A.\u00a0Introduction \u2013 An Overview of the TCJA of 2017<\/strong><\/h2>\nOn December 20, 2017, the U.S House of Representatives and. Senate passed H.R. 1, \u201c[a]n Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018\u201d (referred to hereinafter as the \u201cTax Cuts and Jobs Act of 2017\u201d or (\u201cthe TCJA\u201d)), enacting the most sweeping tax reform bill in 30 years. Then-President Trump signed the TCJA into law on December 22, 2017.\u00a0 And as a result, most of the provisions of the TCJA became effective for tax years beginning after December 31, 2017 (January 1, 2018), and ending on December 31, 2025.<\/p>\n
However, America now has a new president, Joe Biden, who during his campaign and subsequently after taking office has promised to bring an end to what he characterizes as the sweeping tax cuts in favor of corporations and high net worth individuals at the expense of the working-class Americans that the TCJA has wrought.\u00a0 And while world events have overtaken Biden\u2019s young administration\u2019s focus on bringing its version of tax reform to the forefront, I believe it might be prudent to use this lull in Congressional and Presidential focus on the Tax Code to reacquaint ourselves with the key provision of the TCJA and how they impact individual and business taxpayers.<\/p>\n
B. Changed Tax Rates and Brackets due to the TCJA of 2017<\/strong><\/h2>\nWhat follows is a chart comparing the tax rates and brackets for pre-TCJA-2018 and post-TCJA-2019 tax years.<\/p>\n
\n![\"Chart](\"https:\/\/lawyerissue.com\/wp-content\/uploads\/2021\/11\/1.png\")
<\/figure>\n<\/div>\nUnder the TCJA, the top tax rate drops from 39.6% to 37%, and it takes effect at $600,000 of taxable income for married couples rather than about $480,000 under the pre-TCJA regime. For single filers, the top rate takes effect at $500,000 rather than $426,700. The lowest rate remains 10%, which takes effect at the first dollar of taxable income. However, taxpayers may have more or less income before the 10% rate applies than they did in the past, due to changes to deductions, exemptions, and other provisions.<\/p>\n
Let\u2019s quantify the changes for a \u201ctypical\u201d hypothetical taxpayer, Mary Jane:
In 2018 when filing her taxes for 2017, Mary Jane, a single lawyer-taxpayer with a taxable income of $100,000 paid $20,842.75<\/strong> in taxes:\u00a0 <\/strong>($9,525 x 0.10 = $952.50<\/em>) + ($29,175 x 0.15 = $4,376.25<\/em>) + ($55,000 x 0.25 = $13,750.00<\/em>) + ($6,300 x 0.28 = $1,764.00<\/em>).<\/p>\nHowever, in 2019 when filing her taxes for 2018, as a result of the reduction of the tax rates and the expansion of the tax brackets, when filing for the 2018 tax year, Mary Jane, still single with a taxable income of $100,000 paid only $18,289.50 <\/strong>in taxes: ($9,525 x 0.10 = $952.50<\/em>) + ($29,175 x 0.12 = $3,501.00<\/em>) + ($43,800 x 0.22 = $9,636.00<\/em>) + ($17,500 x 0.24 = $4,200.00<\/em>).<\/p>\nC.\u00a0Key Deduction\/Exemption Changes Bought on by the TCJA<\/strong><\/h2>\nThis section highlights the key changes the TCJA of made applicable to individuals. Changes affecting businesses, including provisions affecting corporations versus pass-through entities, such as proprietorships, partnerships, S corporations, and their owners, are addressed in Part E<\/strong>., below.<\/p>\nWhile the TCJA made a number of important changes to the taxation of individuals, many of these provisions, unless extended by Congress, will sunset in tax years beginning after December 31, 2025 (January 1, 2026), at which time the rules under pre-TCJA law will spring back into effect.<\/p>\n
1. Elimination of Taxpayer Personal Exemptions\/ Increase in the Standard Deductions<\/strong><\/h3>\nFor many taxpayers, especially those with several dependent children, the TCJA\u2019s most sweeping change was the increase in the standard deductions and the repeal of all personal exemptions.\u00a0 The TCJA raised the 2018 standard deduction to $24,000 per married couple and $12,000 for singles, compared with $13,000 and $6,500, respectively, under prior law.<\/p>\n
As a result, the number of filers who itemized for 2018 was expected to, and did, drop by more than half\u2014from nearly 47 million to about 19 million out of about 150 million expected tax returns, according to the Tax Policy Center.<\/p>\n
As a result of the change, taxpayers can no longer claim a personal exemption deduction for themselves, their spouse or any of their dependents. Each personal exemption in 2017 provided a $4,050 tax deduction. This allowed a family of four to deduct a total of $16,200 in addition to a standard deduction of $13,000, itemized deductions and any adjustments to income. The loss of this personal exemption deduction greatly reduced the tax benefit of the increased standard deduction for taxpayers with large families.<\/p>\n
