Tax brackets have changed. There are still seven tax brackets, but income is now taxed at a different rate.
- For example, a married couple with taxable income between $77,400 – $156,150 would have been taxed at a 25% rate under the old bracket. Under the new law, it’s a 22% tax rate for taxable income between $77,400 – $165,000.
Personal exemption is eliminated, but the standard deduction is doubled for 2018 tax returns.
- In 2017, a single parent with one child filing as head of household and not itemizing would receive a standard deduction and personal exemption in the amount of $9,350 and $8,100 ($4,050 x 2) respectively for a total of $17,450. In 2018, that same taxpayer would receive a standard deduction of $18,000 and no personal exemption for an increase of $550.
Schedule A (the form used to itemize deductions) will undergo the following changes:
- Real Estate, Sales, and State and Local taxes – the total deduction will be capped at $10,000
- Mortgage interest deduction will be limited to taxpayers with $750,000 in mortgage debt
- The section labeled “Job Expenses and Certain Miscellaneous Deductions” will no longer be deductible after December 31, 2017:
- Unreimbursed employee expenses: job travel, union dues, job education, etc.
- Tax preparation fees
- Other expenses including:
- Safety deposit box
- Advisor investor fees
Moving expenses will no longer be deductible after December 31, 2017. The child tax credit is increased to $2,000 from $1,000, with at least $1,400 being refundable.
- The phase out for the credit changes as well.
- Married filers – Threshold ranges from $0-$440,000 of Modified Adjusted Gross Income (MAGI) – The old threshold was $110,000 of MAGI
- All other filers – Threshold ranges from $0-$240,000 of MAGI
Alimony deduction will no longer be available to the alimony paying spouse for divorces after December 31, 2018. For example:
- Imagine a high-earner significant other “A” now pays and deducts $30,000 a year in alimony. Significant other A’s income is taxed at 33%, so the deduction saves him/her $9,900. The lower-earning significant other “B” owes taxes on the alimony at a 15% rate, paying $4,500 instead of the $9,900 that would be due at significant other “A’s” rate. The two have saved $5,400 between them, and significant other “A” got a break that makes the payments more affordable.
- The deduction is still available to people if their divorce is completed prior to December 31, 2018.
The new tax bill also affects businesses. Some of the changes include:
- The top corporate tax rate will be reduced from 35% to 21%. The corporate tax rate is progressive like the individual tax rate, so most corporations will end up paying tax on an effective rate below 21%.
- The law extends and modifies the additional first-year depreciation deduction for qualified depreciable personal property by increasing the 50% allowance to 100% for property placed in service after September 27, 2017, and before year 2023. The bill removes the requirement in current law that the original use of qualified property must commence with the taxpayer. Thus, immediate expensing applies to purchases of used as well as new items.
- Eliminates the Domestic Production Activities Deduction
- Establishes a 20% deduction of qualified business income from certain pass-through businesses. Specific service type businesses, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service type businesses. This provision would expire December 31, 2025.
Overall, the new tax law will affect many people and businesses. Taxpayers will benefit from a discussion of how the law affects them and their business. Most individual and business taxpayers wait until the end of the year to start planning for next year but that might not be a sound strategy in 2018.
We recommend speaking to one of the members of Krueger CPA Group, a Five Stone Affiliate, to review your current tax situation for ways to reduce your tax liability in 2018 and beyond.
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