Tony Vallejo, CPA (805)845-2046 tony@tonyvallejo-cpa.com 2018 Tax Reform Tony Vallejo, CPA (805)845-2046 tony@tonyvallejo-cpa.com

Overview The most significant changes to tax law in the last 30 years. Most people will end up saving taxes, I estimate 95% of my clients project to save at least some $. Wage earners are already seeing it, since withholding tables adjusted in February. Changes affect both personal and corporate taxes. Personal tax law changes will expire by 2025 without an act of congress, corporate changes are permanent.

Personal tax law changes Lowers individual tax rates Increases the standard deduction Eliminates personal exemptions Expands and increases the child and dependent tax credits Reduces the amount of allowable indebtedness on mortgages of personal residences. Imposes limitations on deductions of state and local taxes. Adjusts Alternative minimum tax. Taxation treatment of alimony

Business/Corporate Tax Changes Reduction in C-Corporate tax rate Eliminates AMT Pass through entities generally get deduct 20% of net income Foreign source dividends can be exempt from U.S. taxation Repatriation of foreign earnings

Alimony Pre-2018 alimony and separate maintenance payments were deductible by the payor spouse and includible in income by the recipient spouse. 2018 law reverses this treatment, making alimony and separate maintenance payments non‐deductible to the payor spouse and non‐taxable to the receiving spouse. The effective date is delayed by one year, generally being effective for any divorce or separation instrument executed after December 31, 2018.

Personal exemptions Under 2017 tax law allowed a $4,050 deduction, subject to phase‐out. Eliminated in 2018; merged with higher standard deduction.

Standard Deduction Currently $12,700 ($6,350 if single) Increase to $24,000 ($12,000 if single), enhanced for elderly and blind. Net result will be a decrease in number of tax payers using itemized deductions.

Business tax law changes Reduces C-corp tax rates Eliminates AMT tax Pass through entities are eligible for a 20% deduction of taxable income (subject to phase out). Excludes foreign source dividends from US income tax. On time repatriation of foreign earnings

Individual tax rates Revised Original 10% $0-$9,525 $0-$19,050 12% Marginal Tax Rate Single Married Filing Jointly 10% $0-$9,525 $0-$19,050 12% $9,525-$38,700 $19,050-$77,400 15% 22% $38,700-$82,500 $77,400-$165,000 25% $38,700-$93,700 $77,400-$156,150 24% $82,500-$157,500 $165,000-$315,000 28% $93,700-$195,450 $156,150-$237,950 32% $157,500-$200,000 $315,000-$400,000 33% $195,450-$424,950 $237,950-$424,950 35% $200,000-$500,000 $400,000-$600,000 $424,950-$426,700 $424,950-$480,050 37% Over $500,000 Over $600,000 39.60% Over $426,700 Over $480,050

Child/Dependent tax credits 2017 tax law allowed $1,000 credit, per qualifying child subject to phaseout beginning at $110,000 (married) and $75,000 (single taxpayers). $2,000 per qualifying child $500 per non‐child dependent; subject to phase‐out beginning at $400,000 (married) and $200,000 others. Helps offset loss of personal exemptions and expands dependents eligible for credit.

Mortgage interest deduction In 2017 were allowed to deduct mortgage interest on up to $1,100,000 in mortgage indebtedness (including home equity lines) Mortgage interest deduction: $750,000 limit on acquisition indebtedness retained (principal or secondary residence); deduction for home equity loan repealed Still a work in progress (appears home equity lines are now deductible but still limited to $750,000). Pre-2018 mortgages not effected. Does not effect rental properties

State and local taxes Pre 2018 there was no limit on the amount of state income tax, property tax, DMV fees, etc that could be deducted. Deduction for state and local income, sales tax and real property taxes limited to $10,000 in aggregate ($5,000 for married filing separately). I believe this will have a much bigger impact. This change was the reason that many felt the law was punitive to the “Blue” states.

Alternative Minimum Tax Pre-2018 - Parallel tax calculation with top rate of 28% and $84,500 exemption for married taxpayers ($54,300 others); phase out of exemption begins at $160,900 for married taxpayers ($120,700 others) Retains and modifies AMT; exemptions raised to $109,400 (married) and $70,300 (others); phaseout of exemption begins at $1 million for married taxpayers ($500,000 others)

C-Corporate tax rate 2018 law creates a flat 21% tax rate Pre 2018 Taxable Income Range Marginal Corporate Tax Rate (2017) $0-$50,000 15% $50,000-$75,000 25% $75,000-$100,000 34% $100,000-$335,000 39% $335,000-$10,000,000 $10,000,000-$15,000,000 35% $15,000,000-$18,333,333 38% $18,333,333 and above 2018 law creates a flat 21% tax rate

Alternative Minimum Tax Parallel tax calculation with top rate of 20% Eliminated for Corporate tax filers

Pass through entities Pre-2018 Subject to tax at individual rates up to 39.6%. An individual taxpayer generally may deduct 20% of domestic qualified business income from a partnership, S corporation, or sole proprietorship. There are some very complicated phaseout rules that may eliminate this deduction. This is a big deal! May lead to fundamental changes in tax planning especially in relation to entity selection.