Many people are still unsure how tax reform will impact their tax filings. Most of the recent changes under the 2017 Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018 do not go into effect until 2018. However, there are a few retroactive changes that should be taken into account when filing your 2017 taxes. These changes are designed to help American taxpayers reduce their tax bills and increase their chance of receiving a tax refund.
Depreciation for business assets
The new tax law allows for 100% deduction for qualified property acquired and placed in service after Sept 27th, 2017. This “bonus depreciation” expensing should not be confused with the prior allowance for Section 179 deductions, which have a different set of rules based on income. A business set up as a pass-through entity with little or no taxable income could be allowed to pass through to its owners the cost of purchasing new equipment and potentially get a large deduction against other income, including wages. Assets placed in service before that date are still eligible for 50% bonus depreciation deduction.
Property that qualifies for the additional bonus depreciation must fall under one of the following definitions:
- Recovery period of 20 years or less (most tangible personal property and computer software falls into this category, but not real property)
- Must be original use with the taxpayer – thus purchase of used property will qualify, but not converting personal assets to business use.
- Qualified improvement property – certain leasehold improvements, interior renovations to nonresidential property.
Figuring out which of many different methods of depreciation should be used by a taxpayer is a complicated equation, and there is no one right answer as to whether a taxpayer should take Section 179 or bonus depreciation, or whether to opt out of both methods.
Business use cars and trucks have even more complicated depreciation rules, and your accountant will have to help you figure out which method you are permitted to use, and which provides you the better tax result in the long run.
The American Opportunity Tax Credit
The American Opportunity Tax Credit is a credit for taxpayers paying college-related expenses for themselves, their spouse, child or other dependent. Depending on income and filing status, individuals or couples filing jointly may be eligible to receive a tax credit of up to $2,500 for post-secondary education expenses such as tuition and course materials.
The American Opportunity Tax Credit allows eligible taxpayers to receive 100% credit on the first $2,000 spent on post-secondary education, and 25% credit on the following $2,000. This tax credit is partially refundable, meaning that taxpayers may receive up to $1,000 in the form of a refund, even if no taxes are paid.
The American Tax Opportunity Act has been made permanent and is an expansion of the Hope Credit.
Discharge of indebtedness on qualified principal residence
The exclusion from income for the discharge of debt on a primary residence had expired in 2016, but the new tax law extended this provision through 2017. IRS tax forms may still not be updated for this change which was adopted in January 2018.
Changes to the Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) eliminates deductions for taxpayers that make more than a certain income. The AMT is designed to ensure that taxpayers in higher tax brackets are still required to pay taxes.
In 2013, Congress created a permanent AMT patch to prevent millions of middle-class taxpayers from having to pay AMT. The following are the 2017 AMT exemptions:
- $54,300 – Single/Head of Household
- $84,500 – Married Filing Jointly/Qualifying Widow
- $42,250 – Married Filing Separately
The Tax Cuts and Jobs Act that was signed into law by President Donald Trump last December keeps the AMT but raises the exemption and phase out levels. However, these changes do not go into effect until the 2018 tax year.
Energy Efficiency Credit
Taxpayers wishing to receive a tax break are strongly encouraged to install energy-efficient equipment in their home. Taxpayers who installed alternative energy equipment during the 2017 tax year are eligible to receive a tax credit worth as much as 30% of the cost of eligible property. Although this tax credit is not refundable, it can be carried forward to future tax years.
Burdette Smith & Bish offers tax planning and preparation services. Please contact us to set up a consultation.