The President has signed the biggest tax reform law in over 30 years. When you file your 2018 tax returns – about a year from now – your tax return will look very different from anything you’ve seen in the past. And because most changes don’t happen until then, we have some time to plan. Have a look at a few of the biggest changes that may affect you:
- Tax rate changes: Both individual and corporate rates have changed. The maximum individual rate is reduced to 37% and the corporate rate is now a flat 21%.
- Standard deduction increases:
Married Filing Joint
Head of Household
However, personal exemption deductions are no longer allowed.
- Child tax credit and new dependent credit increases: The credit is increased for each child to $2,000 (up to $1,400 of which is refundable for each child) and each non-child dependent can now receive a new credit of $500. (No exemption credit of deduction for you or your spouse.)
The phaseout thresholds for these credits is drastically increased. Married taxpayers filing a joint return can claim the full credits if their adjusted gross income is $400,000 or less ($200,000 for all others). The credits are fully phased out for married taxpayers filing a joint return when their adjusted gross income reaches $440,000 ($240,000 for all others). This means that many more taxpayers will be able to claim these credits in 2018 and beyond.
- Deductions disappear: Beginning with the 2018 tax year you will no longer be able to deduct:
- State income tax and property taxes above $10,000 per year in total
- Moving expenses (with exception for certain military)
- Employee business expenses such as mileage, travel, and entertainment, home office expense, union dues, tax preparation fees, and investment fees, among others. If you currently are employed and required to have a home office or incur business expenses that are not eligible for reimbursement we suggest that you discuss the new changes with your employer. Please feel free to give us a call to discuss talking points.
- Mortgage interest above $750,000 on homes purchased after 12/15/2017.
- Equity interest (the interest on any money borrowed against your home that was not put back into your home is no longer deductible). We encourage all of you to keep this in mind for any future refinancing that you may want to do.
- Alimony paid or inclusion of alimony as income, starting with settlements after 12/31/2018. Prior settlements still allowed as a deduction or inclusion but modifications may not be.
- Some new benefits for individuals:
- Beginning in 2018, the medical expense threshold will temporarily drop to 7.5% of AGI.
- The Alternative Minimum Tax (AMT) threshold is increased. (Fewer middle-income taxpayers will be subject to AMT with the higher threshold and less preference items.)
- The estate tax exclusion has basically been doubled to $10,000,000 (adjusted for inflation).
- The gift tax exclusion remains the same ($14,000 for 2017 and $15,000 for 2018) but the maximum rate on gifts above the limits is 35%
- The ability to fund an IRA up to the due date of the return if there was a loan from a qualified plan (generally and employer type plan) and the plan was terminated or you left employment prior to fully paying it back.
- The Affordable Care Act (ACA) individual mandate is repealed after 12/31/2018. This means no penalty for not having insurance.
- Small business and rental benefits: Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxed as a C corporation), partnership, S corporation, and rental activity. The rules are incredibly complex but there is a lot of planning that we can do to maximize this deduction for you. NOTE: This may also affect rental activities with a profit so it is not just small businesses that will benefit.
- Changes that did not make the final bill:
There was a lot of talk over the past few months about deductions to eliminate. A few of those deductions that survived the cut:
- Student loan interest
- Credit for elderly and permanently disabled
- Plug in electric vehicle credit
- Qualified tuition expenses
- K-12 teachers’ expenses above $250