wInTer 2018

new Tax acT makes sweePInG chanGes To InDIvIDual Taxes

The 2017 Act made the mostsignificant changes to the U.S.tax code in over 30 years,

impacting virtually every individualand business. Due to political con-straints and Senate budget rules,most of the individual provisionsbecame effective in 2018, but revertto prior law before 2025. While thereare numerous provisions impactingindividuals, some of the most signif-icant include:

m InDIvIDual Income Tax raTes —While there are still seven taxbrackets for individuals, the ordi-nary income tax rates havedecreased to 10%, 12%, 22%, 24%,32%, 35%, and 37% (compared to10%, 15%, 25%, 28%, 33%, 35%and 39.6% under prior law) andthe income brackets havewidened. See the article “2018 TaxBrackets under Prior Law and2017 Act” on page 4 for moredetails. In future years, incomelevels will be indexed for inflationusing a chained consumer priceindex (CPI). The IRS estimatesthat taxpayers will start to see theeffects of these reductions in theirpaychecks as early as February2018. The Tax Foundation esti-mates that the 2017 Act willincrease the after-tax incomes ofall taxpayer groups in 2018 by

0.8% to 2.2% (Source: preliminarydetails and analysis of the Tax Cutsand Jobs act, December 2017).

m QualIfIeD DIvIDenDs anD caPI-

Tal GaIns — The tax rates on netcapital gains and qualified divi-dends remain, but the bracketsfor the different tax rates areindexed for inflation using thechained CPI-U.

m chaIneD cPI-u — As mentionedabove, the income levels subjectto taxation as well as many otherprovisions in the 2017 Act areadjusted for inflation using achained CPI-U rather than theCPI-U, which had been used inthe past. Typically, chained CPI-Ugrows at a slower rate than regu-lar CPI-U, since it considers sub-stitute purchases in reaction tochanges in relative prices. Manyfeel that CPI-U overstates increas-es in the cost of living because itdoesn’t account for the fact thatconsumers adjust their buyingpatterns when prices increase,instead of simply buying thesame item at a higher price.

m sTanDarD DeDucTIon — Thestandard deduction nearly dou-bled to $24,000 for married cou-ples filing jointly, $18,000 forhead of household filers, and

$12,000 for single individuals,indexed for inflation using thechained CPI-U. Under prior law,the 2018 standard deduction was$13,000 for married couples filingjointly, $9,550 for heads of house-holds, and $6,500 for single filers.This change simplifies tax filingby reducing the number of indi-viduals who itemize deductionsby 50%. Approximately nine outof 10 taxpayers will simply claimthe new standard deductionstarting in 2018 (Source: The Her-itage Foundation, December 19,2017).

m Personal exemPTIon DeDucTIon

— The deduction for personalexemptions and the personalexemption phaseout has beeneliminated through 2025.

m chIlD Tax creDIT — The 2017Act increases the child tax creditfrom $1,000 to $2000 per qualify-ing child, with up to $1,400 beingrefundable. The adjusted grossincome phaseout thresholds are increased to $400,000 for mar-ried couples filing jointly (upfrom $110,000) and $200,000 forall other filers (up from $75,000for single filers and $55,000 for married individuals filing

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Special Tax iSSue

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In ThIs Issue...New Tax Act Makes Sweeping

Changes to Individual Taxes2017 Act Provides Major Changes

for BusinessessEstate- and Gift-Tax Exclusion 

Doubled2018 Tax Brackets under Prior Law

and 2017 ActPlease Call

Copyright © Integrated Concepts 2018. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. Thisnewsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. Theappropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resultingfrom errors or omissions or reliance on or use of this material.

