It’s here, the Tax Cuts and Jobs Act has passe both houses and been signed by President Trump. First let me say that there will more tax legislation in the coming days. This bill with our current tax system will create some unintended consequences. A technical corrections bill will soon follow, but politics will make this difficult and time consuming. Some of the items below may change. More to come!!
Here are some of the provisions and how it will affect you:
1. Standard deductions are almost doubling. Married filing joint (MFJ) is up to $24,000, Head of Household (HOH) is now $18,000, and Single filers will have a standard deduction of $12,000. Individuals 65 and older get an additional $1,250 added to their standard deduction. This provision will steer many taxpayers away from itemized deductions making their return simpler. TAX TIP: If your itemized deductions are typically less than the new limits you should push those deductions back into 2017. Examples are charitable contributions or state income taxes for the self-employed.
2. Personal exemptions are being eliminated. Currently $4,050, now $0. For dependents over the age of 16 this is a big loss. #4 will help a little bit.
3. For a family with children under age 17, the child tax credit is being increased from $1,000 to $2,000. This is a credit which is a direct reduction of taxes. For low income households, $1,400 of the credit is refundable if there is no tax to offset. For high income households the credit does phase out. Previously $110,000 for MFJ, the limit has been increased to $400,000.
4. In addition to the child tax credit there is a new $500 credit for dependents who are not qualifying children. An example would be an elderly parent or a disabled adult child.
5. All tax brackets now have lower rates. For example, for MFJ, and taxable income range of $75,901 – $153,100 was 25%. That range is increased slightly to $77,401 – $165,000 and the new rate is lowered to 22%. TAX TIP: Defer income into 2018 when possible. Examples would include a work-related bonus, December 31 paycheck, stock sales with a gain, wait until 2018 to make that IRA distribution, and sell any losing stocks to take the loss in 2017.
6. Currently home owners can deduct mortgage interest on debt of $1,000,000 or less. The limit is being reduced to $750,000 for mortgages incurred after December 15, 2017. Also, interest on home equity loans (except those used for re-modeling) is banned as a deduction starting in 2018. TAX TIP: If you have home equity loans and are considering refinancing, now might be the time. Weigh the tax savings vs. the cost of the new loan.
7. The itemized deduction for state and local taxes is now capped at $10,000. This DOES NOT apply to property taxes. TAX TIP: State and local taxes prepaid in 2017 to beat the deadline will only be allowed if those taxes are related to 2017. (See #1)
8. This affects very few people, but casualty losses are only deductible in presidentially declared disaster areas.
9. This affects even less people. The estate tax exemption is doubling to $11 million for couples.
10. Medical deductions were on the brink of elimination, but they survived. For 2017 and 2018 the threshold drops to 7.5% of AGI, and returns to 10% in 2019.
11. A big change is coming for divorce. In the past, alimony paid under a divorce decree was deductible by the ex-spouse who paid it and treated as taxable income by the recipient. Starting with alimony paid under divorce or separation agreements executed after December 31, 2018, the reverse will be true: Payors will no longer get to deduct alimony, and the payments will be tax-free for the ex-spouse who receives them. (That’s the same rule that has and will continue to apply to child support payments.) TAX TIP: If you are receiving alimony and you renegotiate your alimony in 2019 the new rules will apply. Then it will no longer be income.
12. The teachers tax adjustment is still at $250. TAX TIP: If you can still itemize keep good records because anything over $250 can be used as a charitable contribution.
13. Starting in 2018, employers can no longer deduct transportation related fringe benefits.
14. Student loan interest is still deductible subject to certain income limits.
15. Sec 529 plans now can be used for elementary and secondary tuition. This is limited to $10,000 per year.
16. Dependent Care Plans which allow working parents to set aside pre-tax dollars for dependent care remains in the law.
17. Converting a traditional IRA to a Roth IRA is currently reversible. Under the new law conversions will be irreversible.
18. The so-called FIFO rule for selling securities did not make it in the bill. TAX TIP: Direct your broker to sell any specifics shares of stock and have control over your capital gains.
19. The 0% capital gain rate has survived. For MFJ, if your taxable income is under $77,200 you will not be taxed on capital gains.
20. Like kind exchanges are still available, but the new tax law limits those exchanges to real estate only.
21. Unfortunately, the Alternative Minimum Tax (AMT) survived in the new tax law. The income limits were raised so that was a small victory.
22. Pass through businesses will see a 20% deduction of qualifying income before they calculate their tax bill. In other words, a Schedule C small business that makes net income of $100,000 will only be taxed on $80,000. That would result in a tax savings of just under $5,000. There is a phase out for incomes over $315,000 for MFJ taxpayers.
23. The moving expense deduction is eliminated except for members of the military.
24. The new law repeals ALL miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) threshold. This includes tax prep fees, investment fees, and the most often used unreimbursed employee business expenses. If you are on the road selling for your company it’s time to look at how this will affect you!! This is a big deal. TIP TAX: Contact your corporate employer who will be saving a lot of taxes and re-negotiate your expense reimbursements.
25. Investment income earned by dependent children under the age of 19 (or 24 for full time students) has been taxed at the parents’ rate. Starting in 2018 this income will be taxed at the same rate as trusts and estates. That rate, 37%, kicks in when their investment income reaches $12,500. This tax is better known as the Kiddie Tax.
26. The new law repeals the Individual Mandate. This is the tax owed if you do not have health insurance. This repeal does not start until 2019.
27. The biggest mystery is paycheck withholding. The new tax bill orders the Secretary of Treasury to “figure it out”. Basically, the old way was to claim Married 4, or Single 2 on your W-4. The 4 was for your total exemptions. See #2. No more exemptions. How will this turn out? Nobody knows. We will just wait and see.
28. The new law would give employees who borrow from their 401(k) plans more time to repay the loan if they lose their jobs or their plan is terminated. Currently, borrowers who leave their jobs are usually required to repay the balance in 60 days to avoid having the amount outstanding treated as a taxable distribution. Under the new law, they will have until the due date of their tax return for the year they left the job.
As of January 1, 2018, $10K per year per student can now be withdrawn from 529 plan for elementary or secondary education.
Entertainment expense is not deductible for businesses (including self-employed).
No more 2 % miscellaneous itemized deductions – including tax preparation fees, investment expenses, employee business expenses (i.e. Form 2106), safe deposit box, etc. https://www.cbiz.com/LinkClick.aspx?fileticket=Il_GxSZfnRY%3D&portalid=0
As you can see there are a lot of changes. We will work hard to make sure our clients get the most out of the new tax law.
