The New Tax Plan Is Here
What a week it’s been! We’ve had numerous questions stemming from Congress’s passage of the Tax Plan so this article attempts to identify the changes that affect the bulk of our clients. Bear in mind that these changes, unless noted otherwise, are for the 2018 tax year.
Tax rates have been reduced for most income levels, with a top tax bracket of 37%. Once the IRS updates its systems, the withholdings from your paycheck may change to reflect these lower brackets. However, if you are losing any of the deductions discussed below, you will want to adjust your Form W-4 to change how your taxes are withheld, or risk having a tax liability when filing your 2018 tax return.
Standard Deduction/Personal Exemptions
The standard deduction is nearly doubled for all filing statuses while the personal exemptions ($4,050 in 2017) are repealed. Standard deduction changes are as follows:
|Filing Status||2017 Amount||2018 Amount|
|Head of Household||$9,350||$18,000|
|Married Filing Separately||$6,350||$12,000|
|Married Filing Joint||$12,700||$24,000|
A married couple with 2 kids who use the standard deduction would go from a total deduction of $28,900 (4 @ $4,050 + $12,700) to a deduction of $24,000.
Child Tax Credit
The child tax credit is increased from $1,000 to $2,000 per child under the age of 17, with up to $1,400 of the credit “refundable”. This means a taxpayer with $0 income tax would receive up to $1,400 of the credit in their refund rather than lose the credit entirely.
There is no limitation on the total of itemized deductions. Previously, itemized deductions were limited and began to phase out at certain income levels ($313,800 for married filing joint in 2017).
Mortgage Interest – limits are imposed on taxpayers whose mortgage debt from buying a home exceeds $750,000. This is a reduction from the current limitation of $1 million. All debt incurred prior to December 15, 2017 is grandfathered in under the 2017 rules. Home equity interest is no longer deductible.
State and Local Income Taxes/Property Taxes – the new bill imposes a $10,000 limitation ($5,000 if you are married filing separate returns) on these deductions. You may not take a deduction in 2017 for prepaying estimated 2018 state income or property taxes. However, prepaying your 4th quarter State estimated tax for 2017 is allowed. Be sure to check with your tax advisor before doing so since other taxes may be triggered. Also, you may prepay your property taxes in 2017 as long as the tax was assessed in 2017 and the Town’s fiscal year (tax year noted at the top of your tax bill) is either 2017 or 2017-2018. For instance, if your town’s fiscal year is July 1 – June 30 and, in 2017, you received an assessment broken down into multiple payments, some of which are due in 2018, you may prepay those 2018 payments because the tax is assumed to be for 2017. Check with your municipality to ensure that prepayments are accepted.
Casualty Losses – the only allowable casualty losses will be those from federally-declared disaster areas.
2% Miscellaneous Deductions – all of these deductions have been repealed. This includes unreimbursed employee expenses, union dues, tax preparation fees, safe deposit box fees, and investment fees.
Medical Expenses – the threshold is reduced back to 7.5% of adjusted gross income from the current threshold of 10%.
For divorce/separation agreements entered into after December 31, 2018, alimony will no longer be taxable to the recipient nor deductible by the payor.
This deduction has been repealed, except for members of the Armed Forces on active duty who are required to move due to military order and a permanent change of station.
Alternative Minimum Tax (AMT)
The calculation of AMT has been drastically changed so we expect to see fewer taxpayers falling into this tax.
Health Insurance Mandate
Beginning after December 31, 2018, the bill repeals the penalty on individuals for failing to secure minimum essential coverage health insurance.
Private School Tuition
Up to $10,000 per year, per student, may be distributed from Section 529 (college savings) plans to pay K-12 private school tuition or certain homeschooling costs.
Rules Left Unchanged
- Student loan interest deduction
- Tuition and fees deduction
- Educator classroom expenses
- Sale of a principal residence
The first 20% of profit from a pass-through entity is tax-free. A pass-through entity has been defined as a Partnership, S-Corporation, Sole-Proprietorship, Real Estate Investment Trust (REIT) dividends, Qualified Cooperative dividends, and Qualified Publicly Traded Partnership income. There are limitations to this 0% tax rate that phase in at certain income levels. The 0% tax rate also does not apply to personal service businesses, such as doctors, lawyers, accountants, and financial advisors, if their taxable income exceeds $315,000 for joint filers ($157,500 for single filers).
Luxury Auto Depreciation
The IRS defines a luxury auto as one that has four wheels, is used mostly on public roads, and has a gross vehicle weight (GVW) of less than 6,000 lbs. Historically, these types of luxury autos have been subject to depreciation limitations so it has often made sense to purchase a vehicle that exceeds 6,000 lbs, thus increasing the allowable depreciation and avoiding the risk of losing deductions. The new tax plan increases the luxury auto depreciation limits from $3,160 to $10,000 in the year of purchase. This means, if a vehicle is purchased in December, weighs less than 6,000 lbs, and its total cost is less than $42,000, no amount of depreciation will be lost due to limitations.
Domestic Production Activities Deduction
The tax plan repeals this deduction.
Deductions are disallowed for entertainment, recreation, or amusement activities. Membership costs associated with clubs organized for business, pleasure, recreation, or other social purpose, and facility costs in relation to these clubs, are also disallowed.
What Can You Do Now?
If you feel you will be subject to the $10,000 limit on state/local/property taxes in 2018, and/or your 2018 tax bracket will be significantly lower than in 2017, you may want to take these steps:
Look at your 2017-2018 property tax bill. If there are payments due in 2018 (in connection with your 2017 assessment), prepay those taxes by December 31.
Do you pay estimated taxes? Contact your professional tax advisor to see if you could benefit from prepaying your 4th quarter state estimate.
What Should You Do Later?
When the IRS comes out with the new withholding tables (estimated to be sometime in February), verify that your withholdings will be enough to cover your tax under the new tax rules.
We’re here to help. Let’s work together…