News

November 2, 2017 Update on Tax Reform

On November 2nd, the House Republicans released a long-awaited and much anticipated first draft of a new tax reform bill.   We would expect some level of compromise and change to the bill(s) as they go through both the House of Representatives and the Senate.  With the multitude of changes, it is evident that the bill, if it were to become law, would impact individuals very differently depending upon circumstances.  While working families in low-tax states might benefit, others may actually see a tax increase resulting from the loss of the ability to deduct items like state income taxes paid and limitations on real estate tax deductions.  We also believe that the repeal of the Alternative Minimum Tax (AMT) might seem beneficial, although AMT is often caused by high deductions for state income taxes and real estate taxes, so the overall tax impact may be minimal.

 

Below, we have itemized some of the more significant aspects of the bill:

  • Reduces the number of individual tax brackets from 7 down to 4. Maintains the top rate of 39.6% but increases the taxable income thresholds whereby the top bracket takes effect. Below is a summary of the updated brackets.

                             Married filing joint (estimates):                                       Single (estimates):

                             12% for taxable income 0 – 90,000                                 12% for taxable income 0 – 45,000

                             25% for taxable income 90,000 – 260,000                   25% for taxable income 45,000 – 200,000

                             35% for taxable income 260,000 – 1,000,000             35% for taxable income 200,000 – 500,000

                             39.6% for taxable income above 1,000,000                  39.6% for taxable income above 500,000

  • Lowers the top corporate income tax rate from 35% down to 20%.
  • Creates a special 25% income tax rate for pass-through business income, with some limitations.
  • Increased expensing of capital asset purchases for businesses.
  • Elimination of domestic production activities deduction.
  • Indefinite carryforward of net operating losses, but limiting the deduction to 90% of current year income.
  • Provides small increases to child tax credits.
  • Eliminates the Alternative Minimum Tax.
  • Immediately doubles the estate tax exemption, with a proposal to completely eliminate the estate tax by 2024. New estate tax exemption would be roughly $10,000,000 per person. Also proposes reducing the top estate tax rate down to 35% from 40% over time.
  • Maintains basis step-up for appreciated assets upon death, even with increased and phased-out estate tax exemptions.
  • One-time tax holiday for overseas earnings.
  • Eliminates potential deductions for alimony and moving expenses.
  • $10,000 of 529 plan distributions would be allowed for elementary or secondary education.
  • Additional restrictions to the gain exclusions related to sale of primary residence (5 of the last 8 years of occupancy required), also phase-out of exclusion for high earning households.
  • Changes specifically related to standard and itemized deductions:
    • Nearly doubles the standard deduction ($12,000 for single taxpayer, $24,000 for married filing joint); however, eliminates deductions for personal exemptions.
    • Elimination of the deduction for state and local taxes paid, or sales taxes paid.
    • Limit on deductibility of real estate taxes paid to $10,000.
    • On new mortgages, homeowners will only be able to deduct mortgage interest on the first $500,000 of indebtedness (down from $1,000,000, although existing mortgages will be grandfathered).
    • Repeals overall limitation on itemized deductions.
    • Potentially eliminates medical expense deduction.

 

We certainly encourage our clients and all taxpayers to discuss any changes, once finalized and clear, with their advisors. Until that time, however, we are cautious in advising clients to not make any hasty decisions until the changes have actually been voted into law.

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Tax Extenders – 2015

Can I direct my required minimum distribution directly to charity?  Can I expense the equipment that I’ve purchased for my small business in 2015?  Is my business eligible to claim research and development tax credits?  These seem like easy questions to answer, but sometimes yes or no isn’t as simple as it sounds.  There are over 50 items, many deductions and credits, that are now referred to as “tax extenders” and that expired as of December 31, 2014.  These tax extenders have been agenda items year after year, and we’ve found ourselves watching the calendar as December 31 draws closer each year without answers as to whether or not the laws will be reinstated.  As recently as last year, these extenders were written into law on December 19th.  That allowed for less than two weeks to incorporate into a tax plan!

Among the individual tax extenders on hold are the following:

  • $250 deduction for teacher classroom expenses
  • Deduction for mortgage insurance premiums paid
  • Tuition and Fees deduction
  • Tax-free distributions from IRAs for individuals age 70 ½ or older, up to $100,000
  • Deduction for state and local sales taxes
  • Discharge of mortgage debt on principal residence excluded form income

Popular business tax extenders also include the following:

  • Research and development credit
  • Enhanced Section 179 limit for immediately expensing capital purchases
  • Work opportunity tax credit
  • Bonus depreciation
  • 15-year write-off for qualified leasehold improvements
  • Exclusion of 100% of gain on certain small business stock

If these are items that you commonly take advantage of, whether as an individual or as a business taxpayer, it certainly poses a challenge when planning for taxes.  Feel free to reach out to one of the professionals at DeMott & Smith to discuss the impact of the extenders and how we can help prepare a tax plan for all circumstances.

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Changes to Partnership and Corporation Filing Due Dates

On July 31, 2015, President Obama signed into law the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015”. While this may not seem like an important piece of tax legislature, the small print contained some of the most important changes to tax return filing due dates in decades. These revisions include changes to both partnership and C-corporation tax return due dates and revised extended due dates for other information based filings. Below is a summary of these changes and the dates these changes will become effective.

Form Original Due Date New Due Date
Partnership 1065 April 15th March 15th
C-Corporation 1120 March 15th April 15th
S-Corporation 1120-S March 15th March 15th
FinCen (FBAR) 114 June 30th April 15th

The above dates are effective for tax years beginning after December 31, 2015. Calendar year partnerships will now be allowed a six month extension of time to file their tax return, while calendar year C-Corporations will be allowed a five month extension. In addition, Form 114, which reports certain foreign financial information will now allow a six month extension of time to file, similar to the filing deadlines for individual tax returns. Partnerships with a fiscal year-end other than December 31 will now have a filing due date of 2 ½ months after the year-end; C-Corporations will now have a filing due date of 3 ½ months after the year-end, unless otherwise indicated below.

Other Changes

  • Special rule for C-corporations with fiscal years ending on June 30th, the above provisions will not be effective until the 2026 tax year.
  • Form 1041 will now have a maximum extension of time to file of 5 ½ months. The previous extension of time to file was five months.
  • Form 5500 (Annual Report of Employee Benefit Plan) will now have a maximum extension of time to file of 3 ½ months. The previous extension of time to file was 2 ½ months.

 

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