Q: What do I need to know about the new federal tax law?
A: Tax Cuts and Jobs Act of 2017 (the “TCJA”) was the most comprehensive tax reform law passed in decades. Even though it was enacted in 2017, this year is the first tax year that Americans will pay taxes pursuant to the TCJA. The text and impact of the TCJA are complex, but there are some highlights that everyone should be aware of.
First, many of the TCJA’s provisions are temporary and most changes for individuals expire after December 31, 2025, unless Congress acts again. Second, the TCJA amends the tax code, but much of the prior law remains in effect. For example, anyone over 70½ can still partially or completely satisfy required minimum IRA distributions by making the distribution directly to tax-exempt charities, which is not income to the taxpayer.
Substantively, the TCJA generally lowered the income tax rates (the percentages at which taxable income is taxed). But even more importantly, the TCJA has changed the calculation of taxable income itself.
Further, the standard deduction has almost doubled for most taxpayers, meaning fewer taxpayers will itemize their deductions. This creates some planning opportunities. For instance, it may make sense to “bunch” deductible events like charitable contributions. This means forgoing those events in one year (and claiming the standard deduction) and then giving twice the usual amount the next year (in order to have an itemized deduction in excess of the standard deduction).
In considering these strategies a taxpayer must be careful, as many itemized deductions have been eliminated and almost all have been changed to some degree. As an example, one drastic change will take place with alimony (spousal support) paid pursuant to a divorce decree. Previously, alimony has been deducted by the payor and treated as (taxable) income to the recipient. Beginning January 1, 2019 (and for prior orders that specifically provide for a change in alimony’s tax treatment), the payor cannot deduct alimony.
Many small business owners may assess their choice of business entity, as pass-through entities (i.e., an entity that is not a C-Corporation) have additional tax benefits. Specifically, the TCJA provides—with some complicated rules—for a deduction of up to 20% of a taxpayer’s Qualified Business Income (“QBI”) from pass-through entities.
Another major change is that there will no longer be a personal exemption for each taxpayer and any dependents. Instead, under the TCJA, the Child Tax Credit has been increased to $2,000 per qualifying child, up to $1,400 of which is a refundable credit.
There are also many important details and major changes in other areas of taxation. These specifics can be worked through with a tax professional.