To make up for the loss of this deduction, the child tax credit for qualifying children under the age of 17 was increased by $1,000 and made available to more taxpayers. Additionally, the TCJA created a new $500 credit for all other dependents, though there is no credit for the taxpayer and her spouse.<\/p>\n
2. Elimination of Alimony (Paid) Deduction and Alimony Received (Inclusion)<\/strong><\/h3>\nFor divorce decrees or separation agreement executed after December 31, 2018, any alimony paid was no longer a deductible expense for the payer. And any alimony received no longer needed to be included in the taxable income of the recipient. It is important to note that this new rule did not affect tax year 2018 returns or anyone who at the time of enactment was then paying or receiving alimony. Taxpayers who divorced before December 31, 2018 continued to be able to deduct and\/or are required to report alimony payments as income.<\/p>\n
3. Elimination of the Nonmilitary Job-related Moving Expenses Deduction<\/strong><\/h3>\nUnder the TCJA, job-related moving expenses paid by an employee lost their deductibility. Only active-duty members of the armed forces who move due to a military order can claim that activity as an adjustment to income. As of the new law, employer-to-employee payments of non-military moving expenses became income that must be included in the employee\u2019s taxable wages, tips, and other compensation reported on a W-2.<\/p>\n
4. Limits on Mortgage Interest Deductions for Acquisition Debt and Elimination of the Home Equity Loan Interest Deduction<\/strong><\/h3>\nUnder the TCJA taxpayers could continue to claim an itemized deduction for their home mortgage interest on acquisition debt \u2014 that is, debt secured by the home and used to buy, build or substantially improve it \u2014 up to $750,000 in principal ($375,000 if married and filing separately) on home purchases made after December 15, 2017.<\/p>\n
Interest on then-existing acquisition debt of up to $1 million in principal for home purchases made prior to December 16, 2017 was \u201cgrandfathered\u201d and remains deductible. The higher $1 million principal limit also applies to acquisition debt incurred before December 16, 2017 that is subsequently refinanced.<\/p>\n
Home equity interest \u2013 interest on mortgage debt to pay for anything other than to buy, build or substantially improve a residence \u2013 became no longer deductible under the TCJA. Additionally, existing home equity debt was not grandfathered.<\/p>\n
As a result of the TCJA it has become more important than ever for homeowners who can itemize to keep separate track of acquisition debt and home equity debt going back to the original purchase of their residences.<\/p>\n
5. Elimination of the Casualty Loss Deduction<\/strong><\/h3>\nOnly a taxpayer who suffers a personal casualty loss from a disaster declared by the president<\/em> <\/strong>will be able to claim a personal casualty loss as an itemized deduction. Casualty losses are losses sustained by a taxpayer that are not connected with a trade or business or otherwise entered into for profit.\u00a0 They include property losses arising from fire, storm, shipwreck, or other casualty, or from theft.<\/p>\n6. Elimination of the Employee Business Expenses Deduction<\/strong><\/h3>\nPursuant to the TCJA, none of the previously allowed miscellaneous expenses that were subject to the 2%-of-AGI exclusion remain deductible on Schedule A. Employee business expenses that had not been reimbursed by the taxpayer\u2019s employer were the most prominent deductible items in this category.<\/p>\n
Additionally, the TCJA eliminated employee-taxpayers\u2019 ability to deduct business meals, travel and entertainment from their taxes. The eliminated deductions included using a car for business as well as job-related education, job-seeking costs, a qualified home office, union and professional dues and assessments, work clothes and work supplies.<\/p>\n
7. Elimination of Investment Expenses Deductions<\/strong><\/h3>\nInvestment expense recapture was also eliminated under the TCJA, making it no longer deductible as a miscellaneous expense on Schedule A. The eliminated expenses include custodial and maintenance fees for investment and retirement accounts, fees for collecting dividends and interest, fees paid to investment advisers, the cost of investment media and services, and safe deposit box rental fees. Investment interest remains deductible as interest on Schedule A, subject to the limitations of IRS form 4952.<\/p>\n
