AMT

Navigating the Tax Cuts and Jobs Act: Volume 2 – Rate reductions

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Posted by Evan Piccirillo, CPA

The most straightforward and significant change of the Tax Cuts and Jobs Act (TCJA) is the reduction in income tax rate to corporations and individuals.  This is the “giveth” of the TCJA, and while there are many “taketh aways,” which we will discuss later on, all things being equal, most entities and people will consequently pay less tax.

Corporations

Corporations pay a flat 21% tax on income, and this provision is permanent (meaning there is no language in the law that builds in an expiration of this provision).  Prior to 2018, corporations would pay tax based on graduated rates as determined by their taxable income for the year (taking into account the dreaded alternative minimum tax (AMT)).

Here are the rates for 2017:

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You may have noticed that this table contains a rate that is lower than 21%, namely the lowest bracket for corporations with taxable income of less than $50k.  Those corporations will be paying more tax under the new regime.  That aside, the 21% rate will result in a much lighter tax burden for most corporations.  I stress here again that this is under an “all things being equal” scenario.  There are other provisions of the TCJA (which we will address in future posts) that will add to these corporations’ tax burdens, given certain circumstances.

Fiscal year taxpayers (that is, corporations with year-ends other than 12/31) will pay tax on a blended rate.  The blended rate is the sum of the ratios of the old tax rate for the number of days in 2017 and the new tax rate for the number of days in 2018.  For example a June 30 year-end will have a blended rate of about 28%.

Also, the corporate AMT is eliminated!  Certain AMT credits will be recoverable as well, which mean those benefits will not be lost.

Individuals

Individuals will pay a 7-bracket, progressive tax.  The rates for most of the brackets drops from 1-3% and most brackets will begin at a higher dollar amount of income as compared to prior years.  This rate reduction will be in effect for only 8 years and then revert to the pre-2018 structure, so remember this “giveth” has an expiration date, unless our legislators decide to extend it.  Prior to 2018, the tax methodology was similar, but at less favorable rates.

In spite of many of the itemized deductions that are suspended while these individual rate reductions are in effect (which we will discuss in later posts), many individual taxpayers will be pay less tax under this regime.  It may vary on a case-by-case basis (as individual tax always does), but for the most part, this is a clear benefit to individuals.

The (kind of) bad news is that the individual AMT has not been eliminated in fact, but I do believe that it has been eliminated in effect.  The thresholds and exemptions have been increased and the primary culprit in determining AMT applicability for most taxpayers (the itemized state tax deduction) is severely limited.  It will be a very rare instance that AMT will apply.

The TCJA has many “giveths" and “takeths", but the rate reductions are a clear “giveth” on the corporate side and individual side alike.  Don’t get too excited yet, because our legislators have found many, often very complex, ways to recover some of this lost tax revenue.

If you have any questions or would like to better understand this, reach out to your trusted advisor, or email me.  Stay tuned for our next post, where we will explore a significant “taketh” provision!

TrumpWatch 2017: Proposing a Proposal

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Posted by David Roer, CPA

On revisiting a TrumpWatch article I wrote back in January, I was struck by the opening tagline:

“There’s been an abundance of 2016 headlines you’ve no doubt heard on loop this year and are probably sick of listening to – Brexit! Zika! ISIS! The election! Star Wars! One headline that we at REM Cycle can’t get enough of, however, is the Trump Tax proposal.”

Almost a full year later, sadly the same holds true for 2017, except substitute the headlines with: Equifax! Hurricanes! North Korea! The White House! and (still) Star Wars! Sad.

On September 27, President Trump and “The Big Six” (a name given for a tax crew consisting of Gary Cohen, Steven Mnuchin, Mitch McConnell, Orrin Hatch, Paul Ryan, and Kevin Brady, and which sounds like it could be the title for a Quentin Tarantino film) detailed the skeleton of what a Trump Tax Reform could look like.

While the nine-page plan is just that—a plan—many believe that the window of opportunity for getting a bill passed in 2017 seems unlikely: with only 28 working days remaining on the legislative calendar, chances for a 2017 tax reform are increasingly slim.

With that being said, as the October 15 tax extension deadline has come and gone, we at the REM Cycle look to the future.

We’ll focus on individual tax changes within the proposed nine-page plan.

Let’s begin with tax rates. The proposal indicates a three-tax bracket system: 12%, 25%, and 35% (the current top rate is 39.6%). Trump did leave wiggle room, however, for a fourth bracket to be enacted if the tax-writing committees (maybe they’ll get a Hollywood-esque nickname like “The Big Six” too?) grant it to be so: to quote the plan: “an additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower-and middle-income taxpayers.”

Another important detail left out of the plan regarding the three tiers is the income ranges for the three (or potentially four) brackets. This leaves a lot in the air as to determining whom these bracket changes may impact the most.

In the context of tax rates, the plan also indicates a full repeal of the Alternative Minimum Tax (AMT, a 28% minimum tax that, simply put, ‘traps’ those individuals with certain high deductions by the disallowance of them). The plan also eliminates most itemized deductions except for charitable donations and mortgage interest paid, rendering the AMT moot for many taxpayers who are subject.

On the topic of itemized deductions, the items that are getting most discussed are the state taxes paid and real estate tax deduction. These two items are heavily utilized (unless you’re in the AMT) by taxpayers, especially those living in high state-income tax states like New York and California. I envision this to be a heavily disputed topic as any tax reform bill begins to work its way through Congress, especially since President Trump was angered to learn that this would increase middle-income taxpayer burden.

With an elimination of significant itemized deductions, the plan attempted to counter that ‘hit’ by increasing the standard deduction by nearly doubling it: $12,000 for individuals (an increase from $6,350) and $24,000 for married couples (an increase from $12,700).

The plan also mentions the child tax credit, which would make the first $1,000 of the child tax credit refundable as well as increase the income levels at which the credit would begin to phase-out for individuals.

In a section titled “WORK, EDUCATION AND RETIREMENT,” the plan shuns specifics, merely explaining that “the framework retains tax benefits that encourage work, higher education and retirement security ... Tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.”

Lastly, the plan proposed the full elimination of the generation skipping tax and the estate tax, a tax which applies to Estates in excess of $5.49 million or more as of 2017. This will only benefit the wealthiest Americans (in the top 0.1%).

While the release of the nine-page proposed plan wasn’t too much of a shock (most of the above had been discussed in the infancy of Trump’s presidency earlier this year), I envision the details, once emerged, will begin a more serious discussion of (a) how to begin working on 2018 tax planning and (b) coming up with a catchier nickname than The Big Six.

Stay tuned to the REM Cycle for more TrumpWatch updates.