As you may have heard, the Tax Cuts and Jobs Act (“Act”) was recently signed into law, providing significant changes to the U.S. tax code for individuals and corporations. Due to the significant changes, we thought it would be helpful to provide you with some guidance as to what these changes entail.
Standard Deductions.
The standard deduction has nearly doubled for all filers; however, the personal exemption was eliminated. For example, in 2018 a single filer would have been entitled to a $6,500 standard deduction, in addition to a $4,150 personal exemption, totaling $10,650 in income exclusions. Under the new Act, a single filer simply receives a $12,000 standard deduction.
The standard deduction has increased to $18,000 for heads of household, and $24,000 for married couples filing jointly.
2018 Tax Brackets.
The following individual income tax rates are applicable for tax years 2018 through 2025:
|
Marginal Tax Rate |
Single |
Married Filing Jointly |
Married Filing Separately |
Head of Household |
|
10% |
$0 – $9,525 |
$0 – $19,050 |
$0 – $9525 |
$0 – $13,600 |
|
12% |
$9,525 – $38,700 |
$19,050 – $77,400 |
$9,525 – $38,700 |
$13,600 – $51,800 |
|
22% |
$38,700 – $82,500 |
$77,400 – $165,000 |
$38,700 – $82,500 |
$51,800 – $82,500 |
|
24% |
$82,500 – $157,500 |
$165,000 – $315,000 |
$82,500 – $157,500 |
$82,500 – $157,500 |
|
32% |
$157,500 – $200,000 |
$315,000 – $400,000 |
$157,500 – $200,000 |
$157,500 – $200,000 |
|
35% |
$200,000 – $500,000 |
$400,000 – $600,000 |
$200,000 – $300,000 |
$200,000 – $500,000 |
|
37% |
Over $500,000 |
Over $600,000 |
Over $600,000 |
Over $500,000 |
Also noteworthy, the “marriage penalty” is mostly removed. The married filing jointly income thresholds are double the single thresholds other than the two highest tax brackets. In sum, the marriage penalty was eliminated for all couples earning less than $400,000.
Capital Gains Taxes.
Although the general structure of the capital gains tax system is not changing, there are a few important details to note.
First, short-term capital gains will remain taxed as ordinary income. Because the tax brackets applied to ordinary have significantly changed, your short-term capital gains will likely be taxed at a different rate than they previously were.
Secondly, the Act changes the long-term capital gains tax rate income threshold. Whereas the three long-term capital gains income thresholds were applicable to specific marginal tax brackets, they are now applied to maximum taxable income levels. The 2018 maximum taxable income levels for long-term capital gains are as follows:
|
Long-Term Capital Gains Rate |
Single Taxpayer |
Married Filing Jointly |
Married Filing Separately |
Head of Household |
|
0% |
Up to $38,600 |
Up to $77,200 |
Up to $38,600 |
Up to $51,700 |
|
15% |
$38,600 – $425,800 |
$77,200 – $479,000 |
$38,600 – $239,500 |
$51,700 – $452,400 |
|
20% |
Over $425,800 |
Over $479,000 |
Over $239,500 |
Over $452,400 |
Lastly, the 3.8% net investment income applicable to high earners remains with the same income thresholds. However, this could be eliminated should Congress real the Affordable Care Act.
Tax Break Changes.
Child Tax Credit. The Child Tax Credit is available for qualified children under the age of 17. The Act doubles the Child Tax Credit from $1,000 to $2,000, and increases the amount of the credit that is refundable to $1,400. Additionally, the phaseout threshold for the credit is increased from $110,000 to $400,000 for married filing jointly, and from $75,000 to $200,000 for individuals.
Dependent Adult Children and Elderly Relatives. If your children are 17 and older, or are the caretaker for elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.
Child and Dependent Care Credit. This credit allows parents to deduct qualified child care expenses, worth up to $1,050 for one child under age 13 or $2,100 for children. Up to $5,000 of income may be sheltered in a dependent care flexible spending account on a pre-tax basis, making child care more affordable. Both of these breaks may not be used to cover the same child care costs, but due to the high costs of childcare, many parents may be able to take advantage of the FSA and credit.
