On December 22, 2017, the Tax Cuts and Jobs Act Update (P.L. 115-97) was signed into law. This will mark a fundamental change in the way you and your businesses calculate your federal income tax bill, and the amount of federal tax you will pay. Here are a few changes effective in 2018 that will affect your individual returns this year:
Beginning in 2018, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction.
Tax Rate Changes: Most taxpayers in most tax brackets will see their rates reduced. The maximum individual rate is reduced to 37% (from 39.6% in 2017)
Standard deduction essentially “doubled” from 2017: Standard deduction is increased to $12,000 for those filing Single, $18,000 for Head of Household, and $24,000 for Married Filing Joint. However, there are no more personal exemption deductions allowed.
Increased Child Tax Credit and New Dependent Care Credit: 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.
Additionally, the phase-out thresholds for these credits are 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 other filers). This means that many more taxpayers will be able to claim these credits in 2018 and beyond.
Disappearing Deductions: Beginning with the 2018 tax year, you will no longer be able to deduct the following:
- State Income tax and property taxes will be capped at $10,000
- Moving Expenses (with the exception for certain military)
- Employee Business expenses (previously exceeding 2% of adjusted gross income) such as mileage, travel, entertainment, home office expenses, union dues, tax preparation fees, and investments fees are no longer deductible
- If you purchased a new home and acquired a loan on or after December 15, 2017, interest beyond interest on $750,000 of acquisition debt is not deductible. If you acquired the loan on or before December 14, 2017 are able to deduct interest on mortgage debt up to $1 Million.
- Mortgage interest paid on equity debt – this was previously allowed up to $100,000 and now it is no longer deductible for any taxpayers.
Some New Benefits for Individuals:
- The medical expense AGI threshold will temporarily drop back down to 7.5% of AGI for 2017 and 2018
- AMT threshold is increased, so fewer middle-income taxpayers will be subject to AMT
- Estate tax exclusion has doubled to $11.2 million (and will be adjusted for inflation)
- The annual gift tax exclusion remains the same ($14,000 for 2017 and $15,000 for 2018)
- Preferred capital gains and qualified dividend rates remained unchanged from the previous law
Small business benefits for flow-through and rentals: 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.
These are the most common changes, and at your tax interview this year we will discuss any other changes of the Tax Cuts and Jobs Act Update that might 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 tax benefit. Contact us at 714.672.0022 to setup your appointment with your tax professional.
