Trump’s Tax Cuts: Friend or Foe?

Finance Matters | By Steve Metzenthin, Tax Partner and Kristen Sayegh, Tax Manager –

If you are interested in knowing if the Trump tax cuts are working as a policy matter, the answer depends on what you read. The Wall Street Journal is trumpeting the latest quarterly Gross Domestic Product (GDP) growth statistic of 4.1% as evidence that the bill’s incentives are working. The New York Times, meanwhile, is cautioning that treasury receipts have fallen dangerously, lending credence to the fact that the bill is a deficit-busting calamity.  Let’s leave conclusions about macro-economics to the experts even if they don’t agree, and focus instead on what you as a taxpayer should be thinking about relative to your own taxes. This was a massive bill, but here are highlights.

Increased Standard Deduction: There’s a pretty good chance that you’ll no longer be itemizing deductions for 2018 and beyond. That’s because the standard deduction amount has almost doubled to $12,000 for single taxpayers and $24,000 for married filing jointly taxpayers, and the deduction for real estate taxes on your residence has been capped at $10,000 per year.  Taxpayers claim the larger of itemized deductions or the standard deduction, so odds are pretty good that the standard deduction will now be higher for a lot of you.  With planning you might be able to benefit by “bunching” certain itemized deductions, for example, pay two years of charitable contributions in a single tax year.  This would result in itemizing deductions in alternate years.

Reduced Mortgage Interest:  The bill reduces the mortgage interest deduction on acquisition debt on primary and secondary homes from $1 million to $750,000; the reduction does not apply to grandfathered interest for loans prior to December 15, 2017.

2% Itemized Deductions Eliminated: Previously taxpayers who itemized could deduct, to the extent the total deduction was more than 2% of their adjusted gross income, amounts spent on tax preparation fees, investment fees, safety deposit boxes, uniforms and other non-reimbursed employee business expenses.

Tax Rate Help:  The top rate on individuals has been reduced from 39.6% to 37%; the corporate tax rate has been reduced from 35% to 21%.  Many individuals will see significant benefit from the rate reductions, and the more income you make, the more likely that the rate reductions will help you.  The lower corporate rate has business taxpayers considering C-corporate status for the first time in many years.

Child Tax Credit:  Available for qualifying children under the age of 17, the tax law doubled the credit from $1,000 to $2,000. Additionally, those qualifying to take the credit increased as the phase out limit doesn’t apply until a taxpayer’s adjusted gross income is more than $400,000 for married filing joint or $200,000 for single taxpayers.

Good News About Alternative Minimum Tax (AMT):  The corporate AMT was repealed.  The individual AMT remains but higher limitations and exemptions under the new law will make it much less common.

Unlimited Expensing of Fixed Asset Additions:  Through 2022, businesses can deduct acquisition of fixed assets, except most structures.  This provision should encourage investment in property since the tax benefit will increase project rate of return.

Increased Lifetime Exclusion for Estates and Gifts:  The new exclusion is $11.18 million per person or $22.36 million for a married couple. This is the amount of net worth that an individual or married couple can transfer through gifts or inheritance  before any estate or gift tax is due.  This is in addition to annual exclusion gifts in the amount of $15,000 per donee.  This means that a husband and wife can donate up to $30,000 per recipient without the gifts counting against the lifetime exclusion.

Some Bad News on Entertainment Expenses:   For years beginning in 2018, no deduction is allowed for an activity generally considered to be entertainment, amusement or recreation.  The cost of business meals will continue to be 50% deductible.

Flow Through Deductions:  When the corporate lobby got its rate reduction, the flow-through lobby (seriously, there is one) went to work.  This is far too complicated for this short piece, but the bottom line is that owners of Subchapter S corporations and partnerships may be eligible for a deduction up to 20% of the income flowing through to them.  There are a number of limitations based on type of business – generally service businesses are not well-treated – and taxable income of the owners.  These provisions provide planning opportunities for business owners and can drive the incremental tax rate for income flowing through to individuals below the 37% nominal rate mentioned above.

As a service provided to clients in the preparation of 2017 individual returns, our firm prepared an analysis of the projected 2018 tax liability assuming the same income and deductions for 2017.  Mostly taxpayers will be saving money next year, as the impact of the lower marginal rates and higher standard deductions seemed to overweigh losing deductions and personal exemptions.  But there were notable – and expensive – exceptions, which were entirely dependent upon the taxpayer’s unique situation.  If you have any concerns or questions, contact your tax professional for advice.

Disclaimer: This article is designed only to provide general information regarding the subject matter discussed. This article is not intended to provide tax, accounting, legal or other professional advice to any specific person or entity. Any advice or opinion regarding the application of the subject matter for a specific person or entity should be provided by a competent professional advisor based on an application of the appropriate law and authorities to the facts and circumstances applicable to that person or entity.