Education. The Lifetime Learning Credit, Student Loan Interest Deduction, and graduate school tuition waivers all remain in place. Additionally, the Act expanded the available use of funds in a 529 college savings plan to include levels of education other than college. Thus, the funds in 529 accounts may be used for private school tuition or tutoring expenses for your child in grade school.
Changes to Deductions.
The Act made significant changes to allowable deductions. While several deductions remain (with changes), many deductions were eliminated.
Mortgage Interest. The mortgage interest deduction remains, but may only be taken on mortgage debt up to $750,000. This is only applicable to mortgages taken after December 15, 2017, NOT preexisting mortgages. However, the interest on home equity debt is no longer deductible, whereas up to $100,000 in home equity debt was previously allowable.
Charitable Contributions. The charitable contribution deduction remains with two notable changes: (1) taxpayers can deduct donations up to 60% of their income; and (2) donations made to a college in exchange for the right to purchase athletic tickets is no longer deductible.
Medical Expenses. The medical expenses deduction also remains; however, it has been reduced from 10% of AGI to 7.5% of AGI. Unlike most provisions of the Act, this IS retroactive to the 2017 tax year.
Real Estate, Sales Tax and State Income Taxes. The deductible amount on real estate, sales tax and state income taxes paid is now limited to $10,000.
Alimony. The Act eliminates the payer’s deduction for alimony and spousal maintenance payments required in a divorce and separation agreement executed after December 31, 2018. Additionally, those payments are no longer includible income to the payee.
Removed Deductions. The Act has eliminated the following deductions:
- Casualty and theft losses (unless attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Moving expenses
- Employer-subsidized parking and transportation reimbursement
- Other miscellaneous deductions previously subject to the 2% AGI cap
Although some of the major deductions remain in place, the higher standard deductions will make itemizing not worthwhile for many households.
Healthcare Tax Penalty.
The Act has repealed the individual mandate. Thus, individuals who do not purchase health insurance will no longer pay a tax penalty. This change becomes effective in 2019, so the healthcare tax penalty is still assessable for 2018.
Estate Tax Exemption.
An estate exceeding $5.49 million for individuals that passed away in 2017 was taxed at 39.6%. The Act has doubled the estate tax exemption to $11.2 million for individuals and $22.4 million for married couples.
The doubling of the estate, gift and GST (generation-skipping transfer) tax exemptions creates a significant opportunity for you to protect more assets than ever. The tax reform opens the doors for planning with dynasty trusts, family partnerships, discounted gifts and other advanced strategies that may shield much more of your assets for your beneficiaries. The increased exemption expires on December 31, 2025 and this tax legislation is likely to be heavily modified. However, we do have tools that can build flexibility into your plan to deal with future changes, although those future strategies only work to preserve options if we implement those plans while the exemption is still available.
Contact us if you have any concerns how the estate tax will impact your family so that we can maximize the opportunities afforded by the new Act.
Changes to Business Taxation.
The Act has significantly simplified the corporate tax rate for tax years 2018 through 2025 by implementing a 21% flat rate tax on corporate profits exceeding $1.
Additionally, the Act has significantly changed how pass-through business income is taxed. Taxpayers with pass-through businesses, such as sole proprietorships, LLCs, partnerships and S corporations, may deduct 20% of their pass-through income. For example, if you own a small business generating $100,000 in 2018 profits, you may deduct $20,000 before ordinary income tax rates are applied.
Contact us if you own a business or are thinking about starting one. Relying on old rules of thumb as you make business plans could mean paying significant amounts of unnecessary taxes. Many of the new, business-oriented deductions (in addition to those discussed above) have specific rules to qualify.
Conclusion.
Planning to minimize income and estate taxes is a balancing act. The Houser Firm is available to answer your questions about tax reform and to work with you to take full advantage of the new planning opportunities.