January 2018 eNewsletter

What You Need to Know About Tax Reform

Tricia Austing, CPA, Senior Tax Manager, Cassady Schiller CPAs & Advisors

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which is set to be the most significant overhaul to the US Tax Code in more than 30 years.  The effective date of the legislation will be January 1, 2018.  The legislation will have major implications for businesses and individuals; however, depending on your unique tax situation, the outcomes may vary drastically.  While the bill contains hundreds of changes, I’ve outlined below some of the changes most likely to impact businesses and their owners.

Individual Taxpayers:

  • Tax Rates.  The top individual tax rate will decrease from 39.6 percent to 37 percent.  The highest bracket will apply to single taxpayers with income over $500,000 and married filing joint taxpayers with income over $600,000.  Lower brackets are widened and have lower corresponding rates. 
  • Personal Exemption.  The personal exemption is repealed under the Tax Cuts and Jobs Act.
  • Standard Deduction for a single taxpayer is set to increase from $6,300 to $12,000 (from $12,600 to $24,000 for married filing joint status).  This, along with the new limitations on itemized deductions (outlined below), may result in many taxpayers receiving a greater benefit from the standard deduction beginning in 2018.
    • Real Estate and State & Local Tax Deduction.  Starting in 2018, the total combined deduction for real estate and state & local tax is limited to $10,000.
    • Charitable Contributions.  The limitation will increase from 50 percent of adjusted gross income (AGI) to 60 percent of AGI.
    • Home Mortgage Interest Deduction.  For home acquisition indebtedness incurred on or after December 15, 2017, the principle is limited to $750,000 versus the $1 million limitation for indebtedness incurred prior to December 15, 2017.  The new tax law also eliminates any deduction related to home equity indebtedness.
    • Medical Expenses.  The new law retains the deduction for expenses in excess of 7.5 percent of AGI.  For 2017, only expenses in excess of 10 percent of AGI were allowed.
    • Miscellaneous Expenses.  Miscellaneous itemized deductions which were previously permitted if in excess of 2 percent of AGI are no longer allowed.  This includes tax preparation fees, investment expenses and unreimbursed employee expenses.        
  • Child Tax Credit.  The child tax credit will increase from $1,000 to $2,000 (per child) beginning in 2018.  In addition, $1,400 of the credit will be refundable.  Of significant importance is that the threshold in which a taxpayer may be phased out of the child tax credit will increase significantly, from $110,000 to $400,000 (for married filing joint taxpayers).  The bottom line - more taxpayers will now be eligible to claim the credit. 
  • Alternative Minimum Tax (AMT).  AMT was retained; however, the Act increases both the exemption amount and the exemption amount phase-out thresholds for individuals subject to AMT which decreases the likelihood of AMT applying to many taxpayers.
  • Estate and Gift Tax.  The estate exemption is increased to $22.4 million for married couples through 2025.

Business Taxpayers:

Tax Rate.  For years beginning prior to January 1, 2018, corporate tax had graduated tax rates ranging from 15 to 35 percent.  Starting in 2018, the corporate tax rate is a flat 21 percent.

Corporate Alternative Minimum Tax.  Corporate AMT is repealed under the Tax Cuts and Jobs Act.

Depreciation.  The maximum amount of Section 179 expensing allowed is increased from $500,000 to $1 million.  100 percent bonus depreciation will be allowed on new and used equipment for property placed in service after September 27, 2017 and before January 1, 2023.  

Domestic Productions Activity Deduction (DPAD).  The Tax Cuts and Jobs Act repeals the DPAD.

Pass-through Income.  Beginning in 2018, individuals and trusts will be allowed a 20 percent deduction of their allocable share of certain income from pass-through entities.  However, the deduction comes with certain limitations:

  • The deduction cannot exceed 50 percent of the individual or trust’s share of W-2 wages paid by the business.  The limitation may also be computed as 25 percent of the share of W-2 wages paid by the business plus 2.5 percent of the unadjusted basis of the property used in the production of income. 
  • Certain personal service businesses are not eligible for the deduction unless their taxable income is less than $157,500 (single) or $315,000 (married filing joint).  Therefore, accountants, doctors, lawyers and many others are not eligible for the deduction.