8. Tax Preparation Fees Deduction<\/strong><\/h3>\nExpenses paid or incurred by an individual in connection with the determination, collection, or refund of any tax are no longer deductible on Schedule A pursuant to the TCJA, no matter which level of government is presiding over the taxation or even what the tax is levied upon.<\/p>\n
9. Elimination of Certain Legal Fees Paid on an Award, Judgment or Settlement Deduction<\/strong><\/h3>\nThe TCJA also changed the nature and structure of financial agreements between counsel and our clients.\u00a0 For example a legal award, judgment or settlement for personal physical injuries or physical sickness is tax exempt<\/em>. So, the related legal fees are not deductible since that income is not taxable. Also, in the wake of the \u201c#metoo\u201d and \u201cTime\u2019sUp\u201d movements, there is no deduction for sexual harassment or abuse settlements if the settlement includes a non-disclosure agreement.<\/p>\nLegal fees related to an award, judgment or settlement of claims of unlawful discrimination<\/em> are deducted as an adjustment to income<\/em> on the 1040 form, reducing adjusted gross income.<\/p>\nHowever, all other Legal fees related to all other taxable awards, judgments or settlements, which were previously allowable as miscellaneous expenses on Schedule A, are no longer deductible on the 1040. For example<\/em>, if a taxpayer is awarded a settlement of $100,000 and her attorney receives $30,000 of it, the taxpayer must pay federal income tax on the entire $100,000 even though she only received $70,000.<\/p>\n10. Doubling of the Estate and Generation Skipping Tax Exemption to $11,400,000 ($22,800,000 for married couples)<\/strong><\/h3>\nThe TCJA doubled the estate and generation-skipping tax exemption to $11,400,000 ($22,800,000 for married couples).\u00a0 Additionally, the step-up in basis is retained at death.\u00a0 As can be seen from the following graph, the enhancement sunsets at December 31, 2025.<\/p>\n
\n![\"Chart](\"https:\/\/lawyerissue.com\/wp-content\/uploads\/2021\/11\/2.jpg\")
<\/figure>\n<\/div>\nIllustration by: Keebler Tax & Wealth Education, Inc.<\/em><\/p>\n11.\u00a0New Flexibility in Education Provisions<\/strong><\/h3>\nPost TCJA, <\/strong>Section 529 Plans allow the distributions of up to $10,000<\/em><\/strong> for \u201cqualified expenses\u201d for elementary school and high school, and starting in 2018, the forgiveness of student loan debt will not be taxable income to the student on account of the student\u2019s death or total disability.<\/p>\n12.\u00a0New Flexibility for ABLE Accounts<\/strong><\/h3>\nThe TCJA also allows for increases in contribution limits in certain circumstances and allows for rollovers from 529 accounts to ABLE accounts.<\/p>\n
D.\u00a0State and Local Tax (\u201cSALT\u201d) Issues<\/strong><\/h2>\n\u201cThe U.S. Supreme Court\u2019s ruling in South Dakota v. Wayfair Inc<\/em>., No. 17-494 (U.S. 6\/21\/18), coupled with the passage of the TCJA, has had the greatest impact on SALT practice in decades, positioning SALT issues to be a one of the leading consideration in the overall tax landscape in the 2019 tax return preparation season and beyond While the reverberation of tax legislation can sometimes take months or longer to take hold, Wayfair<\/em> and the TCJA began to make waves across the country in just a matter of weeks. For taxpayers and tax professionals this consequence continues to mean that SALT\u2019s influence is now greater than ever, drawing more attention to the key role indirect taxes play in a taxpayer\u2019s comprehensive tax strategy.\u201d [1]<\/a><\/p>\n1.\u00a0The TCJA\u2019s SALT Deduction Limitations<\/strong><\/h3>\nUnder TCJA, the SALT deduction was limited to only $10,000.00 per household as to an individual or married filing jointly taxpayer. \u00a0This limitation has proven to be a handicap for many taxpayers, especially those who are homeowners in high home value states such as California and New York; taxpayers who have traditionally been able to take substantial itemized deductions for both the interest paid on their mortgages and the property taxes paid to their county tax collectors.<\/p>\n
However, state, local, and foreign property taxes and state and local sales taxes continued to be allowed as a deduction when paid or accrued in carrying on a trade or business, or an activity described in section 212 (relating to expenses for the production of income).<\/p>\n
