With tax reform pushed through, KRS partners Maria Rollins, Gerald Shanker, and Simon Filip analyzed the proposed changes in both the House and Senate versions of the bill at the December KRS Insights Breakfast.
“It is the most sweeping tax reform since 1986,” Maria noted. This tax reform will have a major impact on both individual and corporate taxpayers.
For those who were unable to attend the breakfast, we wanted to share some of our partners’ insights.
What Individual Taxpayers Need to Know
There are currently seven tax brackets that range from 10% to 39.6%. The House and Senate have different proposals moving forward.
- The House wants to change to four brackets: 12%, 25%, 35%, and 39.6%
- The Senate wants to keep the seven brackets with some adjustments: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%
Sale of Stock
Under current law, sellers may choose the blocks of shares they wish to sell– select high basis shares to minimize gains or to offset other gains with losses– but if the Senate gets its way, sellers will be required to dispose of shares in the order they are acquired. What does that mean? According to Maria, “Your first stock bought in any block will be sold first. The oldest stock has the lowest basis and therefore you won’t be able to plan, pick, or choose.”
Child Tax Credit
Child tax credits are intended to offset the expenses of raising children. Taxpayers are losing the child exemption, but the reform tries to make up the loss with a child tax credit increase.
- Current: $1,000 per child under 17 years
- House: $1,600 per child under 17 years
- Senate: $2,000 per child under 18 years
“Here’s some bad news,” Simon said, as he discussed itemized deductions. Both state and local income taxes deductions are eliminated in the House and Senate bills. Mortgage interest is not eliminated, however, the deduction for new mortgage interest debt would be capped at $500,000, down from the current cap of $1 million. Property taxes will be capped at $10,000 under both House and Senate bills.
What Corporate Taxpayers Need to Know
Corporate Tax Rates
The House and Senate agreed that the corporate tax rate would be a flat 20 percent. The House would put the rate in effect beginning after 2017 while the Senate proposal is effective after 2018. The Senate would eliminate the 35 percent special tax rate for personal service corporations, whereas the House would decrease it to 25 percent.
S Corporation Conversion to C Corporation
In the case of an S corporation which revokes its S corporation election during the two-year period beginning on the enactment date, distributions from the terminated S corporation would be treated as paid from its accumulated adjustments account and from its earnings and profits. Gerald advised, “Don’t rush into converting from an S to a C because you might save a couple percent now, but if you’re going to think about selling your business, within a reasonable amount of time, in can be disastrous.”
Contingency Fee Cases
Under the House’s plan, no deduction would be allowed for any expense paid or incurred in the course of the practice of law resulting from a case for which the taxpayer is compensated primarily on a contingency basis until the contingency is resolved. Under the Senate plan, attorneys would be denied an otherwise allowable deduction for litigation costs paid under a contingency fee arrangement until the contingency ends, applicable to expenses and costs paid or incurred in taxable years beginning after the date of enactment.
New Jersey State Tax Changes
Sales & Use Tax Update
New Jersey sales and use tax rate was lowered from 7 percent to 6.875 percent at the beginning of 2017. Effective January 1, 2018 the rate will be further reduced to 6.625 percent.
Effective January 1, 2018, the New Jersey Estate Tax will no longer be imposed on the estates of individuals who die on or after that date. The panel warned not to dismiss estate planning just yet; “We have a new governor in New Jersey, so the Estate Tax could make a comeback.”
Retirement Income Exclusion
Under current New Jersey law, a couple filing jointly with total income of $100,000 or less can exclude up to $20,000 of retirement income ($15,000 for single). The enhanced tax break will be phased in over four years, so by 2020, a couple filing jointly can exclude up to $100,000 of retirement income and a single filer can exclude $75,000.
We’ve got your back
At KRS CPAs, our goal is to make it as easy as possible for you to get the advice and counsel needed, so you can focus on what matters most to you. The KRS Insights Breakfast Series offers timely and relevant information from experts like Maria Rollins, Gerald Shanker, and Simon Filip, who can help your company understand, plan, and tackle complex tax and accounting issues.
Visit our Insights page to subscribe to our newsletter and you’ll be notified about upcoming breakfasts plus other KRS news, events, and resources.