Interest Expense.  For tax years prior to January 1, 2018, there was no limit on the business interest expense.  For tax years beginning January 1, 2018, the business interest deduction will be limited to 30 percent of adjusted taxable income.  Adjusted taxable income does not include deductions allowable for depreciation, amortization or depletion.

Net Operating Loss Deduction (NOL).  Prior to 2018, a NOL could offset 100 percent of income.  For tax years beginning after January 1, 2018, a NOL may only offset 80 percent of income.   Additionally, net operating losses had been allowed to be carried back up to two years.  For tax years beginning after December 31, 2017, the carryback provision has been eliminated.

Meals & Entertainment.  The new legislation eliminates the business deduction for any activities considered to be entertainment, amusement or recreation (including meals, event tickets and club dues).  Meals provided for employees while traveling, along with meals provided to employees on business property, will be 50 percent deductible.

The Millennial Guide to Financial Health

Dan Barnett, CFA, Johnson Investment Counsel

If you have picked up the paper or opened your favorite periodical this year, chances are you have read an article or two dedicated to the millennial generation.  Articles on the who, what and why of this highly publicized generation are popping up like Nintendo gaming systems did in the 80’s and grunge rock bands in the 90’s.  So why are they getting all this attention?  Simply put, there are a whole heck of a lot of them.  Roughly 80 million to be exact and they will quickly surpass the baby boomers to become the largest generation in this country.  As a millennial, myself, who works with this next generation to help them establish healthy financial habits, I thought it would be helpful to provide my top three tips for millennials to create financial freedom as we start to think about our 2018 resolutions.

The Rainy Day Fund:  For many of you, the ultimate goal may be to take your family or private business to the next generation, but there are simply no guarantees in life.  There may be lean years in the business or you may face crossroads in life that may lead you to pursue other opportunities.  Maybe your true calling is to teach English to students in Indonesia.  Millennials place a high degree of importance on purpose and flexibility and we are no strangers to changing course.  Regardless, creating a financial moat of three to six months of living expenses in a liquid checking or savings account will help protect you from dipping into other sources of savings at the wrong time and with unfavorable terms.

Review and restructure your debt:  Millennials are the most educated among all generations.  The caveat to this accomplishment is that we are also loaded with student loan debt.  Although everyone’s situation is unique, a general rule of thumb is to start paying down debt starting with the highest interest rate loans first.  Most credit card debt would be at the top of the list, followed by student loan and mortgage debt.  Credit card debt often carries a rate of interest that far exceeds any investment return you can achieve in your 401(k) or other investment accounts, so aggressively paying down this debt is a smart first step.  For student loan debt, there are services that help provide consolidation or even refinancing opportunities, so that you can pay the debt down faster (e.g., Social Finance, Inc. (SoFi)).  If you aren’t sure whether or not you should pay down your debt balances, then your answer is that you probably should.

Invest for the future:  As an investment professional, I would be remiss if I didn’t highlight the importance of investing for the long-term.  For current or future business owners, this investment will mostly come in the form of employing human capital.  In other words, working your tail off to build on what past generations have accomplished.  However, it is imperative to start to think about building wealth outside your core business.  The reality may be that the assets in the company far exceed those on the outside, but diversifying your personal balance sheet is a prudent strategy.  At the very least, you should consider taking advantage of some of the programs the Federal Government has created to help save for retirement and education.  Such programs include 401(k) plans or other qualified retirement savings plans, IRAs, deferred compensation strategies, and 529 Education Savings Plans.  Oh, and please make sure you understand what you are investing in.  Your buddy convincing you to buy Bitcoin because it has made them a lot of money is not a smart way to invest!

Bonus Tip!

Focus on the long-term:  There is a reason why Einstein dubbed compound interest as “the most powerful force in the universe.”  The unfortunate reality is that most millennial’s investment DNA has been shaped by a multitude of negative events (e.g., The Great Recession and 9/11) that are leading this cohort to hold “safer” investments (e.g., cash and bonds) than necessary.  This limits an investor’s ability to truly harness the power compound growth can provide.  A good advisor will help you shape a plan that will help balance current and future life goals with a well-constructed investment strategy.

As the next generation of business owners, it is up to us to build a strong foundation in our financial lives so that we can focus our time and talent on keeping Cincinnati’s family and private business community one that continues to thrive.  Make 2018 a great year!