2.\u00a0The Impact of Wayfair <\/em>on the taxation of e-commerce taxpayers.\u00a0<\/strong><\/h3>\nWayfair, which held that states can mandate that out-of-state retailers collect sales taxes from in-state customers, even if the retailers have no physical presence in the state.\u00a0 As such, \u201cWayfair<\/em> overturned 26 years of precedent (see Quill Corp. v. North Dakota<\/em>, 504 U.S. 298 (1992)) by changing the nexus landscape from a physical presence to more of an economic influence<\/strong> considering how companies do business in today\u2019s digital climate. Over the past two decades it had been challenging for states to meet budget requirements, and some would assert that this problem was attributed to out-of-state retailers being able to skirt their sales tax responsibilities thanks to the precedent from Quill<\/em>, which was decided in a less digital world.<\/p>\n\u201cOnce the opinion was handed down in Wayfair<\/em>, it did not take long for states to act and enforce sales tax requirements on out-of-state sellers selling goods and services into their jurisdictions. Before this landmark decision, just 20 states had some sort of economic nexus standard on the books or in the works. Within eight weeks after it, that number was up to 30 plus. The case has also opened the door for states without a sales tax to reconsider implementing one, as e-commerce becomes the norm.<\/p>\n\u201cOn the taxpayer side, misconceptions exist that because remote sellers were not charging sales tax on their goods, those transactions were tax-exempt. In reality, those transactions were supposed to be reported on use tax returns, but very few consumers complied with these obligations. Going forward, individuals will likely have to start paying sales tax on more of their out-of-state purchases, which can be seen as leveling the playing field between e-commerce and brick-and-mortar retailers.\u201d[2]<\/a><\/p>\n
\n[1]<\/a> Brawdy, Why SALT will take center stage next to tax reform in 2019<\/em>, The Tax Adviser (Dec 1, 2018)<\/p>\n[2]<\/a> Id.<\/em><\/p>\nE.\u00a0Overview of the TCJA\u2019s Reduction of the Top Corporate Tax Rate from 35% to a Flat 21% Rate and Section 199A, the New 20-percent Deduction for Pass-through Businesses Pursuant to Section 199A of the Internal Revenue Code<\/strong><\/h2>\n1.\u00a0Corporate and Small Business Tax Rates Reduction<\/strong><\/h3>\nUnder the pre-TCJA law, \u201cthe highest corporate income tax rate was 35The TCJA eliminated the graduated income tax with a top rate of 35% and replace it with a flat 21% corporate income tax rate beginning in the 2018 tax year. \u00a0<\/p>\n
Corporate Tax Rate<\/p>\n
2017<\/strong><\/h4>\n\n![\"Tax](\"https:\/\/lawyerissue.com\/wp-content\/uploads\/2021\/11\/3.png\")
<\/figure>\n<\/div>\n2018<\/strong><\/h4>\n21% Flat rate<\/p>\n
According to a joint analysis from the Congressional <\/strong>Budget Office (\u201cCBO\u201d) and the Joint Committee on Taxation (\u201cJCT\u201d), the reduction will reduce revenue by $1.65 trillion over a decade.<\/em><\/strong> These corporate tax changes are permanent, while many of the <\/strong>major individual provisions, including changes for pass-through businesses, discussed below, will sunset <\/strong>for tax years beginning after December 31, 2025.<\/p>\n\u201cAlso, prior to the TCJA, sole proprietorships and owners of pass-through entities were subject to a maximum marginal rate of 43.4%, (39.6% plus 3.8% if the income was not subject to self-employment (\u201cSE\u201d) tax). Beginning on January 1, 2018, and ending on December 31, 2015, the highest individual rate is now 37% resulting in an effective rate of 40.8% when the net investment income tax applies.<\/p>\n
\u201cWith the corporate income tax rate now a flat 21% and the corporate alternate minimum tax (\u201cAMT\u201d) repealed, a C corporation distributing all of its after tax profits as dividends to individual shareholders in the highest tax bracket results in a maximum effective rate of 39.8%, (21% of taxable income,2.\u00a0An Overview of the TCJA\u2019s Section 199A\u2019s Qualified Business Income Deduction<\/strong><\/h3>\nAfter all the math is done, Section 199A of the TCJA .grants an eligible business-owner-taxpayer other than a corporation a deduction equal to 20% of the taxpayer\u2019s qualified business income, subject to deduction phase-outs and limitations phase-ins that are dependent upon the type of business the taxpayer is engaged in.<\/p>\n
For example, for business owners with taxable incomes in excess of $207,000 ($415,000 in the case of taxpayers married filing jointly), the 20% deduction is phased-out, such that no deduction is allowed against income earned in a \u201cspecified service trade or business,\u201d (\u201cSSTB\u201d).<\/p>\n
