The President signed the biggest tax reform law in over 30 years. When you file your 2018 tax returns — about a year from now — your tax return may look very different. And because most changes don’t happen until then, we have some time to learn about the changes and plan for next year. Here are a few of the biggest changes that may affect you.
- Tax rate changes: The maximum individual rate is reduced to 37%.
- Standard deduction increases: The standard deduction is almost double.
- Personal exemption eliminated: You will have no personal exemption deduction for yourself, your spouse, or your dependents.
- Increased Child Tax Credit and new Dependent 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.
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 others). 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:
- State income tax and property taxes above $10,000 per year in total.
- Moving expenses (with an exception for certain military).
- Employee business expenses such as mileage, travel, entertainment, home office expenses, union dues; all other miscellaneous deductions currently subject to the 2% of adjusted gross income limit including tax preparation fees and investment advisory fees, among others.
- Mortgage interest beyond interest on $750,000 of acquisition debt, if you purchase a new home; however, existing acquisition debt is grandfathered. Grandfathered acquisition debt that is refinanced debt also maintains the $1 million limitation.
- Mortgage interest paid on equity debt (this is no longer deductible for any taxpayer).
- Alimony will no longer be deductible by the payor nor included in the recipient’s income for new marital settlement agreements entered into after December 31, 2018.
- Casualty losses are no longer deductible except in the case of a Presidentially declared disaster.
- The rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions to unwind a Roth conversion is repealed.
- Some new benefits for individuals: These new benefits include:
- The Alternative Minimum Tax (AMT) threshold is increased, so fewer middle-income taxpayers will be subject to AMT.
- Up to $10,000 per year may be distributed from IRC §529 accounts and used for K–12 education.
- The estate tax exclusion has nearly doubled, to $11,200,000 million for 2018 (adjusted for inflation).
- The annual gift tax exclusion is $15,000 for 2018 (adjusted for inflation).
- Small business deduction: Probably the most revolutionary addition to the tax law is the new deduction for qualified business income from “pass-through entities,” which also applies to sole proprietorships and rental properties. This provision can provide a deduction of up to 20% of your net “qualified business income”. This new law is too complicated to discuss in this email, but if you are self-employed or have a partnership, LLC, S corporation; you operate as a sole proprietor; or you have rental income, then we should talk further to plan your income and deductions to maximize this new deduction.
- Like-kind IRC §1031 exchanges: Deferral of gain for exchanged property is limited to real estate property. Trading of vehicles, art and other collectibles will not qualify for like-kind IRC §1031 exchanges.
We believe the above changes are the most relevant and important to our clients but there are others as well so please feel free to reach out to your Bregante + Company LLP team to discuss how the new tax law will impact your specific situation. As the year continues the IRS is expected to adopt regulations and the practical effect of the new tax law and its many provisions will become more evident.