Michael G. Hall

220 Willow Street, Unit 101Fort Collins, CO 80524

(970) 377-3570Toll Free (800) 275-6412

separately), which is not indexedfor inflation. A $500 nonrefund-able credit is also available forqualifying dependents other thanqualifying children.

m sTaTe anD local Tax DeDucTIon

— Deductions for state and localtaxes, including income taxes andproperty taxes, are limited to$10,000 ($5,000 for married indi-viduals filing separately). Salestaxes can be claimed as an alterna-tive to state and local incometaxes. Prepayment of state andlocal income taxes in 2017 for afuture year is disallowed.

m morTGaGe InTeresT DeDucTIon

— The mortgage interest deduc-tion is limited to interest on$750,000 of acquisition debt($375,000 for married individualsfiling separately). If the debt wasincurred prior to December 15,2017, the prior limitation of $1million remains ($500,000 for mar-ried taxpayers filing separately).Taxpayers can still include mort-gage interest on second homeswithin the lower dollar caps.Interest on home-equity loans isno longer tax deductible.

m charITable conTrIbuTIon

DeDucTIon — The 50% limitationfor contributions to public chari-ties and certain private founda-tions has been increased to 60% ofthe taxpayer’s contribution base.Contributions exceeding the 60%maximum can be carried forwardand deducted for up to five years.

m meDIcal exPense DeDucTIon —For tax years beginning afterDecember 31, 2016, and endingbefore January 1, 2019, medicalexpenses in excess of 7.5% ofadjusted gross income (AGI) forall taxpayers can be deducted(down from 10% of AGI for alltaxpayers except those over age65).

m Personal casualTy anD ThefT

loss DeDucTIon — Itemizeddeductions for personal casualtylosses, including those from fire,

storms, shipwrecks, other casual-ties, and thefts, are suspended,except for personal casualty lossesincurred in a federally declareddisaster.

m alImony DeDucTIon — Fordivorce agreements entered intoafter December 31, 2018, alimonyand separate maintenance pay-ments are not deductible by thepaying spouse and not includedin income of the spouse receivingthe payments.

m mIscellaneous ITemIzeD DeDuc-

TIons — The deduction for mis-cellaneous itemized deductions inexcess of 2% of AGI is suspended.

m lImITaTIon on ITemIzeD DeDuc-

TIons — Under prior law, item-ized deductions for higher-income taxpayers were limited(known as the Pease limitation).For taxpayers who exceeded thethreshold amount, itemizeddeductions were reduced by 3% ofthe amount AGI exceeded thethreshold. Under the 2017 Act, thePease limitation is suspended.

m afforDable care PaymenT —The individual shared responsi-bility payment required under theAffordable Care Act (also knownas Obamacare) is permanentlyreduced to zero, effective formonths beginning after December31, 2018. However, both the 3.8%net investment income tax and the0.9% additional Medicare tax,which were enacted as part ofObamacare, remain in effect.

m kIDDIe Tax — A child’s earnedincome is now taxed at the ratesfor single individuals and netunearned income is taxed basedon the brackets for trusts andestates (see the article “Estate- andGift-Tax Exclusion Doubled” onpage 4 for more details on thoserates). Under prior law, the child’snet unearned income was taxed atthe parents’ rate if that rate washigher than the child’s tax rate,while the remainder of the child’sincome (earned income plusunearned income up to $2,100 in2018 less the child’s standard

deduction) was taxed at thechild’s rate.

m secTIon 529 funDs — The defini-tion of qualified higher educationexpenses that can use Section 529account funds has been expandedto include tuition at an elementaryor secondary public, private, orreligious school, up to a $10,000per year limit.

m recharacTerIzaTIon of Ira

conTrIbuTIons — Under priorlaw, both regular contributionsand conversion contributions to aRoth IRA could be recharacterizedas having been made to a tradi-tional IRA. The 2017 Act no longerallows recharacterization of con-version contributions to a RothIRA, although the other recharac-terizations are available.

m alTernaTIve mInImum Tax

(amT) — The AMT is a separatetax calculation meant to preventhigh-income taxpayers fromavoiding tax liability by usingexclusions, deductions, and cred-its to reduce income. If the AMTtax is higher than the regular tax,the larger amount is owed. Whencomputing the AMT, only incomeabove an AMT exemption amountis considered. Under the 2017 Act,the exemption amount has beenincreased to:

— $109,400 for married taxpayersfiling jointly and survivingspouses (up from $86,200)

— $70,300 for single taxpayers (upfrom $55,400)

— $54,700 for married taxpayers fil-ing separately (up from $43,100)

These exemption amounts arereduced (not below zero) to 25%of the amount by which the tax-payer’s income exceeds thephaseout amounts:

— $1 million for married taxpayersfiling jointly and survivingspouses

— $500,000 for all other taxpayers

All amounts will be adjusted forinflation based on the chainedCPI-U. mmm

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The most significant changes ofthe 2017 Act were to the taxa-tion of businesses. While most

of the changes for individuals areeffective from 2018 to 2025, mostchanges for businesses are perma-nent. It is anticipated that the reformsto the business tax code will providea significant boost to the U.S. econo-my by attracting international busi-ness investment and jobs. Estimatesindicate that the economy couldgrow an additional 2.6% to 2.8% overthe long term due to these changes.

Some of the more significantchanges enacted for businessesinclude:

m corPoraTe Tax raTe — For taxyears beginning after December31, 2017, the corporate tax rate is aflat 21%. Under prior law, corpo-rations were subject to graduatedtax rates of 15%, 25%, 34%, and35%. Personal service corpora-tions were subject to a 35% rate onall taxable income. While this is asignificant reduction in tax rates,the cumulative rate for businesseswhen adding average state taxesis approximately 26%, still higherthan the worldwide average of23% (Source: The Heritage Foun-dation, December 19, 2017).

m DIvIDenDs receIveD DeDucTIon

— Under prior law, corporationsthat receive dividends from othercorporations received a deductionof 80% if the corporation owned atleast 20% of the stock. Otherwise,the deduction was 70%. Under the2017 Act, the percentages are now65% and 50%, respectively.

m alTernaTIve mInImum Tax

(amT) — Under the 2017 Act, thecorporate AMT is repealed.

m Pass-ThrouGh DeDucTIon —Partnerships, S corporations, lim-ited liability companies, and soleproprietorships are pass-throughentities. Their income is not taxedat a corporate level, but is passedthrough to the owners and taxedon their individual returns at indi-

vidual income tax rates. Startingin 2018, a 20% deduction reducingtaxable income of certain non-salary business income will beavailable to these owners. Certainservice providers in the fields oflaw, health, consulting, athletics,financial, and brokerage servicesare denied the deduction if theirincome exceeds a $315,000 thresh-old, where the deduction starts tophase out.

m bonus DePrecIaTIon — The 50%bonus depreciation allowance isincreased to 100% for propertyplaced in service after September27, 2017, and before January 1,2023. Bonus depreciation can nowbe utilized on the purchase ofused property. After January 1,2023, the bonus depreciationreduces to:

— 80% for property placed in servicein 2023,

— 60% for property placed in servicein 2024,

— 40% for property placed in servicein 2025, and

— 20% for property placed in servicein 2026.

m secTIon 179 exPensInG — For taxyears beginning after December31, 2017, the maximum Section179 amount that can be expensedis increased to $1 million (up from$500,000), which is reduced by theamount by which the cost of qual-ifying property exceeds $2.5 mil-lion (up from $2 million). Theseamounts are indexed for inflationafter 2018.

m auTomobIle DePrecIaTIon —Starting after December 31, 2017,the cap on depreciation write-offsof business-use vehicles for whichthe additional first year deprecia-tion deduction is not claimed is$10,000 for the first year (up from$3,160), $16,000 for the secondyear (up from $5,100), $9,600 forthe third year (up from $3,050),and $5,760 for each subsequent

year (up from $1,875). The limita-tions are indexed for inflation.

m InTeresT DeDucTIon — Thededuction for net interest expens-es is capped at 30% of adjustedtaxable income.

m neT oPeraTInG losses (nols) —NOLs will be limited to 80% oftaxable income for losses in taxyears beginning after December31, 2017. NOLs can no longer becarried back in most cases, butthere is an indefinite carryforwardperiod.

