The Foreign Service Journal, April 2018

THE FOREIGN SERVICE JOURNAL | APRIL 2018 81 AFSA NEWS Business Taxes Cuts for businesses were central to the new law. Among these, the C corporation income tax rate was reduced from 35 per- cent to a 21 percent flat tax, which does not sunset like most changes to the individual tax laws. Few members of the For- eign Service community operate small businesses as C cor- porations, but this cut may affect future business structuring choices. Those with smaller taxable incomes should note that the 15 percent corporate tax bracket for corporations with less than $50,000 of taxable income has been eliminated. More germane to all business owners, the tax cut permits “bonus” depreciation of capital assets subject to wear and tear (e.g., vehicles, computers and office equipment) of up to 100 percent in the first year. In other words, businesses can write off the entire cost of depreciable assets they acquire the same year they are purchased. Note that this property must be used by a trade or business or held for the production of income. This rule will fully phase out by the end of 2026. A third high-priority business tax cut includes a deduc- tion of up to 20 percent of “combined qualifying business income” for businesses that are not corporations and that own an interest in some kinds of pass-through entities like partnerships, S corporations and sole proprietorships. This concept is highly complex and includes many limits. It appears that businesses with large amounts of real estate held in a C corporation and those operating like merchants (as opposed to rendering professional services such as legal advice) will benefit most from this. In any case, this incen- tive is further complicated by additional layers of complex definitions. You should retain a tax professional for assis- tance claiming this deduction if you believe you may be able to benefit from it. Briefly, some amendments act to increase corporate tax liability to balance loss of revenue from the above cuts. The most relevant of these include reduced deductibility of business entertainment expenses and limiting net carryover losses to 80 percent of taxable income. Net business inter- est expense deductions are also capped at 30 percent of adjusted taxable income. Individual Taxes • Alimony/spousal support no longer deductible by payor Payments of alimony (also known as spousal support or separate maintenance) have been deductible to the payor and included in the income of the recipient since the 1950s. The tax cut eliminates the deduction for payors and the requirement that recipients of such payments include them in their taxable income. This provision applies only to divorces entered into and modifications of support beginning in 2019. • 529 Funds for elementary and secondary education Up to $10,000 of a taxpayer’s 529 plan may now be used to pay for elementary and secondary education. Funds may be used for private and religious education as well as public options. • Some charitable contributions deductible up to 60 percent The tax cut increases the percent by which charitable donations to public charities and private foundations are deductible, from 50 percent to 60 percent of a taxpayer’s “contribution base,” which is often the same as AGI. Some Proposed Changes Were Not Made Earlier versions of H.R. 1 included modifications of many tax laws that did not make it to the president’s desk. Reducing the number of marginal tax brackets, capping the exclusion for employer-provided housing and modifying the ownership requirements for excluding the gain on the sale of a principal residence are among the rejected proposals already sum- marized above. In addition, the $250 deduction for educator expenses and the $5,250 exclusion for employer-provided educational assistance for employees and their dependents were not touched by the new law. Conclusion The Tax Cut and Jobs Act of 2017 is a broad, detailed set of amendments to the existing Internal Revenue Code. It accomplishes much for businesses and individuals, the net effect of which, as estimated by the Joint Committee on Taxation, will be to increase the Gross Domestic Product by about 0.7 percent over a 10-year budget window. That growth is expected to soften the blow to federal revenue, which is forecast to decrease by $1 trillion over the same period. Although each individual and corporate taxpayer will see different results based on their particular circumstances, members of the Foreign Service community will gener- ally benefit from the lower marginal brackets, increased standard deduction, increased child tax credit and reduced need to itemize. Retirees’ deductions for medical expenses over the 7.5 percent AGI floor have been preserved a bit H.R 1 did not touch the IRC Section 912 exclusion for civilian officers and employees for “allowances or otherwise (but not amounts received as post differentials)” paid by the Secretary under the Foreign Service Act.