Winners and losers under the 2017 Tax Act

The second anniversary of the passage of 2017’s Tax Cuts and Jobs Act (TCA) is approaching and what has been learned is there are winners and losers as a result of its passage.

Individuals benefitted from lower tax rates and the number of brackets lowered to seven. Individual tax rates range between 10% and 37%. In 2019, the 37% rate applies to taxable income for joint taxpayers that exceeds $612,351 and itemized deductions have been substantially limited.

Individuals who pay state and local taxes are limited to a total deduction of $10,000. Miscellaneous itemized deductions have been eliminated such as investment fees, taxpayer fees and union dues. The itemized deduction for these individual taxpayers has been replaced by a higher standard deduction of $12,200 for single filers, $24,400 for married couples (filing jointly) and for those married couples over age 65, an additional $2,200 resulting in a standard deduction in 2019 of $26,600.

It is estimated that more than 25 million taxpayers have switched to claiming the standard deduction rather than itemizing their deductions as a result of the aforementioned limitations. The change in the standard deduction has caused many people to bunch charitable contributions in one year or the other, pay them out of a retirement account if they must take required minimum distributions or establish donor-advised funds to make large charitable contributions in a given year that will provide a tax benefit.

Individuals have also benefitted by a substantial reduction in federal estate tax as a result of higher gift and estate tax exemptions. The individual gift and estate tax exemption in 2020 is $11,580,000 per individual or $23,160,000 for a married couple, both of which will continue to increase annually due to inflation. The annual exclusion for gifts remains at $15,000 per donee.

Employees who incur business expenses are losers since they are no longer able to deduct such expenses as miscellaneous itemized deductions and cannot claim a home office deduction for employees who use their home for work.

Businesses have been both winners and losers as a result of the TCA. The corporate tax rate has been reduced to 21% and flow-through entities are now entitled to a 20% Section 199A deduction. This is an extremely complex deduction which applies to most flow-through trades or businesses, including real estate, with limitations on deductions based upon the owner’s taxable income and type of trade or business.

Entertainment costs are no longer deductible but business meals associated with clients or customers can still be deducted subject to a 50% limitation.

Businesses may take a 100% bonus depreciation on qualified property so long as it was acquired and placed in service during the year. The TCA increased the maximum amount of assets the business may expense using Section 179 to $1 million and expanded the types of equipment and other assets that qualify.

The changes from this massive tax act, most of which will continue through the year 2021, have the need for the services of tax professionals to effectively wade through this law’s complexities. Tax attorneys at Chuhak & Tecson, P.C. will be happy to answer individual or business tax questions.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Edwin I. Josephson, Principal