m InTernaTIonal Income — The2017 Act only taxes corporateincome earned in the U.S. byallowing an exemption for divi-dends from foreign subsidiaries.A one-time transition tax on accu-mulated overseas profits isassessed at 15.5% of liquid assetsand 8% of reinvested foreign earn-ings.

m oTher corPoraTe ProvIsIons —Numerous business tax prefer-ences were eliminated, includingthe section 199 domestic produc-tion activities deduction and non-real property like-kind exchanges.Rules for business meals and therehabilitation credit were revised.The research and developmentcredit remains, but requires a five-year amortization of research anddevelopment expenditures. Atemporary credit is now availablefor employers who pay employ-ees on family and medical leave.mmm

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2017 acT ProvIDes major chanGes for busInesses

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esTaTe- anD GIfT-Tax exclusIon DoubleD

While there was strong sup-port for outright appeal ofthe estate tax, the 2017 Act

retained the estate tax, but doubled

the estate- and gift-tax exclusionamount. New income tax rates andbrackets were also enacted forestates and trusts.

Under prior law, the estate- andgift-tax exclusion amount was $5million, adjusted for inflation inyears after 2011. For 2018, theamounts were $5.6 million per indi-vidual or $11.2 million for a marriedcouple. Thus, transferred propertyunder those assets was exempt fromestate and gift taxes.

Starting in 2018 through 2025,the 2017 Act doubles the estate- andgift-tax exclusion amount from $5million to $10 million. The $10 mil-lion amount is indexed for inflationafter 2011 and is expected to beapproximately $11.2 million for anindividual in 2018 or $22.4 millionfor a married couple. Generation-skipping transfers are not mentionedin the 2017 Act. However, since the generation-skipping transfer tax exemption is based on the estate-and gift-tax exclusion amount, generation-skipping transfers willalso be increased to these amounts.

Beneficiaries still receive a stepup in basis as of the date of death forinherited assets for purposes of sub-sequent sales.

The tax rates for estates andtrusts in 2018 are:

10% $0–$2,550

24% $2,551–$9,150

35% $9,151–$12,500

37% Over $12,500

Under prior law, the maximumtax rate for estates and trusts was40%. mmm

2018 Tax brackeTs unDer

PrIor law anD 2017 acT

marrIeD fIlInG joInTly

PrIor law 2017 acT

Rate Income Bracket Rate Income Bracket10% $0–$19,050 10% $0–$19,05015% $19,051–$77,400 12% $19,051–$77,40025% $77,401–$156,150 22% $77,401–$165,00028% $156,151–$237,950 24% $165,001–$315,00033% $237,951–$424,950 32% $315,001–$400,00035% $424,951–$480,050 35% $400,001–$600,00039.6% Over $480,050 37% Over $600,000

sInGle

PrIor law 2017 acT

Rate Income Bracket Rate Income Bracket10% $0–$9,525 10% $0–$9,52515% $9,526–$38,700 12% $9,526–$38,70025% $38,701–$93,700 22% $38,701–$82,50028% $93,701–$195,450 24% $82,501–$157,50033% $195,451–$424,950 32% $157,501–$200,00035% $424,951–$426,700 35% $200,001–$500,00039.6% Over $426,700 37% Over $500,000

Please call

The 2017 Tax Cuts and Jobs Act (2017 Act) was signed

into law by the president on December 22, 2017. The

2017 Act provides the most significant tax changes in

over 30 years. The articles in this newsletter cover major

provisions in the 2017 Act in the areas of individual taxes,

estate taxes, and business taxes. Due to its sweeping nature,

there are many more provisions in the 2017 Act that may

apply to individual situations. Please call if you’d like to

review your situation to determine how specific provisions

may impact you. mmm

Securities offered through first allied Securities, Inc., a registered Broker/dealer, member: fINra/SIpC.advisory services offered through first allied advisory Services, a registered Investment advisor.

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