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$29 Billion For Warren Buffet and Berkshire Hathaway – What Is Your Gain From The 2017 Tax Changes?

Warren Buffet just informed Berkshire Hathaway’s shareholders, no doubt gleeful at the news, that Berkshire realized a tax-windfall of $29 billion in additional income in 2017 from the Tax Cuts and Jobs Act signed into law December 22, 2017. While the amount of additional income realized was stunning, it should not be, given that one of the primary goals of the bill was to significantly lower the corporate tax rate. Buffet’s announcement clearly illustrates that goal was achieved.

The bill makes the most noteworthy changes to the Internal Revenue Code for most taxpayers since 1986. What will you gain, if anything, from these changes? The impact on your taxes will of course depend on your individual circumstances, most importantly, the amount of your taxable income, plus your other specific tax attributes.

Below we summarize the most important changes for different taxpayers, namely corporations, estates, individuals, and passthroughs (e.g. partnerships and limited-liability companies), resulting from the 2017 tax bill.

CORPORATIONS

Corporate Tax Rates

As noted above, probably the most significant change resulting from the 2017 tax bill was the dramatic reduction in corporate tax rates – a flat 21% rate on all taxable income. Previously, the rates ranged from 15% to 38% for eight brackets.

Corporate Alternative Minimum Tax (AMT)

In addition to the reductions to the corporate rates noted above, the 20% corporate AMT has been eliminated.

Depreciation

For most property placed in service from September 27, 2017 to January 1, 2023, the bill increases the bonus depreciation of 50% to 100%. Afterwards, a phase-out schedule commences. Further, the taxpayer need not be the initial purchaser of the depreciable property, thereby allowing depreciation of used property.

For business use vehicles placed in service after December 31, 2017, the limitations on deprecation are raised to $10,000 (from $3,160) for year 1, $16,000 (from $5,100) for year 2, $9,600 (from $3,050) for year 3, and $5,750 (from $1,875) for each year after.

Dividend Received Deduction

The deduction of corporations for the receipt of dividends received, in effect an exclusion of dividend income, is reduced to 65% and 50%, from 80% and 70% respectively.

Interest

The bill limits the deduction for net interest expense for corporate taxpayers of up to 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA).  Any interest beyond this amount is no longer deductible.

Net Operating Losses (NOLs)

Under the 2017 bill, NOLs are limited to 80% of taxable income. NOL carrybacks are eliminated, and NOL carryforwards, subject to the 80% TI limitation, are allowed over an indefinite period.

Repatriation of Foreign Earnings and Profits

The 2017 tax law imposes a one-time tax of 15.5% on repatriation of cash and similar foreign-held assets and 8% on non-liquid assets like equipment, payable over 8 years.

Section 179 Immediate Expense Deduction

The bill increases the section 179 immediate expense deduction limitation to $1 million, and the investment limitation to $2.5 million.

Section 199 Domestic Production Activities Deduction

The section 199 domestic production activities deduction is eliminated

Section 1231 Like-Kind-Exchange Deferral

The section 1231 like-kind exchange deferral for non-real property is eliminated by the 2017 tax bill.

 

ESTATES

The bill dramatically increases the amount of an estate exempt from the federal estate tax from $5.6 million or more per individual, and $11.2 million per married couple to $11.2 million for individuals and $22.4 million for married couples.

INDIVIDUALS

All of the following changes applicable to individual taxpayers are temporary and expire after December 31, 2025.

Affordable Care Act Penalties

Under the bill individuals are no longer mandated to purchase health care insurance after January 1, 2019. Thus, those failing to purchase health care insurance after January 2019 will no longer penalized for failing to do so.

Alimony

The bill repeals the deduction of alimony payments, and excludes alimony from income of the recipients. The changes apply only to divorce and separation instruments effective after December 31, 2018.

Alternative Minimum Tax (AMT)

The bill both increases and indexes the AMT exemption amounts for inflation, as set forth below.

Filing Status Old AMT

Exemption

New AMT

Exemption

Single or Head of Household $54,300 $70,300
Married/Joint $84,500 $109,400
Married/Separate $42,250 $54,700

 

Also, the income thresholds at which the exemption amounts begin to phase out are increased to $1 million for joint filers and $500,000 for individuals.

