Feeling uncertain about the colossal tax overhaul that just occurred in Congress? Don’t worry.

Most people are anxious about what the changes will mean for them and this series of blog posts will attempt to explain some of the salient points.

According to a 2015 Inc. Magazine article, the U.S. now has 27 million entrepreneurs.

Now, if you own a deli you may not think of yourself as an entrepreneur, but you are. You own a business that you started, right? You have employees or maybe a nephew who works for you? That makes you an entrepreneur.

And you’re going to care about how the qualified business income deduction affects you.

As of 2018, there’s a qualified business deduction available to you. The deduction is 20% of your qualified business generated, after deducting expenses.

Now for some industries, the 20% qualified business income deduction will phase out once the taxpayer’s net income exceeds $315,000 for married couples filing jointly and $157,500 for singles.

Some believe that due to the way the language is drafted in the bill, Realtors may likely be subject to the phase-outs. But for those who fall under the taxable income limitation, the tax break for Realtors will be great.

What’s interesting about the new tax law is that rentals will qualify for the qualified business income deduction (QBID). It’s anticipated that the IRS will issue regulations on this point in the future.

Because new regulations concerning the QBID are complicated, we continue our caveat that you should take all your questions and concerns to your CPA.

More Changes

Let’s take a look at some additional tax changes on the horizon.

Overall, income tax rates are dropping by 3% to 4% for most brackets. The top rate was reduced from 39.7% to 37% effective January 1, 2018.

For those of you who worry about capital gains, nothing changed in the fundamental capital gains tax structure.

The long-term capital gains tax rates of 0%, 15%, and 20% still apply. However, the way they are implemented has changed slightly. Under previous tax law, the 0% rate was applied to the two lowest tax brackets, the 15% rate was applied to the next four, and the 20% rate was applied to the top bracket.

On the short-term capital gains side, short-term gains are still considered ordinary income. If your marginal tax rate has changed, your short-term capital gains tax will change as well.

If you enjoy deducting entertain expenses, I have some bad news. They are no longer deductible as of 2018.

Depreciation limits for passenger automobiles acquired after September 28, 2018, have increased. If you purchased a vehicle that cost $47,120, it might be depreciated over a five-year period.

There has been quite a bit of discussion that the Obamacare requirement to have health insurance had been repealed. The truth is that the requirement is still in place, but it will expire effective 2019.

Are Californians being penalized in the new tax code? Californians will feel the limit on state and local tax deductions, but other citizens won’t feel the impact.

Commercial Property

The tax code overhaul expands the definition of qualified real commercial property eligible for the Internal Revenue Code section 179. Taxpayers may deduct the cost of qualifying property rather than recover costs through depreciation deductions. Examples include:

  •     Roofs

  •     Ventilation

  •     Air-conditioning property

  •     Heating

  •     Fire protection and alarm systems

  •     Security systems

Estate Taxes

Before tax reform, few estates were subject to the estate tax. Now, even fewer people have to deal with it. The amount of money exempt from the tax – previously set at $5.49 million for individuals, and at $10.98 million for married couples – has been doubled.

There’s even more to this tax change.

Make sure that the transfer of property from one generation to another is done within the confines of a will or trust. If the parent transfers the property to a child while the parent is still alive, in other words, a “deathbed transfer,” the child will pay taxes. The amount of the taxes would depend on the appreciation of the piece of property. So in the case of a home that a parent purchased for $120,000 that increased in value to $2 million, the tax liability would be high.

It’s imperative that you review your trust again with your attorney. There are a lot of changes, and it’s crucial that your attorney understand the implications of the new tax code on your trust, specifically as it has to do with the transfer of property.

Also, if you have clients who don’t have a living trust, advise them to consider having the title on their properties as “Community Property with Right of Survivorship” instead of a Joint Tenancy.

* This blog post is an indication of our understanding of the new tax code. We urge you to speak with your CPA and tax attorney to determine how the newly passed tax code and regulations will impact your tax liability.


Thanks for reading!

Carissa Abazia