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Tax Reform: What’s Changed, How Has It Changed, and What Does It Mean for You?

Compliance
Article
03/05/2018

Since the tax bill went into law at the end of 2017, many changes have begun impacting businesses and individuals. Below we break down what business and individual taxes, IRS withholding tables, and the individual mandate of the Affordable Care Act looked like before tax reform took effect, and how each has changed following the bill’s passage. Take a look at this before-and-after comparison to learn how these changes impact your business and your employees.

 
Before Tax Reform After Tax Reform
Business Taxes Business Taxes
  • Corporations were taxed at a progressive tiered tax rate, which generally ranged from 15 to 35 percent, or they'd be subject to the corporate Alternative Minimum Tax option.
  • Businesses could make deductions for settlements and costs of settlements that relate to sexual harassment or sexual abuse, regardless if settlements are subject to nondisclosure agreements.
  • Employers got a deduction for contributions made toward commuting expenses. Employees received tax-free funds to offset various commuting costs, including cycling costs. Limitations applied.
  • Reduces the corporate tax to a 21 percent flat rate with no corporate Alternative Minimum Tax.
  • Permits deductions of up to 20 percent for qualified business income for pass-through entities (partnerships, LLCs, sole proprietorships, S corporations). Complex rules and limitations apply. The provision falls under the individual tax code, and will sunset in 2026 without additional legislative action.
  • Allows a tax credit for certain employers that provide paid family and medical leave to their workforce. The credit ranges from 12.5 percent to 25 percent of wages paid. The credit is only available for wages paid in 2018 and 2019.
  • Disallows businesses from making deductions for harassment or sexual abuse-related settlements that are subject to nondisclosure agreements.
  • Businesses no longer get a deduction for contributions to commuting expenses with the exception of cycling cost reimbursement. Employees still receive the tax-free benefit for the previous commuting cost with the exception of cycling. Money toward cycling to work is no longer tax-free for the employee.
  • Modifies the rules for exclusion of employee achievement awards. The change would prohibit items such as cash and gift cards from tax-free status.
Individual Taxes Individual Taxes*
  • In 2017 deductions were $6,350 for single filers, $12,700 for married joint filers, and $9,350 for heads of households.
  • In 2017, the IRS allowed a $4,050 exemption per family member, including the filer.
  • Maximum child tax credit was $1,000. The phaseout threshold was $110,000 for joint filers and $75,000 for single filers.
  • The mortgage interest deduction threshold was $1,000,000.
  • Individuals could deduct qualified medical expenses that exceeded 10 percent of adjusted gross income.
  • Estate and gift tax exemption was $5 million.
  • Civilians could deduct moving expenses.
  • Special rule allowed recharacterization of individual retirement account (IRA) contributions between Roth and traditional IRAs.
  • Almost doubles the standard deduction to $12,000 for single filers, $24,000 for married joint filers, and $18,000 for heads of households.
  • No longer allows personal exemptions.
  • Maximum child tax credit is now $2,000 and there is an additional $500 family credit for nonchild dependents. Phaseout thresholds have been raised to $400,000 for joint filers and $200,000 for singles in 2018.
  • Decreases the mortgage interest deduction threshold to $750,000.
  • Caps state and local tax deductions at $10,000, but takes into consideration sales, income, and property taxes to reach the cap. Both the House and Senate versions only allowed property taxes.
  • Reduces the threshold for deducting qualified medical expenses to pre-Affordable Care Act levels (7.5 percent) for 2017 and 2018 only.
  • Increases the Alternative Minimum Tax threshold.
  • Estate and gift tax exemption is $10 million.
  • Only members of the armed services can deduct moving expenses.
*Note: These individual tax provisions sunset in 2026 without additional legislative action.
IRS Withholding Tables IRS Withholding Tables*
  • The withholding rate on supplemental wages for $1 million or less was 25 percent.
  • The withholding rate on supplemental wages over $1 million was 39.6 percent.
  • The back-up withholding rate was 28 percent.
  • Amount to add to non-resident alien wages is $2,300 annually.
  • The withholding rate on supplemental wages for $1 million or less is 22 percent.
  • The withholding rate on supplemental wages over $1 million is 37 percent.
  • The back-up withholding rate is 24 percent.
  • Amount to add to non-resident alien wages is $7,850 annually.
*Note: Though they were eliminated, personal allowances were retained in the new withholding tables to work with existing W-4 forms. Employers will need to factor these allowances in when applying the withholding. On February 27, 2018, the IRS published a new 2018 W-4 form with instructions and calculations to bring individuals closer to their 2018 tax liability.
Affordable Care Act Affordable Care Act
  • Individuals were required to demonstrate they had qualified health insurance coverage or qualified for an exemption on their tax returns, or face a tax penalty from the IRS.
  • The ACA's individual mandate tax penalty will be reduced to $0 by 2019.
  • Self-insured employers and insurers are required to report individuals covered by their plan or face penalties.
Stay up-to-date with the latest tax reform developments impacting both employers and employees at Paychex WORX.
This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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