KEAN, WIGGINS & COMPANY, LLC
2018 TAX LAW CHANGES FROM THE TAX CUTS AND JOB ACT
deductions nearly double to $24,000 for couples, $12,000 for singles and
$18,000 for household heads. People age 65 or up and blind people get $1250
more per person ($1550 if unmarried). Given these much higher amounts, far
fewer people will itemize.
The new law
reduces or eliminates many deductions claimed by individuals. Personal
exemptions for individual filers and their dependents are repealed. Home
mortgage interest is limited. Interest can be deducted on up to $750,000 of new
acquisition debt on a primary or second residence, down from $1 million. The
new limit generally applies to mortgage debt incurred after Dec. 14, 2017.
Older loans and refinancing’s up to the old loan amount get the $1-million cap.
popular deduction for state and local taxes is being limited. You can deduct
any combination of residential property taxes and income or sales taxes up to a
$10,000 cap. Property taxes remain fully deductible for taxpayers in a business
or for-profit activity, so taxes paid on rental realty can be taken in full on
other write-offs are eliminated: Deductions for job-related moves, except for
the military. All miscellaneous write-offs subject to the 2%-of-AGI threshold,
including employee business expenses, brokerage and IRA fees, hobby expenses
and tax return preparation costs. Alimony for post-2018 divorce decrees will
not be taxed to the recipient or deductible for the payor. Personal casualty
losses are not deductible except for presidentially declared disaster areas.
charitable contribution write-off is preserved, with some changes. The Adjusted
Gross Income (AGI) limitation on cash donations to qualified charities is increased
from 50% to 60%.
medical expense deduction is enhanced. Not only have lawmakers opted to keep
this popular write-off, but they’ve also temporarily lowered the AGI threshold for
deducting 2017 and 2018 medical expenses on Schedule A from 10% to 7.5%.
write-off for personal gambling losses to the extent of winnings is still in
individuals can finally say good-bye to the phaseout of itemized deductions which
is scrapped under the new law.
law keeps seven tax brackets, but with different rates and break points. For
example, not only is the top individual rate lowered from 39.6% to 37%, but
that rate kicks in at a higher income level. And, note that whatever new
bracket you fall into, more of your taxable income will be hit with lower rates
rates on long-term capital gains and qualified dividends do not change.
Currently, your capital gains and dividends rate depends on your tax bracket.
But with the bracket changes, Congress decided to set income thresholds
instead. The 0% rate will continue to apply for taxpayers with taxable income
under $38,600 on single-filed returns and $77,200 on joint returns. The 20%
rate starts at $425,800 for singles and $479,000 for joint filers. The 15% rate
applies for filers with incomes between those break points. The 3.8% surtax on
net investment income remains, kicking in for single people with modified AGI
over $200,000 and $250,000 for marrieds.
law keeps the individual alternative minimum tax with higher exemptions:
$109,400 for joint return filers and $70,300 for singles and household heads.
Additionally, the exemption phaseout zones start at much higher income
levels…above $1 million for couples and $500,000 for single people and heads of
Affordable Act individual mandate is on the way out. The requirement that folks
have health insurance, qualify for an exemption, or pay a fine is repealed for
post-2018 years. Keep in mind the mandate continues to apply for 2018.
child tax credit is doubled to $2,000 for each dependent under age 17, with up
to $1,400 of the credit refundable to lower-income taxpayers. The income
phaseout thresholds are much higher…AGIs over $400,000 for couples and $200,000
for all other filers.
a new $500 credit for each dependent who is not a qualifying child, including,
for example, an elderly parent you take care of or a disabled adult child. It’s
nonrefundable and phases out under the same thresholds as the child tax credit.
fewer estates will be subject to the estate tax, now that Congress has doubled
the lifetime estate and gift tax exemption to about $11 million. The rate
remains 40%. The annual gift tax exclusion for 2018 is $15,000 per donee. There’s
no change in the asset basis step-up for heirs of estates of any size.
kiddie tax is significantly revamped, so that unearned income of children under
18 is taxed at the ordinary income and capital gains rates applicable to trusts
and estates, and not at their parents’ marginal tax rate, as before.
tax benefits for retirement savings haven’t been curtailed. There is an
important change involving Roth IRA conversions, however. The new law bars IRA
owners who convert their traditional IRAs to Roth IRAs from later undoing the
conversion and recovering the income tax paid on the switch.
The new tax
law dramatically reforms the taxation of businesses of all sizes. Regular
corporations (“C corporations”) will pay tax at a flat 21% rate, down from the
35% top rate now. This lower rate begins in 2018 and is permanent. Unlike the
individual Alternative Minimum Tax (AMT), lawmakers eliminated the corporate
individual owners of pass-throughs will get a new 20% deduction. The rules
cover sole proprietors and owners of S corporations, partnerships and LLCs.
REIT shareholders and partners in publicly traded partnerships also get the
break. They can generally deduct 20% of so-called qualified business income.
These provisions are, however, some of the most complex in the new law. The
break phases out for high earners in professional service fields, such as law,
consulting, accounting, health or financial services, with taxable incomes in
excess of $315,000 for joint returns and $157,500 for all other taxpayers.
deduction for business losses on individual returns is capped. The amount of
trade or business losses that exceed a $500,000 threshold for couples and
$250,000 for other filers is nondeductible, but any excess can be carried
forward. Note this limitation applies after application of the current
passive-activity loss rules.
enhanced write-offs for business asset purchases in the law. 100% bonus
depreciation is available for many assets put into use during the year. The
break applies to assets put in service after Sept. 27, 2017 for new and used
assets, and is temporary…generally lasting until 2022 and then phasing out 20%
each year thereafter. There is a higher cap on expensing assets. It doubles to
$1 million. Depreciation limitations on passenger automobiles are increased.
deduction that firms claim for interest on business debt is limited. Their net
interest write-offs will be capped at 30% of adjusted taxable income, with
disallowed interest carried forward. Firms with $25 million or less of gross
receipts, real estate companies and certain regulated public utilities will be
many other business breaks that are eliminated or pared back: Business
entertainment, the 9% domestic production deduction, net operating losses can
offset only 80% of taxable income, and NOL carrybacks are generally prohibited.
Tax-deferred like-kind exchanges are limited to real property not held
primarily for sale. Attorneys can’t deduct litigation costs paid in contingency
fee cases until the contingency ends.
provide paid family or medical leave to workers get a new credit generally
equal to 12.5% of the amount of wages paid during the period leave. The credit
is increased for employers that pay workers over half their normal wages while
on leave and there are lots of other rules and limitations to comply with. The
credit is temporary, applying only for 2018 and 2019.