Specified Service Trade or\u00a0Business<\/h3>\n\n- Health<\/strong><\/li>\n
- Law<\/strong><\/li>\n
- Accounting<\/strong><\/li>\n
- Actuarial science<\/strong><\/li>\n
- Performing arts<\/strong><\/li>\n
- Consulting<\/strong><\/li>\n
- Athletics<\/strong><\/li>\n
- Financial services<\/strong><\/li>\n
- Brokerage services<\/strong><\/li>\n
- Investing and investment management<\/strong><\/li>\n
- Services in trading<\/strong><\/li>\n
- Services in dealing securities, commodities, and partnership interests<\/strong><\/li>\n
- Any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners<\/em><\/strong><\/li>\n<\/ul>\n
On the other hand, at these same income levels,\u00a0the deduction against income earned in an eligible business, a non-SSTB, is limited to the greater of:<\/p>\n
50% of the taxpayer\u2019s share of the W-2 wages with respect to the qualified trade or business,\u00a0or<\/p>\n
\n- The sum of 25% of the taxpayer\u2019s share of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the taxpayer\u2019s share of the unadjusted basis immediately after acquisition of all qualified property.<\/li>\n
- 199A\u2019s Business Classifications, Deductions and Limitations<\/li>\n<\/ul>\n\n
What follows is a chart comparing the tax rates and brackets for pre-TCJA-2018 and post-TCJA-2019 tax years.<\/p>\n
<\/figure>\n<\/div>\nUnder the TCJA, the top tax rate drops from 39.6% to 37%, and it takes effect at $600,000 of taxable income for married couples rather than about $480,000 under the pre-TCJA regime. For single filers, the top rate takes effect at $500,000 rather than $426,700. The lowest rate remains 10%, which takes effect at the first dollar of taxable income. However, taxpayers may have more or less income before the 10% rate applies than they did in the past, due to changes to deductions, exemptions, and other provisions.<\/p>\n
Let\u2019s quantify the changes for a \u201ctypical\u201d hypothetical taxpayer, Mary Jane:
In 2018 when filing her taxes for 2017, Mary Jane, a single lawyer-taxpayer with a taxable income of $100,000 paid $20,842.75<\/strong> in taxes:\u00a0 <\/strong>($9,525 x 0.10 = $952.50<\/em>) + ($29,175 x 0.15 = $4,376.25<\/em>) + ($55,000 x 0.25 = $13,750.00<\/em>) + ($6,300 x 0.28 = $1,764.00<\/em>).<\/p>\n However, in 2019 when filing her taxes for 2018, as a result of the reduction of the tax rates and the expansion of the tax brackets, when filing for the 2018 tax year, Mary Jane, still single with a taxable income of $100,000 paid only $18,289.50 <\/strong>in taxes: ($9,525 x 0.10 = $952.50<\/em>) + ($29,175 x 0.12 = $3,501.00<\/em>) + ($43,800 x 0.22 = $9,636.00<\/em>) + ($17,500 x 0.24 = $4,200.00<\/em>).<\/p>\n This section highlights the key changes the TCJA of made applicable to individuals. Changes affecting businesses, including provisions affecting corporations versus pass-through entities, such as proprietorships, partnerships, S corporations, and their owners, are addressed in Part E<\/strong>., below.<\/p>\n While the TCJA made a number of important changes to the taxation of individuals, many of these provisions, unless extended by Congress, will sunset in tax years beginning after December 31, 2025 (January 1, 2026), at which time the rules under pre-TCJA law will spring back into effect.<\/p>\n For many taxpayers, especially those with several dependent children, the TCJA\u2019s most sweeping change was the increase in the standard deductions and the repeal of all personal exemptions.\u00a0 The TCJA raised the 2018 standard deduction to $24,000 per married couple and $12,000 for singles, compared with $13,000 and $6,500, respectively, under prior law.<\/p>\n As a result, the number of filers who itemized for 2018 was expected to, and did, drop by more than half\u2014from nearly 47 million to about 19 million out of about 150 million expected tax returns, according to the Tax Policy Center.<\/p>\n As a result of the change, taxpayers can no longer claim a personal exemption deduction for themselves, their spouse or any of their dependents. Each personal exemption in 2017 provided a $4,050 tax deduction. This allowed a family of four to deduct a total of $16,200 in addition to a standard deduction of $13,000, itemized deductions and any adjustments to income. The loss of this personal exemption deduction greatly reduced the tax benefit of the increased standard deduction for taxpayers with large families.<\/p>\n To make up for the loss of this deduction, the child tax credit for qualifying children under the age of 17 was increased by $1,000 and made available to more taxpayers. Additionally, the TCJA created a new $500 credit for all other dependents, though there is no credit for the taxpayer and her spouse.