Hello, and welcome to the U.S federal taxation capstone. In this module, we're going to talk about some of the highlights of the major tax legislation signed by the President at the end of 2017. Specifically, on December 20th 2017, Congress passed, and on December 22nd 2017, the President signed into law an act to provide for reconciliation, pursuant to titles two and five of the concurrent resolution on the budget for fiscal year 2018. It's a pretty catchy title, right? This legislation is more commonly known by its former short title, ' The Tax Cuts and Jobs Act' or the TCGA. The legislation was not allowed to keep this name due to the procedural rules of the Senate relating to how this bill passed that chamber. Specifically, they used a procedure known as reconciliation. Where legislation can pass by a simple majority vote of senators as opposed to the usual 60 vote threshold most legislation requires. But for simplicity, we're going to stick with the name 'Tax Cuts and Jobs Act' for this course. So, what's the big deal about this law that it gets its own module? Tax laws get passed all the time, however this particular one is probably the most significant revision to the Internal Revenue Code since the Tax Reform Act of 1986. According to the joint committee on taxation Congress's official tax scorekeeper, the tax cuts and jobs Act was on net a roughly $1.5 trillion tax cut over the next ten years. After taking into account the increased economic activity that is projected to occur as a result of the Law, since increased economic activity means increased tax revenue to the government, the Joint Committee on taxation still projects that the new law will lead to a loss of 1 trillion in tax revenues over ten years. That's the number one followed by 12 zeros. Former United States Senator, Russell Long, who was involved in the 1986 tax reform once famously said, "Tax reform means don't tax you, don't tax me, tax that fella behind the tree." But with one trillion plus in tax cuts spread across both individuals and businesses, there may not be too many people that are going to fall into that behind the tree crowd. However, despite its price tag, the Tax Cuts and Jobs Act is not even close to being the largest tax cut in even recent memory. You may recall the so-called fiscal cliff at the end of 2012. The American Taxpayer Relief Act of 2012, which permanently extended a large portion of the various tax cuts enacted under George W. Bush, known collectively as the Bush tax cuts. Came in at a 10-year cost of roughly $3.9 trillion, not to mention the costs occurring beyond year ten. But if it's not the most expensive tax cut, why is the tax cuts and Jobs Act generally considered to be the most significant revision to the Internal Revenue Code in three plus decades? The answer is in part because of the wide scope of the changes. You probably have vivid memories from your earlier courses about the individual in corporate income tax formulas. Well, the Tax Cuts and Jobs Act has resulted in numerous changes in almost every step of those respective formulas. For both businesses and individuals, there are changes and what is excluded from gross income. There are massive changes and what is deductible, for individuals this includes both for and from AGI deductions. There are changes in the rates used to calculate taxes, and there are changes in the credits available to offset those taxes. Now, I already told you that the reconciliation procedure used by the Senate to pass this legislation caused its former short title to be removed from the bill. That same procedure also place limits on exactly when these tax cuts can occur. Specifically under reconciliation, there generally cannot be a net decrease in federal revenues more than ten years into the future. This ten-year period is known as the budget window. So, because of this budget window restriction, the Tax Cuts and Jobs Act contains a combination of permanent and temporary tax provisions. In general, most of what we broadly group as business tax provisions are permanent or at least as permanent as any law can be, because Congress can always decide to pass new laws or repeal old ones. The big exception to the permanent business provisions are related to accelerated cost recovery, namely the temporary expansion of bonus depreciation. On the other hand, most of the individual changes are temporary, meaning that they will sunset or expire usually at the end of 2025. A few individual provisions are permanent, and those permanent individual provisions actually raise taxes on individuals starting in 2026. Essentially there is a tax increase for individuals starting in 2026, and that increased revenue pays for the prominence of those business tax cuts after that 10-year budget window. You might call this some creative accounting. So, now that we've considered the big picture, let's take a look at some of the specific changes in more detail. We'll start with those permanent individual provisions designed to raise revenue in the long run. You'll recall that several numbers in the tax code such as the standard deduction, tax rate schedules, phase out limitations, etc, are index for inflation. So, in the case of the standard deduction, this means that the value of the deduction gradually increases each year to make sure that the real value of the deduction doesn't decline due to inflation. Under the new law, the tax code has permanently moved to a more gradual inflation called chained CPI. This means that the amount by which the standard deduction or any other index number, would increase is going to be just a little bit lower each year. Second, the individual responsibility payment or more commonly known as the Obama Care individual mandate penalty, has been reduced to zero for tax year starting in 2019, meaning there's no penalty for failure to maintain health insurance. Remarkably, the removal of this tax actually saves the government money, because without the penalty, less individuals are expected to acquire insurance from the health care marketplace, and in turn the government will pay less in health care subsidy tax credits. Finally, for divorces that occur after 2018, alimony we'll be non-deductible to the payer, but excluded from gross income of the recipient. This saves the government money because usually the payer of alimony is in a higher tax bracket than the recipient. Thus, the payers deduction costs more to the government