The 2018 Tax Reform Act
After months of discussion and back-and-forth between the House and Senate, we finally have a Tax Bill, which takes effect January 1, 2018. (NOTE: As of this time, the states DO NOT conform to this Tax Reform bill, so you will need to make adjustments between your federal and state returns) Here is a quick summary, along with some of my tax tips:
Tax Brackets and Tax Rates: Both have been reduced across the board. There are 7 tax rates, ranging from 10% to 37%, with the highest brackets going to single taxpayers' taxable income of over $500K and Married taxpayers over $600K.
Alternative Minimum Tax (AMT): Exemption amounts have been increased to $70,300 (Single) and $109,400 (Married filing jointly), with the phaseout thresholds increased to $500K (Single) and $1 million (Married).
Estate Tax Exemption: Doubled to $11,200,000.
Standard Deduction: Almost doubled in 2018, to $24K (married jointly), $18K (Head of Household), $12K (Single). It's increased by $1,600 if over 65, blind or disabled. TIP: If this increase will eliminate the need to Itemize your deductions in 2018, you may want to prepay such items, like Charity, property taxes, etc., in 2017, so that you can maximize your deductions.
Personal and Dependent Exemptions: Eliminated
Child Tax Credit: Will double to $2,000 per qualifying child under 17 years of age. Plus, the phaseout more than doubles to adjusted gross incomes of more than $400K (Married) and $200K (Single). That means many more taxpayers will benefit from this credit. For other dependents who are not qualifying children, the credit is $500.
Student Loan Interest Deduction: Basically unchanged.
Education Credit: No change, but you will still need a Form 1098-T to claim it.
Section 529 Education Plans: Up to $10K distribution per beneficiary can be used for tuition for public, private elementary, secondary school.
Student Loan Cancellation of Debt: If the cancellation is due to death or disability, the income is excluded.
Teacher Expenses: Still has the above-line $250 deduction (indexed for inflation). See my tips below if you incur expenses greater than the $250.
Moving Expenses: Eliminated, except in the case of a member of the Armed Forces moving pursuant to a military order. Tip: You may want to negotiate getting these reimbursed by the new employer.
Alimony: Beginning with new divorces in 2019, such payments are no longer deductible and not taxable to the recipient.
Itemized Deductions: Where there is discussion and confusion:
State and Local taxes (i.e., state income tax and property taxes and DMV license fees): Can deduct up to $10K beginning 2018. Tip: pay your second property tax installment now, as well as your Jan 15, 2018 estimate state income tax installment.
Foreign Real Property Taxes are no longer deductible.
Medical Expenses exceeding 7.5% are deductible. In 2019, that goes to 10%. Tip: If you have a high-deductible health plan, consider getting a Health Savings Account (HSA). Contributions (to certain limits) are fully deductible and reduce your adjusted gross income, and you can take distributions to pay unreimbursed medical costs.
Charitable Contributions: Continue to be deductible, with the 50% of income limitation now increased to 60%.
Mortgage Interest on both a first and second home are deductible, with the debt cap at $750K of debt. The $1 million cap is grandfathered for loans prior to Dec 15, 2017. However, Home Equity Loans or HELOCs are not deductible, unless used to purchase or improve rental property. (Note: I'm waiting for clarification on if there is any grandfathering on this)
Casualty Losses: Not deductible unless due to a federal disaster. Tip: Always check on www.irs.gov for a list of what they are deeming disaster areas.
Gambling Losses: Only deductible to the extent of the income, but you can now include other expenses incurred in the gambling income, such as travel expenses to/from the casino. Tip: Track your expenses and keep receipts.
Employee Business Expenses: Eliminated beginning 2018. Tip: If your job entails out-of-pocket expenses, you may want to negotiate being reimbursed for your out-of-pocket expenses. Since your employer will get a tax cut with this plan, as well as still be able to deduct these reimbursements, I would think that there would be more of those negotiations. Tip for teachers: Unreimbursed classroom supplies (exceeding the $250), like crayons, Kleenex, pencils, etc. can be separated out and deducted as Charitable Contributions (which will continue to be deductible after 2017) as long as you get a donation acknowledgment from your school. Now is the time to set this up with your school!
All Misc. Itemized Deductions subject to the 2% floor eliminated.
Affordable Care Act: The individual mandate is repealed beginning 2019.
Corporations: The highest tax rate for corporations is reduced to 21% beginning 2018.
Pass-Through Companies: This includes S Corporations, Partnerships, Trusts/estates and sole proprietorships, which are allowed to deduct 20% of business-related income as a deduction to reduce taxable income. It doesn't reduce income subject to Self-Employment tax, and there are some restrictions for service businesses. This deduction phases out for joint filers with income between $315K-$415K.
Domestic Production Activities Deduction (DPAD): Repealed beginning 2018.
Like-Kind Exchanges: : Limited to Real property.
Net Operating Losses: The 2-year Carryback is repealed except in the farming business.
Section 179 Expensing: Increased to $1 million. The $25K SUV limitation stays the same. The definition of qualified real property eligible for this Section 179 expensing has been expanded to include roofs, heating and A/C, security systems.
Bonus Depreciation: Now available to used property as well as new.
Vehicle Depreciation: The cap placed on depreciation write-offs for business vehicles is increased.
Entertainment Expenses: While business meals continue to be 50% deductible, no deduction is allowed for activities generally considered to be entertainment or recreation. This also includes membership dues. In addition, the 100% meals deduction for employer-provided meals for employer's convenience is now reduced to 50%.
If you have employees and provide paid family and medical leave, you get a credit of 12.5% of wages paid to qualifying employees.
I will be posting more information as it comes, but now is a good time to meet with your tax professional and lay out some strategies for 2018 and beyond!