Understanding New Tax Law Changes in 2018
January 23rd, 2018
SUMMARY OF NEW TAX LAW CHANGES
Recently, the President signed the most substantial tax reform in over 30 years, the Tax Cuts and Jobs Act (TCJA). While your 2017 tax returns will be prepared under the old laws, your 2018 tax return will look very different. Since most of the changes don’t happen until 2018, we have time to look at the new laws and plan for next year.
We have summarized the most significant and common changes that may affect you in 2018.
- Tax Rate Changes. The maximum individual rate will be reduced from 39.6% to 37%. The corporate rate will be decreased from 35% to 21%. These rate changes may benefit you but, in certain cases, may also cause your taxes to go up.
- Standard deductions and exemptions. The deduction will double from $12,700 (married filing jointly) to $24,000, from $9,350 to $18,000 (filing head of household) and from $6,350 (filing single or filing married separately) to $12,000. However, personal exemption deductions will no longer be allowed. This may help or hurt you.
- Increased Child Tax Credit and New Dependent Credit. The credit will increase to $2,000 per child, of which up to $1,400 is refundable for each child. Each dependent who is not a qualifying child will receive a credit of $500. However, you will no longer be able to claim the exemption credit or deduction for yourself, your spouse or your dependents.
Many more taxpayers will be able to claim these credits in 2018 because the phaseout thresholds have been dramatically increased. For example, taxpayers filing married jointly, can claim the full credits if their adjusted gross income is $400,000 or less (compared to $110,000 or less) while all other filers can claim the full credits if their adjusted gross income is $200,000 or less (compared to $75,000 or less).
Deductions that will disappear. Beginning in 2018, you will no longer be able to deduct:
- State income tax and property taxes above $10,000 per year in total;
- Moving expenses (except for certain military members);
- Employee business expenses such as mileage, travel, entertainment, home office expenses, union dues, tax preparation fees, and investment fees;
- Mortgage interest beyond interest on $750,000 of acquisition debt, if you purchase a new home;
- Mortgage interest on equity debt;
- Alimony payments (for separation and divorce agreements executed after January 1, 2018, (and modifications, executed after January 1, 2018 if the modification states that TCJA rules apply.)
New benefits for individuals.
- Alimony received is no longer included in income (for separation and divorce agreements executed after January 1, 2018, (and modifications, executed after January 1, 2018 if the modification states that TCJA rules apply);
- The medical expense AGI threshold will temporarily decrease to 7.5% (for 2017 and 2018) from the 10% threshold for 2016 (except for seniors);
- The AMT threshold is increased so fewer middle-income taxpayers will be subject to AMT. For example, the phase in amount for taxpayers filing married jointly starts at $109,400 and phases out at $1,000,000 (compared to $86,200 and $164,100), single and head of household filers phase in at $70,300 and phase out at $500,000 (compared to $55,400 and $123,100), while taxpayers filing married separately phase in at $54,700 and phase out at $500,000 (compared to $43,100 and $82,050);
- The estate tax exclusion has nearly doubled to $10 million;
- The annual gift tax exclusion remains the same at $14,000 for 2017 and $15,000 for 2018. However, the maximum tax rates on gifts is 35%.
Small Business Benefits.
Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxes as a C Corporation), partnership, S Corporation and rental activity. The rules for small businesses are very complex but we can help you plan so that we can maximize this deduction for you.
Beginning in May, 2018 (after the tax season), we will discuss any other changes that may affect you. As these changes are not simple, we suggest a separate appointment to go over the changes that apply to your situation and to talk about how to maximize your benefits under the TCJA.
We look forward to working with you this year.