Your taxes will change in 2018 with the new tax law being enacted.Let’s show you how you will be impacted.
- Alternative Minimum Tax (AMT) did NOT go away! The starting point at which the AMT affects taxpayers has been increased slightly, so fewer will be affected by the AMT. MIXED!
- State and Local Tax deduction reduced to $10,000. HURTS for those in high cost locations.
- Mortgage Interest limited to loans of $750,000 on your primary and second residence. Home equity loan interest is no longer deductible. HURTS in California and high costs locations where loans often exceed this amount.
- Standard deduction increases to $24,000 for married couples and $12,000 for single individuals. For each spouse 65 and older there is an additional standard deduction of $1,300 and an additional $1,300 if blind. For single individuals 65 and older the additional standard deduction will be $1,600 and an additional $1,600 if blind. GOOD if you currently claim the standard deduction!
- Personal exemption goes away. HURTS!
- Child Tax Credit increases. The child tax credit increases from $1,000 to $2,000 and up to $1,400 is refundable if one does not have a tax liability. The child tax credit begins phasing out once income exceeds $200,000 for a single individual and $400,000 for a married couple. A credit of $500 will be available for dependents other than children. GOOD!
- Moving Expenses gone, except for members of the military. HURTS if you have to move for your job or business. Employers will have to add reimbursements to your W-2.
- Alimony payments for divorces ending in 2019 and later will no longer be deductible by the spouse paying the alimony and not considered income to the recipient. MIXED!
- Tax rates drop slightly with the top rate at 37%, down slightly from the current 39.6% rate. For the most part, the brackets are similar, but with tax rates at 10%, 12%, 22%, 24%, 32%, 35% & 37%. GOOD!
- Estate Tax threshold doubles to $11.2 Million per individual. GOOD!
- Corporate tax rates drop to 21%. GOOD for large corporations! Does not help closely held corporations. Beware that profits taken out as dividends are subject to the double taxation rule when in addition to the corporation paying tax the individual receiving the dividends, pay tax at their individual tax rates bringing the combined rates close to the top tax rate.
- Tax rates for pass-through entities like S-Corporations and LLC’s gets a partial reduction. The final version allows a deduction of 20% of the income, but subject to limits based on a combination of wages paid and capital invested. This does not apply to those in the professional service industry when income exceeds $315,000 for a married couple and $157,500 for a single individual. GOOD for some!
- Section 179 write off expensing the purchase of equipment allowed up to $1 Million of purchases. GOOD for closely held businesses!
- Net Operating Losses limited to 80% of taxable income. HURTS when recovering from a devastating loss!
- The penalty for not purchasing health insurance goes away beginning in 2019. MIXED as this means that health insurance will likely become more expenses because fewer healthy individuals participate.
There have been a lot of experts looking at the potential impact of these changes on individuals and there is one clear winner, the ultra-wealthy, who are most likely to benefit from the tax proposals. There will be those who save and those who pay more in tax in all tax brackets.
There are some tax provisions that Congress or the Senate wanted to eliminate, but were allowed to remain. Those include:
- Sale of Residence – $250,000/$500,000 exclusion on sale of primary residence will continued to be allowed if one lives in the home for 2 out of 5 years.
- Medical Expenses – The threshold for 2018 & 2019 will drop to 7.5% of Adjusted Gross income, but then goes back to 10% after that.
- Teacher’s Deduction for the purchase of classroom supplies & expenses up to $250 will continue to be allowed.
- Student Loan Interest deduction of up to $2,500 will continue.
- Itemized deductions for high income taxpayers will continue to be limited.
- Tax Credits for Students continues. The American Opportunity Tax Credit and Lifetime Learning Credits continue to be available for parents or students.
- Tax credits for electric vehicles continue.
- Work Opportunity and other credits continue.
Last minute actions you can take during 2017 to minimize the impact of the new tax law:
- Unless you are paying the AMT, prepay all state and local taxes for 2017 by December 31. This includes property taxes due during the first few months of 2018.
- Unless you are paying the AMT, prepay Misc. deductions that we historically have claimed for you.
- If your itemized deductions have been less than $24,000 for a married couple or $12,000 for an individual, prepay charitable donations for 2018 along with state and local taxes mentioned above.