<\/p>\n For divorce decrees or separation agreement executed after December 31, 2018, any alimony paid was no longer a deductible expense for the payer. And any alimony received no longer needed to be included in the taxable income of the recipient. It is important to note that this new rule did not affect tax year 2018 returns or anyone who at the time of enactment was then paying or receiving alimony. Taxpayers who divorced before December 31, 2018 continued to be able to deduct and\/or are required to report alimony payments as income.<\/p>\n Under the TCJA, job-related moving expenses paid by an employee lost their deductibility. Only active-duty members of the armed forces who move due to a military order can claim that activity as an adjustment to income. As of the new law, employer-to-employee payments of non-military moving expenses became income that must be included in the employee\u2019s taxable wages, tips, and other compensation reported on a W-2.<\/p>\n Under the TCJA taxpayers could continue to claim an itemized deduction for their home mortgage interest on acquisition debt \u2014 that is, debt secured by the home and used to buy, build or substantially improve it \u2014 up to $750,000 in principal ($375,000 if married and filing separately) on home purchases made after December 15, 2017.<\/p>\n Interest on then-existing acquisition debt of up to $1 million in principal for home purchases made prior to December 16, 2017 was \u201cgrandfathered\u201d and remains deductible. The higher $1 million principal limit also applies to acquisition debt incurred before December 16, 2017 that is subsequently refinanced.<\/p>\n Home equity interest \u2013 interest on mortgage debt to pay for anything other than to buy, build or substantially improve a residence \u2013 became no longer deductible under the TCJA. Additionally, existing home equity debt was not grandfathered.<\/p>\n As a result of the TCJA it has become more important than ever for homeowners who can itemize to keep separate track of acquisition debt and home equity debt going back to the original purchase of their residences.<\/p>\n Only a taxpayer who suffers a personal casualty loss from a disaster declared by the president<\/em> <\/strong>will be able to claim a personal casualty loss as an itemized deduction. Casualty losses are losses sustained by a taxpayer that are not connected with a trade or business or otherwise entered into for profit.\u00a0 They include property losses arising from fire, storm, shipwreck, or other casualty, or from theft.<\/p>\n Pursuant to the TCJA, none of the previously allowed miscellaneous expenses that were subject to the 2%-of-AGI exclusion remain deductible on Schedule A. Employee business expenses that had not been reimbursed by the taxpayer\u2019s employer were the most prominent deductible items in this category.<\/p>\n Additionally, the TCJA eliminated employee-taxpayers\u2019 ability to deduct business meals, travel and entertainment from their taxes. The eliminated deductions included using a car for business as well as job-related education, job-seeking costs, a qualified home office, union and professional dues and assessments, work clothes and work supplies.<\/p>\n Investment expense recapture was also eliminated under the TCJA, making it no longer deductible as a miscellaneous expense on Schedule A. The eliminated expenses include custodial and maintenance fees for investment and retirement accounts, fees for collecting dividends and interest, fees paid to investment advisers, the cost of investment media and services, and safe deposit box rental fees. Investment interest remains deductible as interest on Schedule A, subject to the limitations of IRS form 4952.<\/p>\n Expenses paid or incurred by an individual in connection with the determination, collection, or refund of any tax are no longer deductible on Schedule A pursuant to the TCJA, no matter which level of government is presiding over the taxation or even what the tax is levied upon.<\/p>\n The TCJA also changed the nature and structure of financial agreements between counsel and our clients.\u00a0 For example a legal award, judgment or settlement for personal physical injuries or physical sickness is tax exempt<\/em>. So, the related legal fees are not deductible since that income is not taxable. Also, in the wake of the \u201c#metoo\u201d and \u201cTime\u2019sUp\u201d movements, there is no deduction for sexual harassment or abuse settlements if the settlement includes a non-disclosure agreement.