than what they would collect in taxes from the alimony recipient who would include an income, because they are generally in a lower tax bracket. Now onward to some of the most significant and temporary individual provisions in the Tax Cuts and Jobs Act. All the provisions we're going to discuss next are generally only effective for tax years 2018 through 2025. In 2026, the individual tax code basically resets to the system that existed for tax year 2017, with the exception of those few permanent provisions we just discussed. Along with those permanent business provisions, which may impact filers who report business income on their individual return. First, one of the most advertised changes in the tax law for individuals was a dramatic increase in the standard deduction, which as you can see here results in an almost doubled standard deduction amount. This increased standard deduction in combination with some of the new limitations on itemized deductions we'll discuss later, means far fewer taxpayers will be itemizing deductions on their tax returns. But the large increase in the standard deduction is at least partially offset by the suspension of personal and dependency exemptions. If you have multiple children or other dependence, the loss of these exemptions may actually make you worse off even with an almost doubled standard deduction. The good news is that for taxpayers with children, you may now be eligible for a vastly expanded child tax credit. Not only has the amount of the credit been doubled to $2,000 from $1,000, there has also been a dramatic increase in who based on their adjusted gross income, qualifies for the credit. What about if you have a dependent that doesn't qualify for the Child Tax Credit? Well, you don't necessarily have to kick anyone out of the house for tax reasons just yet because there is a new non-refundable $500 credit for dependents who don't qualify for the child tax credit. This could be qualifying children that are just too old to be eligible for the child tax credit or any other qualifying relative. So the rules for who qualifying children and qualifying relatives are still matter and they remain generally unchanged but the tax savings that they will generate is going to result from those credits as opposed to dependency exemptions. Another hallmark of the Tax Cuts and Jobs Act is lower tax rates, which as you can see on the next couple slides showing a comparison of the Pre-tax Cuts and Jobs Act tax rate schedule for 2018 with the new tax rate schedules in effect are generally lower across the board. On this slide, we can specifically look at the rates for single filers. On the next slide, we can see a comparison for married individuals filing jointly. Again, as you can see once you incorporate the savings of the lower tax brackets, taxes have gone down for the vast majority of filer at least based on those rates schedules. And speaking of tax rates, the tax rates of a parents will no longer matter in computing the so-called Kiddie Tax on a child's unearned income. Instead that unearned income will be taxed using the tax rate schedule applicable to trust in the states. When it comes to 'For AGI' deductions, the biggest change here is the suspension of the deduction for qualified moving expenses. Likewise, if your employer reimburses you, that reimbursement will no longer be tax-free. The one exception here is for moves related to being an active member of the military. Now when it comes to itemized deductions, we have a whole host of new changes. Perhaps, the most significant is the new cap on the state and local tax deduction at $10,000. So a taxpayer regardless of filing status, cannot deduct more than $10,000 in state property taxes plus either state income taxes or state sales taxes. The deduction for personal casualty and theft losses has also been significantly curtailed and is now only available in presidentially declared disaster areas. Another big change is the suspension of all miscellaneous itemized deductions subject to the 2% of AGI floor. So no more deductions for hobby expenses, unreimbursed employee expenses and investment expenses at least until 2026. Some of the less dramatic changes where a scale back of the mortgage balance, eligible for the mortgage interest deduction. Previously, you could deduct interest on up to one million dollars of acquisition indebtedness on your principal residenc plus another $100,000 of a home equity balance. That limitation is now down to a flat $750,000 of acquisition indebtedness for new home purchases. And now for some taxpayer favorable changes in itemized deductions. First, medical expenses for 2018 are now deductible to the extent they exceed 7.5% of AGI down from the previous 10% of AGI threshold. This is in contrast to the previous 10% of AGI limitation. Second, the AGI ceiling for certain charitable deductions such as cash has been increased from 50% to 60%. Finally, the pease limitation, which phased out certain itemized deductions once your AGI reached a certain threshold has also been suspended until 2026. Moving on from itemized deductions, which are a 'From AGI' deduction, we have a brand new 'From AGI' deduction, which is the qualified business income deduction. This provision establishes a 20% deduction for certain income earned from pass-through businesses or as a sole proprietorship. While this is a 'From AGI' deduction, meaning that you deduct it after you compute your adjusted gross income, it is not an itemized deduction, so you can still pair it with a standard deduction. Now if your taxable income is below 315,000 if you file jointly or below 157,500 for any other filing status, you can claim those qualified business income deduction pretty much without any limitation. But if you are above those thresholds, you have a couple additional limitations that are going to phase in. First, certain types of service businesses which unfortunately includes accountants, will not be eligible for the deduction. Additionally, your ability to claim the deduction will depend on the amount of wages in qualified investments in business property you make. Finally, jumping over to the federal gift and estate tax system, the lifetime exclusion on gifts and estates has doubled to just over $11 million per taxpayer in 2018. Meaning if at your death your state is worth less than $11 million, then you won't be subject to any estate tax. For a married couple, that's roughly $22 million.
