TO KEEP YOU INFORMED
HOW WILL TAX REFORM CHANGES IMPACT YOUR PERSONAL TAX RETURN?
TAX CHANGES IMPACT EVERYONE – HERE ARE SOME THINGS TO BE AWARE OF BEFORE IT IS TIME TO FILE YOUR RETURN
July 6, 2018
Tax Reform, otherwise known as the Tax Cuts and Jobs Act (TCJA) has made significant changes to the way we will all file our tax returns this year. Some of the changes will be advantageous and some will not. The changes are extensive, and many of the changes require additional guidance from the IRS before we fully understand how they are to be applied in complex situations. For that very reason, we recommend that you take action now to understand your specific situation and how you will be impacted by the changes. Additional discussions on the changes and even updated tax projections are likely necessary to ensure that you make the correct moves this year.
Lower Tax Rates
Tax Reform brought with it lower tax rates, which is of benefit to almost everyone. There are still as many tax brackets as in prior years, but in general, they are now lower, and the highest tax rate was reduced from 39.6% to 37%. Tax rates for capital gains and qualified dividends did not change.
Changes to the Standard Deduction
For each filing status, the standard deduction has increased:
- Single taxpayers increased from $6,350 to $12,000
- Married taxpayers filing jointly increased from $12,700 to $24,000
- Heads of household increased from $9,350 to $18,000
Due to the changes in what now qualifies for itemized deductions, may mean that many taxpayers that have historically itemized will not just take the standard deduction.
Increased Child and Family Tax Credit
Changes to the child and family tax credit were designed to assist those taxpayers negatively impacted by the elimination of the dependency exemptions. For taxpayers with adjusted gross income under $200,000 ($400,000 married filing jointly), there is now a $2,000 child tax credit available for children under age 17. This is double than in prior years and is available to significantly more taxpayers. Additionally, there is now a new $500 credit available for dependents who are not considered to be qualifying children.
Significant changes have been made to what is and isn’t eligible to be deducted on your tax return. For many, this may mean that the standard deduction is now beneficial.
Changes include the following:
- Itemized deductions are no longer reduced for high income taxpayers.
- The itemized deduction for state and local taxes is limited to a total of $10,000; this includes not only state income taxes but real property taxes and personal property taxes.
- Mortgage interest is now only deductible on acquisition debt up to $750,000; however for loans in existence prior to December 15, 2017, the limit is still $1 million. Be sure to check with your tax advisor prior to refinancing your mortgages – you may find that you lose some of your tax deduction.
- Interest on home equity indebtedness (such as a home equity line of credit) is no longer deductible unless the debt was used for home improvement. It is important to now consider how your home equity indebtedness was used – if there was a business or investment purpose, you may still have a deduction available.
- Cash donations to public charities are now deductible up to 60% of adjusted gross income.
- Donations to colleges and universities for ticket or seat rights at sporting events are no longer deductible.
- Miscellaneous itemized deductions, such as investment management fees, tax preparation fees, unreimbursed employee business expenses and safe deposit box rental fees are no longer deductible.
- Medical expenses are deductible by the amount the expenses exceed 7.5% of adjusted gross income for 2018.
It may make sense to look at some other strategies to boost the deductibility of certain expenses if your itemized deductions are close to the new standard deduction:
- Consider bunching of deductions:
- if you normally give to charity annually, consider making this year’s contribution in January of 2019 and next year’s contribution in December of 2019, so that both contributions are in the same year.
- Paying medical bills in the same year can have a similar effect.
- Remember that payments made on a credit card are counted in the year charged and not when you pay your credit card bill.
- If you are over 70 ½, consider making charitable contributions (up to $100,000) from your IRA. Amounts processed as QCDs count toward your RMD requirement and reduces the taxable amount of your IRA distribution. This lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability
Qualified Business Income Deduction
The most talked about deduction, and the one that we have the most questions about, is the new deduction for qualified business income. This new deduction generally allows for a 20% deduction for qualified business income from a partnership, S corporation or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
The deduction reduces taxable income, but not adjusted gross income, and is available even if you don’t itemize. However, there are many limitations and restrictions especially if the income comes from services. It is highly recommended that you schedule a personal consultation to determine how this deduction will apply to you if you have these types of income.
Education Savings Plans
Many taxpayers use 529 plans to save money for college. In the past, these plans were used for qualified higher-education costs. Now, taxpayers can use up to $10,000 per year of these funds to pay for private elementary and secondary tuition. If you are paying tuition to private schools, contact us to find out how these new rules may apply to you.
For divorce decrees executed after December 31, 2018, there will no longer be allowed a tax deduction for alimony paid, and alimony received will no longer be taxable. If you are in the middle of a divorce, contact us and your divorce attorney to determine how this will impact you.
Although tax reform eliminated the individual shared responsibility payment for those that do not have minimal essential healthcare coverage, as this does not go into effect until 2019, if you do not have qualifying healthcare coverage, you will still be subject to the penalty for 2018. As the penalty is calculated on a monthly basis, do not cancel your insurance without fully understanding the impact of both the lack of insurance and the penalty.
Changes to Business Deductions
If you are a sole proprietor, make sure to understand how some of the business tax provisions impact you:
- Entertainment Expenses – tax reform eliminated the deduction for business entertainment. This includes such items as taking clients to sporting events or shows, and paying for season tickets. Now is the time to review your accounting for these expenses and to contact us to assist in determining how these items will be treated on your tax return.
- Bonus Depreciation – tax reform has increased the bonus depreciation percentage to 100% and it is now available for both new and used qualified assets.
- Section 179 Expensing – tax reform has increased the Section 179 limit to $1 million of expensing with a total purchase threshold of $2.5 million.
The combination of bonus depreciation and Section 179 expensing allows for some excellent tax planning opportunities. Please contact us to help you maximize these deductions for you.
Please Call Our Office to Schedule a Planning Meeting
There is no time like the present. Although there are still some uncertainties related to some of these provisions, and we are still waiting for technical guidance to clarify some of the changes, we are here to help you identify opportunities and to minimize pitfalls. Please contact our office to schedule a tax planning meeting.