<\/p>\n Legal fees related to an award, judgment or settlement of claims of unlawful discrimination<\/em> are deducted as an adjustment to income<\/em> on the 1040 form, reducing adjusted gross income.<\/p>\n However, all other Legal fees related to all other taxable awards, judgments or settlements, which were previously allowable as miscellaneous expenses on Schedule A, are no longer deductible on the 1040. For example<\/em>, if a taxpayer is awarded a settlement of $100,000 and her attorney receives $30,000 of it, the taxpayer must pay federal income tax on the entire $100,000 even though she only received $70,000.<\/p>\n The TCJA doubled the estate and generation-skipping tax exemption to $11,400,000 ($22,800,000 for married couples).\u00a0 Additionally, the step-up in basis is retained at death.\u00a0 As can be seen from the following graph, the enhancement sunsets at December 31, 2025.<\/p>\n Illustration by: Keebler Tax & Wealth Education, Inc.<\/em><\/p>\n Post TCJA, <\/strong>Section 529 Plans allow the distributions of up to $10,000<\/em><\/strong> for \u201cqualified expenses\u201d for elementary school and high school, and starting in 2018, the forgiveness of student loan debt will not be taxable income to the student on account of the student\u2019s death or total disability.<\/p>\n The TCJA also allows for increases in contribution limits in certain circumstances and allows for rollovers from 529 accounts to ABLE accounts.<\/p>\n \u201cThe U.S. Supreme Court\u2019s ruling in South Dakota v. Wayfair Inc<\/em>., No. 17-494 (U.S. 6\/21\/18), coupled with the passage of the TCJA, has had the greatest impact on SALT practice in decades, positioning SALT issues to be a one of the leading consideration in the overall tax landscape in the 2019 tax return preparation season and beyond While the reverberation of tax legislation can sometimes take months or longer to take hold, Wayfair<\/em> and the TCJA began to make waves across the country in just a matter of weeks. For taxpayers and tax professionals this consequence continues to mean that SALT\u2019s influence is now greater than ever, drawing more attention to the key role indirect taxes play in a taxpayer\u2019s comprehensive tax strategy.\u201d [1]<\/a><\/p>\n Under TCJA, the SALT deduction was limited to only $10,000.00 per household as to an individual or married filing jointly taxpayer. \u00a0This limitation has proven to be a handicap for many taxpayers, especially those who are homeowners in high home value states such as California and New York; taxpayers who have traditionally been able to take substantial itemized deductions for both the interest paid on their mortgages and the property taxes paid to their county tax collectors.<\/p>\n However, state, local, and foreign property taxes and state and local sales taxes continued to be allowed as a deduction when paid or accrued in carrying on a trade or business, or an activity described in section 212 (relating to expenses for the production of income).<\/p>\n Wayfair, which held that states can mandate that out-of-state retailers collect sales taxes from in-state customers, even if the retailers have no physical presence in the state.\u00a0 As such, \u201cWayfair<\/em> overturned 26 years of precedent (see Quill Corp. v. North Dakota<\/em>, 504 U.S. 298 (1992)) by changing the nexus landscape from a physical presence to more of an economic influence<\/strong> considering how companies do business in today\u2019s digital climate. Over the past two decades it had been challenging for states to meet budget requirements, and some would assert that this problem was attributed to out-of-state retailers being able to skirt their sales tax responsibilities thanks to the precedent from Quill<\/em>, which was decided in a less digital world.<\/p>\n \u201cOnce the opinion was handed down in Wayfair<\/em>, it did not take long for states to act and enforce sales tax requirements on out-of-state sellers selling goods and services into their jurisdictions. Before this landmark decision, just 20 states had some sort of economic nexus standard on the books or in the works. Within eight weeks after it, that number was up to 30 plus. The case has also opened the door for states without a sales tax to reconsider implementing one, as e-commerce becomes the norm.<\/p>\n \u201cOn the taxpayer side, misconceptions exist that because remote sellers were not charging sales tax on their goods, those transactions were tax-exempt. In reality, those transactions were supposed to be reported on use tax returns, but very few consumers complied with these obligations. Going forward, individuals will likely have to start paying sales tax on more of their out-of-state purchases, which can be seen as leveling the playing field between e-commerce and brick-and-mortar retailers.