The one thing that never changes is that life is always changing. The Tax Cuts and Jobs Act (TCJA) has made huge changes to the federal income tax rules for individuals. But how will you, your family, and your business be affected? It depends on your specific circumstances. Major life changes, both personal and business, can provide opportunities and pitfalls under the new tax law. Here are some of the TCJA provisions that may be relevant for different life events.
Starting a New Business Under the New Tax Law
There’s nothing like starting a new business, it’s both exciting and stressful. And unfortunately, what you may have learned in business school in regards to choosing a business structure, deducting net operating losses (NOLs) and depreciating assets may no longer be the case under the Tax Cuts and Jobs Act. In order to make tax-savvy choices for your startup, it’s important to seek guidance from your tax and legal advisors.
Under the TCJA, C corporations are taxed at a flat 21%, and the corporate alternative minimum tax (AMT) has been eliminated. These changes, which are permanent, make an old-fashioned C corporation more attractive than under prior law.
However, the new qualified business income (QBI) deduction of up to 20% for 2018 through 2025 does help level the playing field for “pass-through” entities, like sole proprietorships, partnerships, limited liability companies and S corporations. There are rules and regulations that the QBI deduction is subject to, and within those limitations, there are planning strategies to consider. Some things you can do include adjusting your business’s W-2 wages, change independent contractors to employees, or invest in short-lived depreciable assets to maximize your QBI deduction.
Net operating losses (NOLs) tended to be generated by start-ups as they ramp up operations. NOLs occur when deductible expense exceeds income for the tax year. With the TCJA, for NOLs that arise in tax years starting after December 31, 2017, the maximum amount of taxable income for a year that may be offset with NOL deductions is generally reduced from 100% to 80%. Plus, NOLs that arise in tax years ending after 2017 can’t be carried back to an earlier tax year any longer (except for certain farming losses). NOLs so affected can be carried forward indefinitely.
Note: Additional guidance on the NOL provisions of the new law is expected from Congress. Check with your tax advisor for the latest developments.
In addition, there is a new limitation that applies to deductions for “excess business losses” incurred by noncorporate taxpayers. Those losses that are disallowed under this rule are then carried forward to later tax years. At that point, they can be deducted under the rules that apply to NOL carryovers. This new limitation applies after the passive activity loss rules are applied. However, it applies to an individual taxpayer only if the excess business loss exceeds the applicable threshold.
When you start a business, it may also require that you purchase fixed assets, such as office furniture, operating equipment, vehicles, and computers. In most cases, you can deduct more for capital expenditures the first year they are placed in service, and, in some cases, to depreciate any remaining amounts over shorter time periods. Two key tax breaks will allow for accelerated expensing:
- Expanded Section 179 deductions. Under the TCJA, for any qualifying property placed in service in tax years beginning after December 31, 2017, the maximum Sec. 179 deduction increases to $1 million (up from $510,000 for tax years beginning in 2017) and the Sec. 179 deduction phaseout threshold increases to $2.5 million (up from $2.03 million for tax years beginning in 2017). The new law also expands the definition of property that’s eligible for Sec. 179.
- More generous first-year bonus depreciation. Under the TCJA, for qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage is increased to 100% (up from 50% in 2017). The 100% deduction is allowed for both new and used qualifying property. In later years, the first-year bonus depreciation deduction is scheduled to be gradually reduced and then eliminated.
Your marital status on December 31, 2018 will determine your marital status for the 2018 tax year. Under the TCJA, some marriage penalties and bonuses remain. If you’re planning to wed in 2018, it’s important to determine your marginal tax rate as a married couple. For example, if both spouses work, it may be necessary to adjust your witholdings.
You will also want to consider the healthcare implications associated with getting married, such as potential exposure to the individual mandate penalty. That penalty is still in effect for 2018, although it will go away in 2019 under the TCJA.
If your household increases with a new child—through birth, adoption, or marriage—you’ll be disappointed to hear that the dependency deduction has been eliminated for 2018 through 2025. The expanded child tax credit may help make up the difference though.
The expanded child tax credit increases from $1,000 to $2,000 per qualifying child for tax years starting in 2018. Plus, increased phaseout thresholds of $400,000 for married individuals who file jointly and $200,000 for all other taxpayers (not indexed for inflation) will let many more people claim the credit.
Unfortunately, dependents aged 17 and older will not be eligible for the $2,000 credit. But they may be eligible for the new $500 credit for dependents who aren’t qualifying children. There are also changes to rules regarding Section 529 qualified tuition plans and the kiddie tax rules that may provide tax savings opportunities for parents.
There’s an important change to the tax rules for alimony payments to be aware of if you’re currently divorced or in the process of getting divorced. For post-2018 divorce agreements that require payments, alimony payments will not be deductible, and they will not be considered income to the recipient.
However, for payments required by divorce agreements that are executed in 2018 or before, pre-TCJA rules will continue to apply.
For those individuals who will be making alimony payments, this changes gives a big tax incentive to finalize divorces before year end. For those who will be receiving payments, the change creates a major incentive to delay settlements until 2019.
Should you need to modify an existing agreement, the TCJA allows taxpayers to modify existing divorce decrees to adopt the TCJA rules. For example, this may be appropriate if the expected income levels and tax rates of the alimony payers or recipient have changed.
Prenuptial agreements that stipulate alimony payments are also affected by the alimony provision of the TCJA. Existing agreements that stipulate alimony payments based on pre-TCJA rules may overcompensate alimony recipients. So it makes sense to consider updating existing agreements based on the new law. Related, it’s important to factor in the tax treatment of alimony payments under the TCJA if you’re planning to sign a prenuptial agreement before getting married in 2018 or beyond.
Interest deductions for new home acquisition debt are subject to the new $750,000 debt limit ($375,000 if married filing separately). Deductibility of home equity loans may depend on what you used the proceeds for. Interest paid on home equity loans and lines of credit may be deductible if the funds are used to buy, build or substantially improve the home that secures the loan, as long as the total home acquisition debt (including home equity loans treated as acquisition debt) is within the allowable limit.
If you moved at least 50 miles for work in 2018, you might be expecting a tax deduction or a tax-free moving expense reimbursement from your employer. Unfortunately, these tax breaks are suspended by the TCJA for most taxpayers from 2018 through 2025. The above-the-line deduction on Form 1040 won’t be available in tax years starting in 2018, and moving expenses reimbursed or paid by an employer during this period must be included in your taxable income. An exception is made for members of the Armed Forces on active duty (and their spouses and dependents) who move thanks to a permanent change of station.
For people who die in 2018 through 2025, exposure to the federal estate tax is lower for people than under prior law. The base estate and gift tax exemption amount has been increased to $10 million under the TCJA. The $10 million amount is indexed for inflation occurring after 2011 and is $11.18 million for 2018 ($22.36 million per married couple). However, state death taxes, if applicable, may still apply, typically at lower exemption amounts.
Estate planning opportunities for high net worth individuals come from the increased estate and gift tax exemption. And for individuals or married couples with net worth less than the exemption limits, it may eliminate the need for complicated estate plans.
Start Planning Now
Meeting with your tax advisor at least annually to strategize on ways to save taxes is important for tax-savvy individuals. It will be especially important in 2018 to do midyear tax planning meetings given the sweeping changes and opportunities to lower your taxes under the TCJA. The IRS is expected to provide additional guidance this fall to clarify many of the changes. Contact a tax professional to understand how the new law affects you.