The Tax Cuts and Jobs Act of 2017 (the Act), drastically modifies the Internal Revenue Code (IRC)—including changing income tax rates, increasing standard deduction amounts, and removing personal exemptions. The bill will affect approximately 120 million tax returns, according to the Congressional joint conference committee.
That means clients of CPAs, EAs, financial planners, attorneys, and other tax preparers will be clamoring for answers about how the Act applies to tax, financial, and estate planning.
Taxation consultant Arthur Werner in his webinar Understanding the Tax Cuts and Jobs Act of 2017 outlines the significant changes in the 1,100-page Act, including sunset provisions, ACA issues, tax rates and more.
New Tax Rates, Same 7 Tax Brackets
Let’s take a closer look at the changes. The Act keeps seven tax brackets but adjusts the income tax rates.
For unmarried individuals other than surviving spouses and heads of households, according to the bill published by the joint conference committee, the new tax rates are:
- 10% of taxable income for taxable income less than $9,525
- $952.50 plus 12% over $9,525 for income between $9,525 and $38,700
- $4,453.50 plus 22% over $38,700 for income between $38,700 and $82,500
- $14,089.50 plus 24% over $82,500 for income between $82,500 and $157,500
- $32,089.50 plus 32% over $157,500 for income between $157,500 and $200,000
- $45,689.50 plus 35% over $200,000 for income between $200,000 and $500,000
- $150,689.50 plus 37% over $500,000 for taxable income over $500,000
The rates that apply to married individuals filing joint returns and surviving spouses are:
- 10% of taxable income for taxable income less than $19,050
- $1,905 plus 12% over $19,050 for income between $19,050 and $77,400
- $8,907 plus 22% over $77,400 for income between $77,400 and $165,000
- $28,179 plus 24% over $165,000 for income between $165,000 and $315,000
- $64,179 plus 32% over $157,500 for income between $315,000 and $400,000
- $91,379 plus 35% over $200,000 for income between $400,000 and $600,000
- $161,379 plus 37% over $600,000 for taxable income over $600,000
The rates that apply to heads of households are:
- 10% of taxable income for taxable income less than $13,600
- $1,360 plus 12% over $13,600 for income between $13, 600 and $51,800
- $5,944 plus 22% over $51,800 for income between $51,800 and $82,500
- $12,698 plus 24% over $82,500 for income between $82,500 and $157,500
- $30,698 plus 32% over $157,500 for income between $157,500 and $200,000
- $44,298 plus 35% over $200,000 for income between $200,000 and $500,000
- $149,298 plus 37% over $500,000 for taxable income over $500,000
The rates that apply to married individuals filing separate returns are the same as for individuals up till the 35% bracket. The rates for married individuals filing separately who fall into the two top brackets are:
- $45,689.50 plus 35% over $200,000 for income between $200,000 and $300,000
- $80,689.50 plus 37% over $300,000 for taxable income over $300,000
The rates that apply to estates and trusts are:
- 10% of taxable income for taxable income less than $2,550
- $255 plus 24% over $2,550 for income between $2,550 and $9,150
- $1,839 plus 35% over $9,150 for income between $9,150 and $12,500
- $3,011.50 plus 37% over $12,500 for income over $12,500
Standard Deductions Increased, Personal Exemptions Suspended
The good news, according to Forbes, is that the standard deduction amounts “increase to $12,000 for individuals, $18,000 for [heads of household], and $24,000 for married couples filing jointly.”
However, deductions on personal exemptions—the deduction you can claim against your personal income when calculating taxable income—are suspended under part V of the Act. And, per the committee bill, for a “taxable year beginning after December 31, 2017, and before January 1, 2026”, the “term ‘exemption amount’ means zero.”
For estates and trusts, “Section 642(b)(2)(C) is amended by adding at the end the following new clause:”
‘‘(iii) YEARS WHEN PERSONAL EXEMPTION AMOUNT IS ZERO — (I) In the case of any taxable year in which the exemption amount under section 151(d) 2 is zero, clause (i) shall be applied by substituting ‘$4,150’ for ‘the exemption amount under section 151(d)’.”
‘‘(II) INFLATION ADJUST6 MENT—In the case of any taxable year beginning in a calendar year after 2018, the $4,150 amount in subparagraph (A) shall be increased in the same manner as provided in section 6334(d)(4)(C).’’
Pass-Through Taxation Changed
Owners of so-called “pass-through companies”—e.g., LLCs and S corporations—as well as sole proprietors “will be taxed at their individual tax rates less a 20% deduction (to bring the rate lower) for business-related income, subject to certain wage limits and exceptions”, reports Forbes. “The deduction would be disallowed for businesses offering ‘professional services’ above a threshold amount,” Forbes clarifies.
The summary description of the committee bill mentions that the individual taxpayer may “deduct 20 percent of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 20 percent of aggregate qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income.”
Special rules apply to some agricultural or horticultural cooperatives, however.
The conference bill further states “Qualified business income for a taxable year generally means the net amount of domestic qualified items of income, gain, deduction, and loss with respect to the taxpayer’s qualified businesses.” The provision is expected to affect over 10% of small business tax returns, according to the joint committee bill.
Multiple Changes to the IRC through 2026
There are many other rule changes coming—to student loans (e.g., those discharged due to death or disability are no longer taxable), alimony, fringe benefits, MSAs and HSAs, retirement plans, home sale exclusion, business expensing, and IRC §179 issues. For tax professionals tasked with advising clients on their tax, financial, and estate plans, learning about the legislative changes that have occurred and how these changes will affect the compliance and planning needs of clients is essential for this tax year.
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