\u201d[2]<\/a><\/p>\n [1]<\/a> Brawdy, Why SALT will take center stage next to tax reform in 2019<\/em>, The Tax Adviser (Dec 1, 2018)<\/p>\n [2]<\/a> Id.<\/em><\/p>\n Under the pre-TCJA law, \u201cthe highest corporate income tax rate was 35 The TCJA eliminated the graduated income tax with a top rate of 35% and replace it with a flat 21% corporate income tax rate beginning in the 2018 tax year. \u00a0<\/p>\n Corporate Tax Rate<\/p>\n 21% Flat rate<\/p>\n According to a joint analysis from the Congressional <\/strong>Budget Office (\u201cCBO\u201d) and the Joint Committee on Taxation (\u201cJCT\u201d), the reduction will reduce revenue by $1.65 trillion over a decade.<\/em><\/strong> These corporate tax changes are permanent, while many of the <\/strong>major individual provisions, including changes for pass-through businesses, discussed below, will sunset <\/strong>for tax years beginning after December 31, 2025.<\/p>\n \u201cAlso, prior to the TCJA, sole proprietorships and owners of pass-through entities were subject to a maximum marginal rate of 43.4%, (39.6% plus 3.8% if the income was not subject to self-employment (\u201cSE\u201d) tax). Beginning on January 1, 2018, and ending on December 31, 2015, the highest individual rate is now 37% resulting in an effective rate of 40.8% when the net investment income tax applies.<\/p>\n \u201cWith the corporate income tax rate now a flat 21% and the corporate alternate minimum tax (\u201cAMT\u201d) repealed, a C corporation distributing all of its after tax profits as dividends to individual shareholders in the highest tax bracket results in a maximum effective rate of 39.8%, (21% of taxable income, After all the math is done, Section 199A of the TCJA .grants an eligible business-owner-taxpayer other than a corporation a deduction equal to 20% of the taxpayer\u2019s qualified business income, subject to deduction phase-outs and limitations phase-ins that are dependent upon the type of business the taxpayer is engaged in.<\/p>\n For example, for business owners with taxable incomes in excess of $207,000 ($415,000 in the case of taxpayers married filing jointly), the 20% deduction is phased-out, such that no deduction is allowed against income earned in a \u201cspecified service trade or business,\u201d (\u201cSSTB\u201d).<\/p>\n On the other hand, at these same income levels,\u00a0the deduction against income earned in an eligible business, a non-SSTB, is limited to the greater of:<\/p>\n 50% of the taxpayer\u2019s share of the W-2 wages with respect to the qualified trade or business,\u00a0or<\/p>\nC.\u00a0Key Deduction\/Exemption Changes Bought on by the TCJA<\/strong><\/h2>\n
1. Elimination of Taxpayer Personal Exemptions\/ Increase in the Standard Deductions<\/strong><\/h3>\n
2. Elimination of Alimony (Paid) Deduction and Alimony Received (Inclusion)<\/strong><\/h3>\n
3. Elimination of the Nonmilitary Job-related Moving Expenses Deduction<\/strong><\/h3>\n
4. Limits on Mortgage Interest Deductions for Acquisition Debt and Elimination of the Home Equity Loan Interest Deduction<\/strong><\/h3>\n
5. Elimination of the Casualty Loss Deduction<\/strong><\/h3>\n
6. Elimination of the Employee Business Expenses Deduction<\/strong><\/h3>\n
7. Elimination of Investment Expenses Deductions<\/strong><\/h3>\n
8. Tax Preparation Fees Deduction<\/strong><\/h3>\n
9. Elimination of Certain Legal Fees Paid on an Award, Judgment or Settlement Deduction<\/strong><\/h3>\n
10. Doubling of the Estate and Generation Skipping Tax Exemption to $11,400,000 ($22,800,000 for married couples)<\/strong><\/h3>\n
<\/figure>\n<\/div>\n11.\u00a0New Flexibility in Education Provisions<\/strong><\/h3>\n
12.\u00a0New Flexibility for ABLE Accounts<\/strong><\/h3>\n
D.\u00a0State and Local Tax (\u201cSALT\u201d) Issues<\/strong><\/h2>\n
1.\u00a0The TCJA\u2019s SALT Deduction Limitations<\/strong><\/h3>\n
2.\u00a0The Impact of Wayfair <\/em>on the taxation of e-commerce taxpayers.\u00a0<\/strong><\/h3>\n
\nE.\u00a0Overview of the TCJA\u2019s Reduction of the Top Corporate Tax Rate from 35% to a Flat 21% Rate and Section 199A, the New 20-percent Deduction for Pass-through Businesses Pursuant to Section 199A of the Internal Revenue Code<\/strong><\/h2>\n
1.\u00a0Corporate and Small Business Tax Rates Reduction<\/strong><\/h3>\n
2017<\/strong><\/h4>\n
<\/figure>\n<\/div>\n2018<\/strong><\/h4>\n
2.\u00a0An Overview of the TCJA\u2019s Section 199A\u2019s Qualified Business Income Deduction<\/strong><\/h3>\n
Specified Service Trade or\u00a0Business<\/h3>\n
\n
\n
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