We finally have a passed bill. A bill that has a lot of complexity to it. My purpose is to give you the basics of the bill. Tax planning and reaction to the bill’s complexity will come in future emails. Here are the highlights of the bill in its final terms, effective January 1, 2018:
(1) The holding period to qualify for the exclusion on the sale of a personal residence remains at two out of five years. Both the House version and Senate version had the holding period changed to five out of eight years. Somehow, someway, someone was able to convince the committee that great harm would be done to real estate and the net worth of United States taxpayers if the holding period to sell your personal residence was changed to five out of eight years. It is possible that either the significant harm or the real estate lobbyists may have intervened. This is fantastic news for you, your clients, and all home owners.
(2) State taxes, local taxes, and property taxes will be limited to a maximum of $10,000.
(3) All new purchases of principal and secondary residences will be limited to a maximum total debt of $750,000 for the mortgage interest deduction. The $100,000 equity debt law is dead. There is a grandfathering in of current debt on loans up to $1,000,000. If there is a refinancing, and if that refinancing doesn’t add up to more than the original basis of the loan, then the grandfathering of $1,000,000 debt will remain. If the refinancing takes out more money than the historic basis of the debt to the property, the debt limit will be $750,000.
(4) The deduction for business meals remains in place, but entertainment will no longer be deductible. That means you can deduct the business dinner but not the movie or the concert after dinner. No deduction will be allowed for country club dues under this change.
(5) The deduction for new vehicles purchased after September 27, 2017 will be dramatically increased. You can now take a maximum depreciation of $10,000 in the first year and $16,000 in the second year. So new vehicle purchases are being rewarded in the new bill.
(6) Depreciation rules will change. 100% bonus depreciation is back in the law. Section 179 (immediate write-off of equipment purchases) is increased from a maximum of $500,000 per year to $1,000,000 per year under the new law.
(7) Medical deductions are kept in place under the new law with a 7.5% reduction based on AGI.
(8) Employee deductions (taken on Form 2106 in the past) are terminated.
(9) The most complex part of the law for individuals is the flow-through entity law. This law gives qualifying flow-through entities a potential 20% deduction of net profit of that entity. But the law is complex in that there is a limitation and phase-out of the 20% for active entities, with professional service entities having a lower phase-out. There is even more complexity in a “lesser than” provision that brings in the issue of percentage of W-2 wages paid and depreciation. This provision is so complex that only future communication and analysis will bring light to the subject.
(10) Teachers will be given a $500 deduction rather than the previous $250.
(11) Moving expenses are disallowed.
(12) Solar credit is kept in the law but the federal credit for electric vehicles is terminated.
(13) Personal exemptions are terminated.
(14) Standard deductions are doubled.
(15) The child tax credit increases to $2,000 with $1,400 refundable.
(16) Multiple personal tax rates with the lowest rate at 10% and highest at 37%.
(17) Alternative Minimum Tax is diluted.
(18) The estate tax exclusion is doubled.
(19) Interest on student loans is still deductible.
(20) Education credits are kept in place.
(21) Individual mandate terminated with penalties for Obama Care.
(22) Rules for the depreciation of rental property have been changed. For residential rentals, the depreciation has moved from 27.5 years to 30 years. On commercial real estate, depreciation has moved from 39 years to 40 years.
(23) Business deduction for interest is very complex. The new tax rules only allow a portion of the interest to be deducted for businesses with gross receipts over $5,000,000, and then a set of complex rules determine what happens to the disallowed interest deduction.
YEAR-END TAX PLANNING:
(1) Pay your state estimated tax payment on or before December 31, 2017.
(2) Defer income into 2018.
(3) Pay business expenses on or before December 31, 2017.
(4) Offset capital gains of 2017 with selling losses to offset the gains in the stock market.
(5) Purchased equipment or vehicles have to be placed in service on or before December 31, 2017.
In my future emails I will be highlighting other tax planning and how to make this law work for you. Right now I want to take a deep breath and say that this law could have been more damaging to your profession. Yes, there is a limitation of state tax deduction. Yes, there will be a limitation on the mortgage interest deduction. But the big news is that, somehow, the two out of five years to qualify for the home sale exclusion was kept in the law. This is a true miracle and I think we should celebrate it as such.
Harold Berman J.D.