Impact for Individuals
- Tax Brackets and Tax Rates – There are still seven brackets, but the brackets reflect broader income ranges, and reduced rates.
- Personal exemptions – Eliminated through 2025.
- Standard deductions increased – $12,000 Individual Taxpayers or Married Filing Jointly $18,000 Head-of-Household $24,000 Married Filing Jointly
(Additional amounts if over age 65, blind or disabled – $1,600 Unmarried Individuals/$1,300 Each spouse meeting criterion.)
Child Tax Credit – $2,000 per qualifying child, refundable up to $1,400, subject to phase-out income level. Social Security numbers are required for each qualified child.
Non-Child Dependents Credit – $500 per qualifying dependent, temporary, non-refundable, subject to phase-out income level. (Phaseouts begin with AGI of more than $400,000 for Married Filing Jointly, $200,000 for all other taxpayers.)
Estate and Gift Tax Exemption – An individual can leave $5.6 million to heirs and pay no federal estate or gift tax. A married couple can leave $11.18 million. Exemption amounts also apply to the generation-skipping tax. The annual gift exclusion amount is $15,000 for 2018 (up from $14,000).
Section 529 Plans – Funds, up to $10,000 per beneficiary, can be used for tuition expenses for public, private or religious elementary or secondary schools. Per student basis. Previously, only available for college expenses.
State and Local Taxes (SALT) – Aggregate deduction for state and local income tax, sales tax, and property tax is capped at $10,000.
Medical – Expenses for 2018, expenses exceeding 7.5% of income are deductible. Percentage increases to 10% in 2019. Mileage deduction for medical purposes is 18 cents per mile. Additionally, the penalty for failing to maintain minimum essential coverage for individuals (individual mandate) is repealed beginning in 2019.
Mortgage Interest – Deduction is capped at $750,000 of debt. Allowed on first and second home. Interest on up to $1 million of acquisition debt for loans prior to December 15, 2017 is grandfathered. Interest on home equity loans/LOC is deductible only if funds were used to make significant home improvements.
Charitable Contributions – Those who itemize can include charitable contributions. The limitation is now 60% of income. Standard mileage rate when using vehicle for charitable purposes is indexed for inflation in taxable years beginning after Dec. 31, 2017 (14 cents per mile).
Casualty Losses – Unexpected losses to personal property deductible only if covered by specific federal disaster declarations.
Fully eliminated deductions: Unreimbursed Employee Business Expenses – W-2 employees, tax preparation fees, investment interest expenses.
Alternative Minimum Tax – AMT exemption and phase-out amounts temporarily increased. ($109,400 for MFJ in 2018, compared to $84,000 in 2017/$70,300 for singles and heads-of-household in 2018, compared to $54,300 in 2017)
“Above-the-line” deductions eliminated – Alimony deduction for payments made under orders executed after Dec. 31, 2018, Tuition and Fees deduction, Domestic Production Activities deduction (DPAD), use of like-kind exchanges to defer income on sale of personal property assets. Real property still eligible (some guidelines apply). Moving expenses except for those of active military who relocate pursuant to military orders.
Impact for Businesses
Corporate Tax Rates – Came down (cut from 35% to 21%). The AMT for corporations has been eliminated. Dividends Received deduction reduced.
Pass-through Entities may be eligible for up to a 20% deduction on QBI (qualified business income). Very active discussion in progress regarding this deduction and many details apply.
Net Operating Loss Rules – NOL can offset only 80% of taxable income in any given year. NOLs can no longer be carried back, but now carryforward period is indefinite. Only applies to NOLs generated in tax years beginning after Dec. 31, 2017. (There are carryback exceptions.)
Excess Business Losses – For tax years Jan. 1, 2018 – Dec. 31, 2025, EBLs of a taxpayer other than a corporation are not deductible. Any EBL will carry forward under the NOL rules, subject to the limitations such rules place on the utilization of NOL carryforwards. The EBL rule is applied after the application of the passive loss rules.
Business Interest Expense – Limitations imposed for businesses with $25 million or more in gross receipts. Exceptions in place for real estate trades and businesses.
Depreciation – New law allows for 100% bonus depreciation of assets acquired after Sept. 27, 2017. Instead of depreciating assets over several years, businesses will be able to deduct 100% of the cost, and there is no limit on how much can be deducted. Assets acquired can be new or used. This provision begins to phase out 20% each year beginning in 2023 until it is completely phased out in 2027.
Deductions for entertainment, club membership dues or recreation expenses – Eliminated. The current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria.
Small Businesses – Allows cash method of accounting for small business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period. This change expands the number of small business taxpayers eligible to use the cash method of accounting and also exempts them from certain accounting rules for inventories, cost capitalization and long-term contracts.
U.S. Multinationals – Now taxed using a territorial system. The TCJA also requires companies to pay a one-time tax on existing overseas profits. (Taxed at a rate of 15.5% on cash assets, 8% on non-cash assets (equipment abroad in which profits were invested).
Non-Profit Employers – Those that pay high compensation will pay an excise tax of 21% on compensation over $1 million of the top 5 highest paid employees. Additionally, the new tax law imposes an unrelated business income tax (UBIT) penalty on the amount tax-exempt employers pay for employees’ transportation benefits, such as commuting/parking expenses. They may still subsidize employees’ commuting/parking expenses through a bona fide reimbursement arrangement so that payments are excluded from the employees’ W-2s, but nonprofit employers will have to pay UBIT on those amounts. (BTW – The tax bill also eliminated the personal deduction for commuting by bicycle.) The new law also impacts nonprofits with income or losses from “unrelated business activities”. Other changes apply to donors.
Arizona State Tax Credits
Private School Tax Credit – Individuals may claim a credit for contributing to a School Tuition Organization (STO) in order to create tuition scholarships for kids enrolled in a qualified private school. Maximums: $2,213 MFJ, $1,107 Single filers.
Public School Tax Credit – Individuals may claim a credit for making contributions or paying fees to an Arizona public school for support of qualified activities or qualified programs. Maximums: $400 MFJ, $200 single filers. (Donations must be made directly to the school.)
Qualifying Charitable Organization Tax Credit – Individuals may claim a credit for making contributions to a list of eligible non-profit organizations. Maximums: $800 MFJ, $400 single filers.
Qualified Foster Care Charitable Organization – Individuals may claim a credit for making contributions to a qualifying foster care organization. Maximums: $1,000 MFJ, $500 Single filers.
Corporate Tax Credit – Available to C-Corps, S-Corps and LLCs who file taxes as an S-Corp or C-Corp, and insurance companies that pay an AZ premium tax credit. Allows them to redirect their state tax liability to a qualified STO. These funds are dedicated to the support of tuition costs for low income or “needs based” students. Arizona sets a state-wide cap each year. Corporate tax credit applications are accepted by ADOR until that maximum is met. For 2019-2020 fiscal year, the state cap is $106,993,207. (The cap for 2018-2019 has already been met.) Minimum contribution of $5,000 may apply. Once cap is met, no more applications will be accepted. Corporations have 20 days to fund after acceptance by the state of their application. Tax credits are awarded by ADOR beginning July 1st, so applications must be completed prior to that date.
The information included in this very brief summary is meant to inform. It is not meant to replace expert advice from your accountant. Please contact your accountant for all of the facts and how they best apply to you.