Today we continue our series highlighting some of the provisions in the recent Tax Cuts and Jobs Act. All provisions are effective 1/1/2018 unless otherwise stated. As always, if you should have any questions, please feel free to reach out to our office.
Additional Changes for Individuals
For estates of decedents who die or for gifts made after 12/31/2017 and before 1/1/2026, the basic exclusion amount is $10 million (indexed for inflation occurring after 2011). The annual gift exclusion amount is $15,000. Basis step-up rules remain unchanged. For decedents dying in 2018, the estate tax exemption amount is $11.2 million.
Repeal Rule Permitting Recharacterizations of Roth Conversions
The special rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. However, recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution for a year to a Roth IRA and, before the due date for the individual’s income tax return for that year, recharacterize it as a contribution to a traditional IRA.
Extended Rollover Period for the Rollover of Plan Loan Offset Amounts in Certain Cases
Extends the deadline to avoid having a plan loan be treated as a taxable distribution as a result of an individuals’ separation from service (or in the event of plan termination) by permitting employees to roll over the loan balance to an IRA/plan by the due date for filing their tax return (including extensions).
Relief for 2016 Disaster Areas
There will be no 10% additional tax on early distributions from qualified plans, 403(b) plans and IRAs if it’s a qualified 2016 disaster distribution. The aggregate distribution for a taxable year cannot exceed the excess of (1) $100,000 over (2) the aggregate amounts treated as qualified 2016 disaster distributions received by such individual for all prior taxable years. (Controlled group rules apply.) Special rules will allow the distribution to be repaid to the plan. The distribution will be included in income over a 3-year period, rateably.
Applies to 2017 and 2018 tax years for casualty losses arising in 2016 and 2017.
Modifications of Treatment of Certain Farm Property
The provision shortens the recovery period from 7 to 5 years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer and is placed in service after 12/31/2017. The provision also repeals the required use of the 150% declining balance method for property used in a farming business (i.e., for 3, 5, 7, and 10-year property). The 150% declining balance method will continue to apply to any 15-year or 20-year property used in the farming business to which the straightline method does not apply, or to property for which the taxpayer elects the use of the 150% declining balance method.
The term ‘‘farming business’’ means a trade or business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity (e.g., the trade or business of operating a nursery or sod farm; the raising or harvesting of trees bearing fruit, nuts, or other crops; the raising of ornamental trees (other than evergreen trees that are more than six years old at the time they are severed from their roots); and the raising, shearing, feeding, caring for, training, and management of animals). A farming business includes processing activities that are normally incidental to the growing, raising, or harvesting of agricultural or horticultural products. A farming business does not include contract harvesting of an agricultural or horticultural commodity grown or raised by another taxpayer, or merely buying and reselling plants or animals grown or raised by another taxpayer.
Effective for property placed in service after 12/31/2017.
Use of Alternative Depreciation System for Electing Farming Businesses
The provision requires an electing farming business, i.e., a farming business electing out of the limitation on the deduction for interest, to use an alternative depreciation system to depreciate any property with a recovery period of 10 years or more (e.g., property such as single purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements).