In 2017 the Tax Cuts and Jobs Act (TCJA) was passed. The legislation was the largest change to the US tax code in over 30 years. The last major tax reform before the TCJA was the Tax Reform Act of 1986.

Some of the key changes that were introduced is as follows:

Individual Tax Changes

1. Tax Rates and Brackets
   • The TCJA revised the income tax brackets and lowered the tax rates across the board, maintaining the seven-bracket system but generally reducing rates.
2. Standard Deduction and Personal Exemptions
   • The standard deduction nearly doubled, rising from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples filing jointly.
   • Personal exemptions were eliminated.
3. Itemized Deductions
   • The state and local tax (SALT) deduction was capped at $10,000.
   • The mortgage interest deduction was limited to interest on the first $750,000 of mortgage debt, down from $1 million.
   • Miscellaneous itemized deductions subject to the 2% floor were eliminated.
4. Child Tax Credit
   • The credit was doubled from $1,000 to $2,000 per qualifying child, with a higher phase-out threshold, making more families eligible.
   • A new $500 credit for non-child dependents was introduced.
5. Alternative Minimum Tax (AMT)
   • AMT exemption amounts were increased, and phase-out thresholds were raised, reducing the number of taxpayers subject to AMT.
6. Healthcare Mandate
   • The individual mandate penalty of the Affordable Care Act was effectively repealed by reducing the penalty to $0 starting in 2019.

Business Tax Changes

1. Corporate Tax Rate
   • The corporate tax rate was permanently reduced from 35% to 21%.
2. Pass-Through Business Income
   • A new 20% deduction was introduced for qualified business income from pass-through entities (e.g., S-corporations, partnerships, sole proprietorships), with certain limitations for service businesses based on income levels.
3. Expensing and Depreciation
   • The TCJA allowed for 100% bonus depreciation for qualified property, enabling businesses to fully expense the cost of certain assets in the year they are placed in service. This applies to assets acquired and placed in service after September 27, 2017, and before January 1, 2023.
   • The Section 179 expensing limit was increased to $1 million, with a phase-out threshold of $2.5 million.
4. Interest Deduction Limitation
   • The deduction for net interest expense is generally limited to 30% of the business’s adjusted taxable income.
5. Net Operating Losses (NOLs)
   • NOL carrybacks were generally eliminated, but NOLs can be carried forward indefinitely, though the deduction for NOL carryforwards is limited to 80% of taxable income.
6. Foreign Income
   • The TCJA moved the U.S. toward a territorial tax system, where income earned by foreign subsidiaries is largely exempt from U.S. tax when repatriated.
   • A one-time transition tax was imposed on previously untaxed accumulated earnings of foreign subsidiaries.
   • New provisions like the Global Intangible Low-Taxed Income (GILTI) and the Base Erosion and Anti-Abuse Tax (BEAT) were introduced to limit profit shifting and erosion of the U.S. tax base.

Estate and Gift Tax Changes

1. Estate Tax Exemption
   • The estate and gift tax exemption was doubled from $5.49 million to $11.18 million per individual (adjusted for inflation, it is $12.92 million for 2023).

Planning Tips for Beyond 2025

With the potential sunsetting of TCJA provisions in 2025, we want our clients to consider some planning tips:

1. Maximize Current Benefits
   • Take advantage of the current lower tax rates, higher standard deduction, and other benefits while they are in effect. Consider accelerating income and deferring deductions to capitalize on the lower rates.
2. Review Estate Plans
   • With the estate tax exemption potentially reverting to pre-TCJA levels, review and update estate plans to utilize the higher exemption while it is available. Gifting strategies and trust planning should be revisited.
3. Optimize Retirement Contributions
   • Maximize contributions to retirement accounts like 401(k)s and IRAs, taking advantage of the current favorable tax treatment. Consider Roth conversions to lock in the current lower tax rates.
4. Evaluate Business Structures
   • Assess the structure of your business to ensure it is optimized for potential changes. For pass-through entities, ensure you are maximizing the 20% qualified business income deduction.
5. Invest in Capital Expenditures
   • Take advantage of the 100% bonus depreciation for qualified property by investing in capital expenditures before the provision sunsets. This can provide significant tax savings.
6. Plan for SALT Deduction Changes
   • With the SALT deduction cap potentially reverting, plan for its impact on your tax liability. Consider the timing of state and local tax payments and explore strategies to mitigate the cap’s effect.
7. Engage in Charitable Giving
   • Charitable contributions can provide valuable deductions. Consider donor-advised funds or other charitable vehicles to maximize the tax benefits of your philanthropic efforts.

Implications

If the TCJA legislation is not extended, there are several considerations for tax planning, financial strategies, and compliance requirements. For businesses; the reduced corporate tax rate, the ability to fully expense capital investments, and changes to international taxation are particularly significant. For individuals; the changes in standard deductions, itemized deductions, and family credits have altered tax filing strategies.

Navigating these changes requires careful planning and a thorough understanding of the new rules.

Rose Group CPAs will continue to monitor legislative developments to keep you informed about legislative changes and proposals that could impact your tax planning. Work with your CPA to adapt your strategies as new information becomes available.