Spring 2018 issue of Horizons

Individual Income Tax Rates

Deduction Against Business Income Earned by Pass-Through Entities In 2018 there is a new deduction, generally equaling 20% of qualified business income. The deduction is generally not available for income from service businesses, which includes law firm professionals, otherwise known as the service business limitation. There is an exception to the service business limitation: The limitation does not apply until an individual partner’s taxable income exceeds $157,500 (or $315,000 for joint filers). Above those income levels, the service business limitation is phased-in over a $50,000 range (or $100,000 for joint filers). If a partner’s taxable income is under the service business limitation amount listed above, the partner still has to have “qualified business income” in order to get the 20% deduction. Qualified business income does not include reasonable compensation paid to the partner for services rendered with respect to the business. Guaranteed payments and investment income from the partnership do not qualify as part of the business income base used for calculating the 20% deduction. It is uncertain at this time if the “reasonable compensation” definition would include a portion of the partner’s ordinary income allocation as well. Disallowance of Certain Employee Fringe Benefits The Tax Cuts and Jobs Act disallows the deduction, at the firm-level, for any qualified transportation fringe benefits provided to employees, except as necessary to ensure an employee’s safety.

Pre-Reform Rates

2017 Reform Act

10% 15% 25% 28% 33% 35%

10% 12% 22% 24% 32% 35% 37%

39.6%

Section 529 Plans Distributions of up to $10,000 per year allowed for elementary and secondary public, private or religious schools. State and Local Tax Deduction There is a $10,000 maximum deduction now allowed for state income tax, real estate tax and personal property tax combined. Home Mortgage and Home Equity Interest The new law eliminates the interest deduction for home equity debt and caps the interest deduction on acquisition debt of $750,000. Note: This new law only applies to new acquisition debt after December 31, 2017.

Charitable Contribution Limit The new law raises the charitable deduction limit from 50% of AGI to 60%.

28 New Tax Law Highlights: The Impact on Law Firms and Their Partners