The Tax Cuts and Jobs Act was signed into law on December 22, 2017 and is the most significant tax reform we have seen in over 30 years. With two-thirds of 2018 already passed, it’s worth revisiting the new law to ensure you’re prepared come tax season.
Major elements of the law include reducing tax rates for businesses and individuals; an increase in the standard deduction and family tax credits coupled with the elimination of personal exemptions, making it less beneficial to itemize deductions; limiting deductions for state and local income taxes and property taxes; further limiting the mortgage interest deduction; reducing the alternative minimum tax for individuals and eliminating it altogether for corporations; reducing the number of estates impacted by the estate tax; and repealing the individual mandate of the Affordable Care Act.
These substantial changes to the Internal Revenue Code will change the way that individuals and businesses calculate their federal income tax liability. These changes can be confusing, but also present numerous planning opportunities. While it would be impossible to discuss the impact of all of these changes in a short blog entry, there are several changes of interest highlighted below.
Individual income tax rates are now lower, including the top marginal rate, which went from 39.6% to 37%. The bottom rate remains at 10% but now covers twice the amount of income as compared to previous tax brackets. These changes were effective as of January 1, 2018.
Standard Deduction/Itemized Deduction
While you may still itemize deductions, far less people will do so going forward due to the increased standard deduction. Beginning on January 1, 2018, the standard deduction doubled (i.e. for married filing joint the deduction went from $13,000 to $24,000) and the personal exemption was eliminated. If you itemize deductions, you can still deduct the amount you paid in state and local income taxes (including real estate taxes) but there is now a cap of $10,000. In addition, mortgage interest is still deductible but only on mortgage debt up to $750,000 and home equity interest is no longer deductible.
Child Tax Credit
The Child Tax Credit has doubled and is now $2,000 per child and $1,400 of the credit is refundable. The phase-out for this credit is also significantly increased.
Under the old tax law, alimony was a deductible expense for those paying it and income for those who received it. Under the new law, alimony is no longer a deductible expense nor is it income. This change takes effect for divorce and separation agreements executed on or after January 1, 2019. Agreements executed prior to this date may be modified to comply with the new provisions.
Under the new law, the costs of moving are generally no longer deductible, although there are some exceptions for military personnel.
Federal Estate Tax
The exemption amount increased to $10 million (as adjusted for inflation). For 2018, the adjusted amount is $11.2 million per person or $22.4 million for married couples utilizing portability. This applies to the estates of people who die after December 31, 2017 but before January 1, 2026 due to built in sunset provisions in the law. Some clients may wish to utilize this higher exemption by gifting before the law potentially sunsets.
Pass Through Entities
Under the new law, most taxpayers with pass through business income will be able to deduct 20% of their pass through income. There are, however, phase out income limits that apply to “professional services” such as doctors, lawyers and consultants.
There are also several provisions in the law that did not change, including student loan interest, adoption assistance, dependent care accounts, the exclusion of capital gains on the sale of a personal residence, tax benefits for workplace retirement savings accounts, teacher classroom expense deduction, several energy credits, etc.
As the days grow shorter and 2019 approaches, now is an appropriate time to consider any changes you might need to make in your personal or business tax situation to anticipate the impact of the new tax law.