The tax law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, which was enacted in December, contained the most sweeping federal tax law changes in more than 30 years. Despite the rhetoric about simplifying the Internal Revenue Code (IRC), the TCJA did just the opposite--it added layers of new complexity for many taxpayers.
The federal complexity is matched by uncertainty regarding how state legislatures and taxing authorities will respond. This column provides an overview of state tax considerations resulting from the TCJA and the status of states' legislative responses.
Summary of federal changes
Below is a summary of some of the TCJA provisions that may affect state tax filings. (For a more comprehensive discussion of the TCJA's provisions, see Nevius, "Congress Enacts Tax Reform," 225-2 Journal of Accountancy 52 (February 2018), tinyurl.com/y9dx85d7.) Unless indicated otherwise, these changes became effective Jan. 1, 2018. Most individual tax provisions are effective through 2025, while most corporate tax provisions are permanent.
* The standard deduction is increased to $24,000 for married filing jointly, $18,000 for heads of household, and $12,000 for single filers.
* Personal exemptions are eliminated.
* Numerous itemized deductions are modified or eliminated:
** The amount deductible for state and local taxes (SALT) is limited to $10,000 ($5,000 for married filing separately), comprised of income, real estate, and sales taxes.
** The cap on acquisition indebtedness qualifying for the home mortgage interest deduction is decreased from $1 million to $750,000 ($375,000 for married filing separately). The pre-TCJA cap still applies for mortgage loans existing prior to Dec. 15,2017, and for individuals who signed a binding contract before Dec. 15 to buy a home and met certain other requirements.
** Only home-equity loan interest on loans used for improvements to a home is deductible. Under the prior law, interest on home-equity loans of up to $100,000 was deductible regardless of how the funds were used.
** The adjusted-gross-income (AGI) cap for contributions to public charities increased to 60%.
** The deduction for miscellaneous expenses (tax preparation fees, etc.) subject to the 2% floor is eliminated.
** For 2017 and 2018 only, the AGI threshold for deducting medical expenses is lowered to 7.5%.
** Casualty losses will be deductible only if they are attributable to a presidentially declared disaster.
* Moving expenses are deductible only by members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station.
* Moving expense reimbursements are now includible in gross income and wages, other than reimbursements to a member of the military on active duty who moves pursuant to a military order.
* Owners of flowthrough entities including S corporations, partnerships, and sole proprietors engaged in a qualified trade or business may deduct 20% of their shares of the qualified business income (QBI) from the fiowthrough entities. The deduction is available for individuals, estates, and trusts, and excludes wages and guaranteed payments received from the fiowthrough entity. The deduction for income from certain personal service businesses will be entirely phased out if the owner's taxable income exceeds specified thresholds. Owners of other (nonpersonal service) businesses do not face the phaseout but are subject to potential reductions of the benefit. For owners of these entities, the deduction is affected by overall taxable income, wages the entity paid, and, in some cases, certain fixed-asset costs of the entity. Interestingly, the federal tax return's placement of this deduction (presumably post-AGI, but before itemized deductions) may have an impact on state taxes, as discussed below.
* For the last tax year beginning before Jan. 1, 2018, U.S. shareholders of specified foreign corporations must include in income a "deemed repatriation dividend."The deemed dividend is the shareholder's pro rata share of the corporation's post-1986 accumulated earnings and profits. For corporations, this income will be taxed at either 8% or 15.5%, but through the complex use of restricted deductions, the effective individual rates generally will be somewhat higher. The first payment for most taxpayers was due April 17, 2018, but the tax can generally be paid over an eight-year period. This tax is due regardless of whether cash is actually repatriated. It is paid separately and electronically; it cannot be combined with, or paid as part of, any standard income tax paid with a taxpayer's tax return or extension.
* Tax-free distributions from a Sec. 529 education savings plan of up to $10,000 per year, per recipient can now be used toward tuition at elementary and secondary schools, including religious or other private schools.
* Businesses with average gross receipts for the prior three tax years of greater than $25 million are subject to limitations on the deduction for business interest. The limitation applies to all businesses, regardless of entity type--C corporations, fiowthrough entities, and sole proprietorships.
* Net operating losses (NOLs) can no longer be carried back, but the carryforward period is indefinite (vs. 20 years). And, with very few exceptions, NOLs can offset only up to 80% of the taxpayer's taxable income in the year to which the loss is carried.
* Corporations must recognize the deemed-dividend repatriation for the last tax year beginning before Jan. 1, 2018. (The TCJA includes other complex foreign tax provisions that are beyond the scope of this column. For more, see Lady, "The New GILTI and Repatriation Taxes: Issues for Flowthroughs," on p. 370.)
* Bonus depreciation of 100% (vs. 50%) applies to the qualifying costs of property put in service after Sept. 27, 2017. The bonus percentage decreases beginning in 2023 and expires after 2026.
* The Sec. 179 deduction is increased to $1 million, and the phaseout begins at costs exceeding $2.5 million.
The fiscal impacts that will be felt by the states and their residents as a result of the TCJA's provisions depend on multiple factors, including how the state conforms to...