Capital Gains Taxes

The general method of taxation of capital gains tax has not changed as a result of the 2017 tax changes, except to the extent of changes to tax rates discussed below. Short-term capital gains are still taxed as ordinary income, but due to the changes to the tax rates for ordinary income, short-term capital gains will now be taxed at different rates than in the past.

For 2018, the long-term capital gains tax rate income thresholds are applied to maximum taxable income levels as follows:

LTCG

Tax Rate

Single Married/Joint Head of Household Married/separate
0% $0-$38,600 $0-$77,200 $0-$51,700 $0-$38,600
15% $38,600 –  $425,800 $77,200-$479,000 $51,700-$452,400 $38,600-$239,500
20% $425,800 plus $479,000 plus $452,400 plus $239,500 plus

 

Also, the 3.8% net investment income tax applicable to high earners remains, along with the same income thresholds.

Casualty and Theft losses

No longer deductible, except those attributable to a federally declared disaster.

Charitable Contributions

Taxpayers can deduct cash donations up to 60% of income, increased from 50% of income. Donations to a college in exchange for athletic tickets are no longer deductible.

Child and Dependent Care Credit

The bill doubles the credit which is available for qualified children under age 17 from $1,000 to $2,000 and also increases the amount of the credit that is refundable to $1,400.

In addition, the phase-out threshold for the credit is increasing as noted below.

Filing status Old Income Threshold New Income Threshold
Married/Joint $110,000 $400,000
All Others $75,000 $200,000

 

If your children are 17 or older or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.

Employer-Subsidized Parking and Transportation Reimbursement

No longer deductible.

Individual Tax Rates

The tax bill retained seven income brackets, but did lower rates for the most part.

Tax

Rate

Single Married/Joint Head of Household Married/separate
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700
22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500
24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500
32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-$200,000
35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$300,000
37% $500,000 plus $600,000 plus $500,000 plus $300,000 plus

 

The new married-filing-jointly income thresholds are exactly double the single thresholds for all but the two highest (the 35% and 37%) tax brackets. Therefore, the marriage penalty has been eliminated for everyone except for married couples earning more than $400,000.

Medical Expenses

The threshold for the medical-expenses deduction has been reduced from 10% of adjusted gross income (AGI) to 7.5% of AGI. This change is retroactive to 2017, unlike most other changes enacted in the bill.

Miscellaneous Deductions (subject to the 2% AGI Floor)

No longer deductible.

Mortgage Interest

For mortgages incurred after December 15, 2017, the mortgage interest deduction can be claimed only on mortgages of $750,000 or less, reduced from $1 million.

While the bill initially suggested that interest on home-equity debt is no longer deductible to any degree, recent guidance (IRS Statement/Announcement IR-2018-32) from the IRS provides that such interest on a home equity loan, line of credit or second mortgage is still deductible if the loan proceeds are used to buy, build or substantially improve the home which secures the loan, and the total indebtedness encumbering the home is within the statutory limitations ($750,000 for married taxpayers filing joint returns, and $375,000 for single taxpayers) .

Moving Expenses

No longer deductible.

Personal Exemptions

The deduction for personal exemptions has been eliminated, thereby offsetting some of the benefit of the increased standard deduction discussed below.

Standard Deduction

The standard deduction has been doubled for all filers, as set forth below.

Filing status New Standard Deduction
Single $12,000
Married/Joint $24,000
Married/Separate $12,000
Head of Household $18,000

 

Section 529 College Savings Plans

The 2017 bill expands the available use of funds saved in a 529 college savings plan to include levels of education other than college, such as private grade school, or grade school tutoring.

State and Local Tax (SALT) Deduction

The deduction for state and local income, sales, and property taxes is limited to a total of $10,000.

Tax Preparation Expenses

No longer deductible.

Unreimbursed Employee Business Expenses

No longer deductible.

PASSTHROUGHS

One of the 2017 bill’s most noteworthy changes is its method of taxing income of passthrough entities, such as limited-liability companies (LLC), partnerships, sole-proprietorships, and S corporations. Under the new law, taxpayers with income from such entities can deduct 20% of their pass-through income, before the taxpayer’s ordinary income tax rates apply.

“Professional services” business owners such as accountants, consultants, doctors, and lawyers, are subject to phaseout income limits, which seek to prevent the conversion of higher-taxed income, into lower taxed income from new passthrough tax regime.

 

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