Today, December 20, 2017, the House passed a slightly revised (and renamed) version of the Tax Cuts and Jobs Act, which the Senate passed in the wee hours last night. The president is expected to sign the bill into law this week. It will take effect on January 1, 2018 and apply to earnings for 2018. It will not affect taxes payable for 2017. The bill reflects a consolidation and reconciliation of each chamber’s bill. While we are still reviewing the bill and its impact on authors with our tax advisors, here is a summary of some of the major changes below.
Self-employed authors may deduct business expenses, and that will not change; and so for many authors, it will probably continue to makes sense to itemize their deductions. If you do not itemize (i.e., because your total allowable deductions under the new law add up to less them the new standard deduction), you may benefit from the slightly higher effective standard deduction and slightly lower tax rate, at least until 2025 when the new lower rates expire. If you do itemize, and you live in a state with high property and real estate taxes, you may actually see your taxes go up, as only up to $10,000 in state and local taxes will be deductible now. If your total state and local taxes are less than $10,000, your taxes may be slightly lower until 2025. We have not yet determined when and if it would make sense from a tax perspective for an author to set up a pass-through entity; and we will be analyzing that and providing more information in the New Year.
The main reduction in taxes applies to corporations. The tax rate has been cut from a high of 35% to 21% (slightly up from the Senate bill’s 20%).
Individual tax rates will go down slightly for most people, with the greatest cut at the top tier, and minor reductions for other brackets. The top rate, which applies to single individuals with earned income over $500,000 and married couples filing jointly with earned income over $600,000,will be reduced to from 39.6% to 37%. Table 4 from the bill (see below) shows the new rates in each of the other tax brackets. These cuts, along with many others, will expire after 2025 (due to a budgetary measure which allowed the bill to pass with a Republican majority).
Standard Deductions and Personal Exemptions
The standard deduction has been doubled, but the personal exemptions have been eliminated, meaning that the effective increase in the standard deduction is actually quite slight. For those filing as single individuals, the standard deduction will be increased from $6,350 ($10,400 if you include the personal exemption) to $12,000 for single individuals. It will be raised to $24,000 for married couples filing jointly, up from $12,700 ($20,700 if you consider the personal exemptions), but for those filing as married couples with two children, the new standard deduction will amount to a decrease, even with the child tax credit increasing from $1,000 to $2,000 -- if you account for the loss in personal exemptions from $28,700 (the existing standard deduction plus exemptions amount for married couples with two children.) All bets are off in 2025, however, when these deductions and exemptions revert back to their current levels.
With respect to the state and local tax, including property taxes, deductions (commonly referred to as “SALT”) which have been the subject of much concern in states with high taxes such as New York, New Jersey and California, taxpayers will be allowed to deduct only up to $10,000 total of state and local income taxes and property taxes combined. Taxpayers will be able to deduct the interest on mortgage debt up to $750,000 for their primary home and one other “qualified residence.”
For most home owners in the New York metropolitan area, as well as many counties in California (as well as some Philadelphia suburbs), where state taxes and local property taxes are high, as are home prices (and hence mortgages), the overall impact will be a significant tax increase. It is also predicted that home values are likely to decrease in the short run as a result of the reduction in SALT deductions.
Currently, taxpayers can deduct out-of-pocket medical expenses that exceed 10% of their adjusted gross income. This will be adjusted to expenses that exceed 7.5% – until 2019, when the figure will go back to 10%.
As we previously noted, the Affordable Care Act’s individual mandate – the requirement that individuals must buy a qualifying health insurance plan or pay a penalty – has now been eliminated by reducing the penalty to zero in 2019. This will probably lead to higher health insurance premiums for those who don’t qualify for premium subsidies (because the point of the individual mandate was to widen the risk pool and lower premiums for all), which has been predicted to lead to 13 million fewer people having health in insurance in 10 years.
Starting in 2019, certain individuals will be able to deduct 20% of their qualified business income from a partnership, S corporation and sole proprietorship; however, certain service industries (such as law and other “specified service trade or businesses”) are excluded from this provision.
We are working with our tax advisor to understand whether the bill will make it advantageous for authors with income over a certain level to create an S-Corp or LLC as a pass-through for their writing income. It is not clear to us yet whether an author’s pass-through entity will be subject to the new tax rate of 20% or whether authors’ pass-throughs will be excepted out as service entities and subject to the individual income tax rates. We will report on that shortly after the New Year. It costs several thousand dollars to set up such a corporation and additional accounting fees each year to maintain one. In addition, there are some copyright law ramifications which we are looking into. As such, setting up a pass-through entity is not something to be undertaken without carefully thinking through the costs and benefits with your accountant. You might consider asking your publisher to hold off paying any significant amounts due to you early in the new year until you can figure out the best course of action.
Authors who work as independent contractors should still be able to deduct business expenses, including home office expenses and commissions paid to agents. If an author is treated as an employee for any particular project (for which you receive a W-2 instead of a 1099), however, the commission and other business expenses, will no longer be deductible. We will provide more information on this early in the New Year.
Student loan interest is still deductible and graduate student tuition waivers are still alive and kicking (meaning that graduate students need not consider the reduction in their tuition as taxable income). Teachers can continue to take a limited deduction for certain job-related and classroom expenses.
Alimony and separation payments will not be deductible for divorce or separation documents signed after December 31, 2017.