The most comprehensive tax reform since 1986, known as the Tax Cuts and Jobs Acts (TCJA), was signed into law in 2017, with its ramifications taking effect in the current 2018 tax year. The TCJA significantly revamped the current tax law by modifying or removing many deductions, while simultaneously doubling the standard deduction, lowering tax rates, and introducing a 20% business deduction. Due to the confluence of these opposing effects, the TCJA cannot conclusively be described as beneficial or adverse to taxpayers, however, studies have shown that on average it will reduce taxpayers’ income tax, with the greatest tax savings to those in higher tax brackets.
Below are some highlights of the Tax Cuts and Jobs Acts that may affect individuals in the theatre, entertainment and arts industry:
Benefits
- Decreased tax rates – the lower tax brackets have expanded to include larger income levels, and the tax rates in each bracket decreased, with the highest tax rate dropping from 39.6% to 37%
- Increased Standard Deduction – the standard deduction has nearly doubled from $12,700 to $24,000 for married filers, and increased from $6,350 to $12,000 for single filers
- Child Tax Credit – the child tax credit has doubled from $1,000 to $2,000 for each qualifying child
- Section 529 Plans – the Section 529 plan has been expanded to allow contributing funds into tax free investment accounts for elementary and high school tuition use. Prior to the tax reform, Section 529 only provided tax free growth on savings for higher education
Drawbacks
- Limitation on State & Local Tax Deduction – the most significant cutback of the tax reform has been the limitation on the itemized deduction for state income tax, property tax, and sales tax, which will be capped at a combined $10,000 for all taxes. In 2017 there was no limit to the state deductions
- Cap of Deductible Mortgage Interest – mortgage interest on home purchases that exceed $750,000 will no longer be deductible, however, homes purchased before 12/15/17 will be grandfathered at the 2017 limit of $1,000,000
- Elimination of the Personal Exemption – The personal exemption has completely been eliminated. In 2017, the exemption was $4,050 for the taxpayer and each dependent, subject to an AGI (adjusted gross income) phaseout
- Elimination of the Miscellaneous Itemized Deduction – The miscellaneous deduction which allowed deducting investment advisor fees, tax preparer fees (among others) has been removed.
Perhaps the most discussed aspect of the TCJA is code section 199A, a new deduction available to (non-corporate) taxpayers, which entitles a 20% deduction from the taxpayer’s “qualified business income.” (QBI). According to the new regulation, taxpayers who are engaged or invested in a business which is not a “specified service trade or business” (SSTB) can utilize this deduction against their business income, subject to various limitations. Currently, the IRS has deemed performing arts, such as theatrical productions as an SSTB’s and its income is therefore excluded from the 199A deduction. However, Withum is in the process of challenging the interpretation that performing arts should be defined as an SSTB. Withum has already met in Washington DC with the IRS representatives involved with formulating the current legislation, and intends to continue lobbying the IRS on this matter.
In light of the far reaching changes of the tax reform, new planning opportunities are available for taxpayers who seek to capitalize on the changes in the tax law. While taxpayers are best advised to have a discussion with Withum’s Theatre, Entertainment and the Arts team to consider customized planning options, below are general strategies to consider:
- Charitable Deductions – with the increased standard deduction, the tax benefit of charitable deductions for many taxpayers can be reduced. Taxpayers should therefor consider consolidating their multi-year charitable giving into one year. A Donor Advised Fund is a tool that can be helpful towards this end, as the deduction is fully received in year of donation while the charity can be distributed over the course of multiple years.
- Section 529 Savings – as the TCJA significantly expands the usefulness of the Section 529 savings tool, coupled with the existing state credit many states offer for Section 529 contributions, the benefit of 529 savings is all the more attractive.
- Estate Planning – with the doubling of the estate tax exclusion to $22 million for married couples, many new creative tax planning opportunities exist. The specialists in Withum’s Estate and Trust team are available to provide unique planning strategies.
Author: Joseph Cowan |[email protected]
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