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Last updateThu, 21 Feb 2019 12am







    Wednesday, February 20, 2019-10:06:36A.M.






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US tax reform doubles child tax credit

THE U.S. Tax Cuts and Jobs Act of 2017 has increased the child tax credit from $1,000 to $2,000 per qualifying child through tax year 2025, according to Rotarian Shamika Ratwatte on Tuesday.

In his presentation on the new law signed on Dec. 22, 2017 by President Donald Trump, Ratwatte said it retains the age limit of a “qualifying child” at below 17 years old. The child must be a U.S. citizen or resident with a Social Security number.

The new law adds a $500 non-refundable dependent credit for dependents who are not qualifying children, he said.

Ratwatte is the treasurer of the Rotary Club of Saipan and head of the Saipan office of the accounting firm Ernst & Young.

He said the purpose of the tax cuts is to spur economic growth and new investments.

Most provisions of the federal law are effective for tax year 2018, he said, adding that corporate provisions were generally made permanent.

But most individual provisions will expire after 2025 and will generally revert to pre-change law, if not otherwise extended by the U.S. Congress, Ratwatte said.

The Tax Cuts and Jobs Act lowers individual tax rates to 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent and adjusts rate-bracket thresholds.

The highest tax bracket is 37 percent instead of 39.6 percent for single taxpayers with taxable income of over $500,000.

For married taxpayers filing jointly, the threshold is taxable income of over $600,000, he said.

“The new law roughly doubles the standard deduction,” he added.

In 2017, the single standard deduction was $6,350 and it will be $12,000 in 2018.

In 2017, the head of household deduction was $9,350 and it will be $18,000 in 2018. In 2017, the deduction for those married and filing jointly was $12,700 and it will be $24,000 in 2018.

The new law suspends the deduction for personal exemptions through 2025. Currently, it is $4,050 per exemption, Ratwatte said.

Individuals may deduct qualified medical expenses in excess of 7.5 percent of their adjusted gross income or AGI for tax years 2017 and 2018.

After 2018, the threshold will increase to 10 percent of AGI. Due to the higher standard deduction, fewer taxpayers will receive a tax benefit for medical expenses.

Section 529 plans are educational savings plans sponsored by a state or state agency, Ratwatte said, adding that distributions of up to $10,000 are allowed per student per year tax-free from 529 accounts to be used for elementary, secondary, and university tuition.

The annual limit does not apply to post-secondary education tuition.

Alimony payments are nondeductible after 2018; however, old separation agreements are grandfathered.

The new law decreases the corporate tax rate from 35 percent to 21 percent and gets rid of the corporate alternative minimum tax.

Furthermore, the new law allows temporary 100 percent expensing of certain business assets.

The bonus depreciation percentage increased from 50 percent to 100 percent for property acquired and placed in service after Sept. 27, 2017 and before 2023.

A net operating loss is a loss taken when a company’s allowable tax deductions are greater than its taxable income, Ratwatte said.

The current law has a two-year carryback and 20 year carryover while the new law has no carryback and an unlimited carryover.

Ratwatte said the current law applies to 100 percent of taxable income, and the new law applies to 80 percent of taxable income.

He said the new law also allows “pass-through” companies such as S corporations, LLCs, partnerships, and sole proprietorships to deduct 20 percent of their qualified business income. Trusts and estates may take the deduction.

This provision will expire in 2026.

Ratwatte said qualified businesses do not include specified service businesses such as accounting, law, health, several other professions, service businesses related to investing, but include engineering and architectural trades.

In an interview, Ratwatte said:

“The Saipan code is a mirror of the federal tax code. Instead of paying the IRS you pay the CNMI Rev and Tax.

“After you calculate your taxes… the CNMI government will give you a rebate for both personal and corporate income taxes

“Even Chapters 2 and 7 are not really…different. Chapter 2 is calculated using the table published by Rev and Tax. Chapter 7 is the difference between Chapter 2 and the regular federal income tax.

“If you add Chapter 2 and Chapter 7 tax it will total to the federal income tax.

“Everything in the recently passed law will apply to the CNMI.

“For example, for 2018, there will be no exemptions for anyone in the CNMI. The child tax credit will apply. The lower individual and corporate tax rates will apply. Businesses will be able to take the 100 percent bonus depreciation

“This is a complicated area and it seems very hard for a lot of people…to understand, but to reiterate, the new tax law will absolutely apply to everyone paying taxes in the CNMI It’s just that you will pay your taxes to the local Rev and Tax instead of to the IRS.”