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Black cow and calf pair standing in a pasture.

This cannot explain everything in the 500-page Tax Cuts and Jobs Act, but the following are some of the highlights of the Act.

Estate Tax Changes

For estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026, the Act doubles the applicable exclusion amount from $5 million to $10 million. That amount is indexed for inflation for years after 2011. The exclusion amount for 2018 is $11.2 million per individual ($22.4 million for a married couple).

Individual Tax Changes

The following individual tax changes are effective as of January 1, 2018, but all expire on January 1, 2026.

The Act keeps the seven tax brackets but reduces the rates. The old rates were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The new rates are 10% (on income less than $19,050 for married filing jointly), 12% ($77,400), 22% ($165,000), 24% ($315,000), 32% ($400,000), 35% ($600,000) and 37%.

The standard deduction was increased from $13,000 for 2018 to $24,000, but the personal exemption, which would have been $4,150 for 2018, was reduced to zero. So, a non-itemized, joint return in 2018 will be allowed a deduction from adjusted gross income (AGI) of $24,000 instead of $21,300 ($13,000 standard plus 2 * $4,150). If the married couple had two children, the deduction would still be $24,000 instead of $29,600 ($13,000 plus 4 * $4,150). However, the child tax credit was increased from $1,000 per child to $2,000 which would more than erase the additional tax. A deduction is subtracted from income, but a credit is subtracted from tax owed.

The capital gains provisions were not changed. The 0% rate applies to long-term capital gains of a married, filing jointly couple if their adjusted gross income is less than $77,200, and 15% if over. The 20% breakpoint is $479,000 for joint returns.

The Act adds a new section, Code Section 199A, “Qualified Business Income,” under which a non-corporate taxpayer, including a trust or estate, who has qualified business income from a sole proprietorship, partnership or S corporation is allowed a deduction. An explanation of this section is beyond the word limit for this article.

There were also changes to the “kiddie tax,” and deduction for state and local taxes, home mortgage interest, charitable contributions and miscellaneous itemized deductions.

The excess farm loss limitation does not apply; instead, a non-corporate taxpayer’s “excess business loss” is disallowed.

The “shared responsibility payment” for individuals not covered by a health plan under the Affordable Care Act has been permanently reduced to zero for months after December 31, 2018.

Business Tax Changes

The corporate tax rate is a flat 21%; no more graduated rates. Remember, that is the rate the C corporation pays on its income. If any of that income is distributed, the shareholder will have to pay tax at his or her personal rate.

Bonus depreciation is increased from 50% to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The additional first-year deduction is allowed for new and used property.

Expensing under Section 179 was increased to $1 million for property placed in service after December 31, 2017. In addition, the phase-out threshold was increased to $2.5 million. The definition of qualified real property was expanded to include roofs, HVAC, fire protection and security systems.

The cost recovery period for property used in a farming business, except grain bins, cotton ginning equipment, fences and other land improvements, has been shortened from seven to five years. In addition, the 150% declining balance method was repealed and farmers may use the 200% declining balance method.

The domestic production activities deduction has been repealed.

The Act also limits the deduction for business interest and modifies the net operating loss deduction. Like kind exchanges are limited to business property and not investments.

The business tax changes, as well as the individual tax changes, affect your individual tax return. You should consult a tax professional to determine the effect on your operation.


*This article is for information purposes only and is not a substitute for legal advice or recommendations.

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