When you file your 2018 tax return a year from now, it may look a bit different, thanks to the biggest tax reform law in over 30 years. Although most changes won’t be realized until then, now is a good time to plan ahead and familiarize yourself with the changes. Following is a brief summary of the changes you may notice.
Standard Deduction and Exemptions
The standard deduction will jump from $13,000 for a couple filing jointly to $24,000. For single filers, it jumps from $6,500 to $12,000. The standard deduction for heads of household will jump from $9,300 to $18,000. People aged 65 and older, as well as blind people, will get $1,550 more per person ($1,250 more per person if married).
Unfortunately, the $4,150 personal exemption would be repealed.
Child Tax Credit
The child tax credit is currently $1,000 and starts to phase out at incomes of $110,000 for couples and $75,000 for individuals. The new law doubles the credit to $2,000, and $1,400 of that is a refundable tax credit. In addition, it doesn’t start to phase out until incomes of $400,000 for couples and $200,000 for individuals.
New Dependent Credit
Under the new plan, each non-child dependent can receive a credit of $500. However, there will be no exemption credit or reduction for yourself, your spouse or your dependents.
Cutback on Itemized Deductions
Not only are fewer people likely to itemize their deductions considering the increased standard deduction, they’ll also no longer be allowed to itemize the following deductions:
- Job-related moving expenses, except for military
- Miscellaneous write-offs subject to the 2% of adjusted gross income threshold, including employee business expenses, brokerage and IRA fees, hobby expenses and costs of tax return preparation
- Theft losses
- Personal casualty losses, with the exception of those in presidentially declared disaster areas
- A cap of $10,000 for state and local taxes
In addition, allowable mortgage interest deductions have decreased by $250,000 (from loans up to $1 million to loans up to $750,000).
New Benefits for Individuals
New benefits for individual taxpayers include the following:
- There will be an increase to the alternative minimum tax (AMT) threshold, so fewer middle-class taxpayers will be subject to AMT. The $70,300 for individuals and heads of household will start phasing out above $500,000. The $109,400 for joint filers will start phasing out above $1 million.
- The lifetime estate and gift tax exemption has been almost doubled and is now close to $11 million. The 40% rate stays the same, and the annual gift tax exclusion is $15,000 per person.
- The annual gift tax exclusion will be $15,000 with a maximum rate on gifts at 35%.
- There will no longer be a fine for individuals who have don’t have health insurance or fail to qualify for an exemption.
Tax Rate Changes for Individuals
The maximum individual tax rate has been reduced from 39.6% to 37%. No matter what bracket you fall into, more of your taxable income will be charged lower rates than before.
|2018 Income Tax Brackets|
|Rate||Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||$38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||Over $500,000||Over $600,000|
It is important to note that tax brackets, standard deductions and other items will be adjusted annually via a chained consumer price index. The result should be lower inflation adjustments and smaller annual increases than with the current index. Eventually, however, individual filers will realize the impact of the slow and somewhat hidden tax hike.
Revised Income Tax Rates and Brackets for Trusts and Estates
|If income of an estate or trust is:||Then the income tax is:|
|Not over $2,550||10% of taxable income|
|Over $2,550 but not more than $9,150||$255 plus 24% of excess over $2,550|
|Over $9,150 but not more than $12,500||$1,839 plus 35% of excess over $9,150|
|Over $12,500||$3,012 plus 37% of excess over $12,500|
Unearned income of children under 18 will be taxed as ordinary income and capital gains rates that are applicable to trusts and estates (instead of their parents’ marginal tax rate, which is the current practice).
529 college Savings Plans
Distributions of up to $10,000 per student will be allowed to pay tuition for elementary and secondary education.
Furthermore, the new law will allow limited tax-free rollovers from 529 plans to ABLE accounts and allow ABLE account beneficiaries to make contributions to their accounts over the $15,000 annual pay-in limit.
Capital Gains and Dividends
Instead of depending on one’s individual tax bracket, rates for capital gains and dividends will rely on income thresholds.
|Tax Rate for 2018 Long-term Capital Gains and Dividends|
|Rate||Individuals||Married Filing Jointly|
|0%||Under $38,600||Under $77,200|
|15%||$38,601 to $425,799||$77,201 to $478,999|
|20%||$425,800 and up||$479,000 and up|
Corporate Tax Rate
The corporate tax rate for C-corps will reduce from the 35% top rate to a flat 21% rate. There will be no more AMT for corporations.
Small Business Benefit
There will be up to a 20% deduction from net business income for sole proprietorships, LLCs, partnerships, S-corps and rental activity. It is important to note that there are many complex limits and restrictions, and the break phases out for high earners in professional service fields with taxable incomes in excess of $157,500 for individuals and $315,000 for filers of joint returns.
Business Losses on Individual Returns
The deduction for business losses on individual returns that exceed a $250,000 threshold for individuals and $500,000 for joint filers is nondeductible. However, any excess can be carried forward.
Enhanced Write-offs for Business Asset Purchases
There will be a 100% bonus depreciation for many assets put into use after Sept. 27, 2017. The break is temporary and will be phased out by 20% each year after 2022.
New Credit for Businesses that Provide Paid Family or Medical Leave
There will be a temporary 12.5% credit (only for 2018 and 2019) for firms that pay paid family or medical care leave. The credit will increase for employers that pay workers more than half of their normal wages during leave.
Limited Deduction for Interest on Business Debt
Interest write-offs will be capped at 30% of adjusted taxable income. Disallowed interest will be carried forward. Firms that have gross receipts of $25 million or less, real estate companies and certain regulated public utilities will be exempt.
Other Disappearing Business Deductions
There are many business deductions and breaks that will either be eliminated or cut back, including the following:
- Business entertainment
- Country club dues
- Sexual harassment settlement payments subject to nondisclosure agreements
- Local lobbying expenses
- Employer write-offs for fringe benefits related to the cost of transportation (e.g., parking, mass transit passes and bicycle commuting)
Private colleges with large endowments will pay a 1.4% excise tax on net investment income. The tax will apply to schools with at least 500 students and assets unrelated to education valued at $500,000 or more per full-time student.
Most of the new individual tax provisions expire after 2025 unless they’re extended by another Congress. However, all of the corporate tax changes are permanent.