for Taxpayers that own Pass-Thru Entities:
▪   Basic Provision – The new law will allow a deduction of 20% of “qualified business income,” calculated on an entity-by-entity basis
    from the Taxpayers’ taxable income. (It will not reduce AGI.)

      •   This deduction can be used by sole proprietors, partners in partnerships, and S-Corp shareholders, as well as LLC’s receiving
          pass-thru tax treatment.
      •   It is calculated on the individual Taxpayer’s tax return for each entity they belong to individually.

BEWARE - there are limitations!

▪   Taxpayers whose income exceeds the “threshold amount” ($315,000 MFJ or $157,500 Single) will see a wage limit calculation
    phased into the calculation.
▪   Similarly, certain types of businesses, referred to “specified service businesses,” will start to lose the tax benefit if their “threshold
    amounts” are reached too. Specified service businesses include most businesses where personal services are the primary source of
    income like financial advisors, attorneys, accountants and consultants.

There are actually three potential calculations for this credit, depending on your type of business and “threshold amount” so it is likely
professional assistance will be needed.

There is no denying this NEW tax credit is complicated and there are a lot of questions and few answers
right now! Regulations will be needed to clarify exactly how this credit will be calculated, even for the
most basic calculation. The one thing that is clear, if you are eligible for this credit, it will save you tax
dollars! Talk to your Tax Advisor for more detail!

Some “Not So Entertaining” Business Deduction Changes
▪ Say “Goodbye” to those sports, concert and theater tickets, no more rounds of golf and any other “entertaining” events you
  have provided or attended as a part of work. It also eliminates deductions for any membership dues for clubs organized for
  business, pleasure, recreation or social purposes. After years of a reduced expense deduction for entertainment (currently
  only 50% is deductible), all “entertainment” related expenses are no longer deductible!
    ➢ This rule raises the question, “does Washington even know how business gets done?” Imagine the impact, as every
        major stadium or concert hall is filled with skyboxes and seats paid for by corporate sponsors who entertain their
        clients at these events! Not to mention the club membership elimination – are they including groups like Rotary,
        networking groups, professional organizations? Not sure yet but the concern is real, the Regulations will need to
        clarify the rule on this!

▪ The 50% deduction on meals was further expanded as well, eliminating almost any meal from being eligible for the 100%
  deductibility category.
    ➢ The change here is not as ominous as the entertainment change – YET! Meals however are a target for lawmakers and
       the deductibility for all meals is scheduled to disappear after 12/31/2025!

▪ Reduction of the Corporate income tax rate to a flat 21%
    ➢ While a nice tax break for some Corporations, this is actually a tax increase for many small corporations whose net
      income was under $50,000. Their tax rate had been 15%, they just received a 6% tax increase!

Some “Not So Entertaining” Business Deduction Changes

▪ Employer reimbursed moving expenses are no longer excluded from income. The employer may still reimburse the employee
  but the reimbursement will be included in the employee’s taxable income. If employees pay to relocate out of pocket, there is
  no tax deduction. There is an exception for Armed Services relocating to permanent posts.
    ➢ The impact of this exclusion is significant to both companies and employees. Companies will need to re-consider
        relocating personnel if it will cost them out of pocket and the employees will be unwilling to relocate if the cost is on
        them to do so. As a result, company resources, employees, may not be properly allocated within companies.

▪ Employer reimbursed or paid commuting costs or parking is no longer deductible to the employer. The employer may still
  reimburse or provide the benefit tax free, subject to the monthly limit, but they will not receive a deduction for those
  expenses.
    ➢ Not as large an impact but a targeted one. This fringe benefit will hit city workers, especially east and west coast
       taxpayers hardest. Employers may be forced to continue providing the benefit initially but eventually it will likely end
       up in the employees’ paycheck as taxable income.

▪ An increase to the Section 179, election to expense depreciable property, has been increased to $1 million dollars subject to
  certain restrictions, including a phaseout limit when more than $2.5 million of qualified assets are placed in service.
    ➢ A nice tax break for companies that can afford to take advantage of it.

Assorted Other Changes
▪ Alimony – For marital contracts dated after 12/31/18, no deduction and no reportable income from
  alimony.

▪ Net Operating Loss – Carrybacks are eliminated for years beginning after 12/31/17 in most situations;
  the carryforward may only offset up to 80% of the current year income before application of the NOL.

▪ Increased AMT limits which will reduce Taxpayer exposure to AMT along with increased AMT
  exemption amount.

▪ Recharterization rules on IRAs eliminates the ability “unwind” a Roth conversion once made; the
  reverse is still allowed.

▪ Extended rollover period for loans from Qualified Plans in the event of termination from employment
  or termination of the plan. Prior law resulted in a deemed distribution if the funds were not rolled
  over within 60 days. The new law grants relief to terminated employees by granting them until the
  due date of the return, including extensions, to repay the plan loan.

What To Do Now?
➢ Talk to your Tax Advisor – SOON! – Don’t wait until year end or next April! Most Tax Advisors would welcome a chance
  to assist you over the summer months – plenty of time for you to make any needed changes.
➢ Review your new paystubs for correct withholding. New tax tables are being implemented and the result may increase
  your pay by improperly reducing your tax withholding. No one knows the correct withholding without knowing your
  complete financial picture. Have your Tax Advisor assist you with calculating what you should be withholding to avoid
  an unpleasant surprise next April!
➢ Double check that your estimates are correct for 2018! Not all tax software has integrated the 2018 rules. You need to
  be sure you have met the correct rules for estimated tax payments to avoid penalties and interest. This is very
  important for self-employed people in 2018!
➢ If you are affected by the loss of employee business deductions, talk to your boss about implementing an expense
  reimbursement plan. This would allow you to set aside a portion of your salary to be used for those business expenses
  like education, seminars, client promotional events, mailings, etc.
➢ Similarly, consider asking your company to pay mileage reimbursement based on documented business miles. This is a
  win-win since mileage is not taxable to you but still deductible by the company. Many companies shifted to the taxable
  allowance to avoid “babysitting” the employees records but you would be better off, especially under the new law, with
  a documented reimbursement system.
➢ Another option may be to consider becoming self-employed. This choice should be carefully considered, but the new
  tax law certainly encourages entrepreneurship with the pass-thru credit. It would also eliminate the loss of the work
  related expenses since all of those expenses would now be on your business schedule.

One Final Note!
Last week, Congress added some extras onto their budget extension bill that affect your 2017 tax
filing – yes, seriously!
If you are eligible for any of the following deductions, make sure you double check your 2017 tax return before
you file it, since these deductions were not included on the original software releases or even in IRS’ initial
forms. The most common items that changed:

    •   Tuition deduction as an above the line item instead of the credit
    •   Residential energy credit for qualified improvements
    •   Discharge of indebtedness on qualified principal residences
    •   Deduction of mortgage insurance premiums as interest

   Thank you for joining us. Please contact us with any questions or to make an appointment.