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Tax Cuts and Jobs Act

December 27, 2017

In light of President Trump signing the Tax Cuts and Jobs Act on December 22nd,  many federal tax changes are on the horizon with individuals.  Included in this email are highlights of the law that will affect your tax return for tax years beginning in 2018 and afterward. 

All figures below are for 2018 however most individual income tax changes will revert to current law after 2025 unless extended.  Please feel free to contact us with any questions.

 

Everyone’s Income Taxes Go Down: 

Below are the old and new tax brackets

Old Income Tax Brackets: 

— 10% (income up to $9,275 for individuals; or $18,550 for married filing join) 
— 15% (over $9,275 to $37,650; over $18,550 to $75,300 for couples) 
— 25% (over $37,650 to $91,150; over $75,300 to $151,900 for couples) 
— 28% (over $91,150 to $190,150; over $151,900 to $231,450 for couples) 
— 33% (over $190,150 to $413,350; over $231,450 to $413,350 for couples) 
— 35% (over $413,350 to $415,050; over $413,350 to $466,950 for couples) 
— 39.6% (over $415,050+ ; over $466,950+ for couples) 

NEW Income Tax Brackets: 
— 10% (income up to $9,525 for individuals; or $19,050 for married filing join) 
— 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples) 
— 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples) 
— 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples) 
— 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples) 
— 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples) 
— 37% (over $500,000; over $600,000 for couples) 

 

Small-business owners get a break
The new law allows a 20% deduction for pass-through entities such as LLCs, S Corporations, and sole proprietorships, after which they would be taxed at their individual tax rates. For example, if you operate an LLC and earn $100,000 in profit in 2018, you'll be able to deduct $20,000 before the income tax rates in the chart above would be applied.  But of course, there are exceptions to the rule.

If you are a specified service business (any business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or "any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners) and your taxable income exceed the threshold amount plus the phase in range ($207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly), then you lose the deduction completely. In that case, the old pass-through rules apply meaning you pay tax using your individual tax rate.

Fewer People Hit By Alternative Minimum Tax (AMT): 

The alternative minimum tax, a parallel tax system that ensures people who receive a lot of tax breaks still pay some federal income taxes, remains in place for individuals. But fewer people will have to worry about calculating their tax liability under the AMT moving forward. The exemption has been raised to $70,300 for singles, and to $109,400 for married couples.

 

Standard Deduction Doubled: 

One goal behind this law is to have fewer people itemize their deductions on their Form 1040. To achieve this, the standard deduction is nearly doubled in 2018. For single filers, the standard deduction will increase from $6,350 to $12,000; for married couples filing jointly, it will increase from $12,700 to $24,000.

 

Personal Exemption No Longer Exists: 

You used to be able to claim a $4,050 personal exemption for yourself, your spouse, and all of your dependents, which lowered your tax bill in the past, but this is now going away. 

 

Itemized Deductions - A Few Big Changes Here: 

·         State and local income taxes plus property taxes will have a combined deduction limit of $10,000

·         Mortgage interest deduction will be capped at $750,000 on new mortgages, down from $1 million. This will impact homes purchased after December 15, 2017. Existing mortgages and future refinancing of these mortgages will retain the old rules. 

·         Interest paid on home-equity loans will no longer be deductible beginning in 2018, with no grandfathering in. In other words, if you already have a home-equity loan or line of credit, this is the last year you can write off the interest paid on it for a while.  Previously you could deduct up to $100,000 if you met certain criteria.

·         Medical expenses will be deductible with amounts exceeding 7.5% of your AGI, down from the current 10%. This deduction applies to 2017 and 2018. 

·         Charitable Deduction Stays – You can continue to benefit from a federal tax deduction for donations to a qualified charitable organization.

·         Many deductions are going away: Many itemized deductions are eliminated under the new law. Everything that falls under the category of "miscellaneous itemized deductions" is going away. This includes things like unreimbursed employee expenses and tax preparation costs.

 

Child Tax Credit Gets Doubled: 

What used to be a $1,000 credit for kids under 17 years of age will now be $2,000.  In addition, the income limit above which the child tax credit is no longer allowed is also being increased to allow more individuals (up to $200,000 for single parents from $75,000 before) and couples (up to $400,000 for couples from $110,000 under the old plan) to take advantage. 

 

New Credit for Non-Child Dependents: 

Taxpayers may now claim a $500 credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.

 

Student Loan Interest, Classroom Supplies, and Tuition Waivers: 

Earlier versions of the bill that were tossed back & forth between congress and the senate eliminated many of these deductions, but the final bill that was signed preserved all of them in their old/current form.

 

No More Penalty if You Don’t Buy Health Insurance: 

The new bill eliminates the tax penalty levied against anyone who decides not to buy health insurance on their own, through a group plan at work, or through the healthcare exchanges. 

 

529 savings accounts can be used in new ways.

In the past, funds invested in 529 savings accounts wasn't taxed -- but it could only be used for college expenses. Now, up to $10,000 can be distributed annually to cover the cost of sending a child to a public, private or religious elementary or secondary school.

 

Say goodbye to the tax deduction for alimony payments.

The new tax law will scrap a 75-year-old tax deduction for alimony payments. In any divorce commenced after Dec. 31, 2018, the spouse paying alimony can’t deduct it, and the spouse receiving the money no longer has to pay taxes on it.

   

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